UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 46694 / October 21, 2002
Accounting and Auditing Enforcement
Release No. 1652 / October 21, 2002
File No. 3-10917
In the Matter of
AARON CHAITOVSKY, CPA AND
ROBERT GLASS, CPA,
| ORDER INSTITUTING A|
TO RULE 102(e) OF THE
COMMISSION'S RULES OF
PRACTICE AND FINDINGS AND
ORDER OF THE COMMISSION
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted against Aaron Chaitovsky ("Chaitovsky") and Robert Glass ("Glass") pursuant to Rule 102(e) of the Commission's Rules of Practice.1
In anticipation of the institution of this public administrative proceeding, Chaitovsky and Glass have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings, except that each admits the entry of the injunction set forth in paragraph III.2, and further admits the Commission's jurisdiction over him and over the subject matter of this proceeding, Chaitovsky and Glass consent to the entry of this Order Instituting a Public Administrative Proceeding Pursuant to Rule 102(e) of the Commission's Rules of Practice and Findings and Order of the Commission ("Order").
On the basis of this Order and the Offers, the Commission makes the following findings:2
- Chaitovsky and Glass are certified public accountants licensed in New York. Chaitovsky and Glass served as the audit and SEC review partners, respectively, for Citrin Cooperman & Co., LLP's audit of AppOnline.com, Inc.'s ("AppOnline") December 31, 1999 financial statements.
- On October 18, 2002, the United States District Court for the Eastern District of New York entered final judgments permanently enjoining Chaitovsky and Glass from violating Sections 10A and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. SEC v. Paul Skulsky, et al., No. 02-CV-1524 (DRH).
- In its complaint in SEC v. Paul Skulsky, et al., the Commission, among other things, alleges:
- AppOnline misappropriated funds that warehouse banks had advanced to close mortgage loans, and used these funds to pay, among other things, its operating expenses. In order to conceal its misappropriation of funds, AppOnline materially misrepresented its financial condition. Among other things, AppOnline created a phantom payable on its books and records to a related party, the Skulsky Trust. This liability to the Skulsky Trust generally reflected the amount of funds that AppOnline had misappropriated from the warehouse banks. In fact, AppOnline did not owe the Skulsky Trust any funds. Because this sham liability to the Skulsky Trust became too large, AppOnline also improperly netted unrelated receivables to reduce the amount of the supposed liability. As of December 31, 1999, AppOnline had misappropriated approximately $47 million from its warehouse banks.
- Chaitovsky and Glass caused the issuance of an audit report containing an unqualified opinion stating that the audit was conducted in accordance with Generally Accepted Auditing Standards ("GAAS") and that the financial statements had been prepared in conformity with Generally Accepted Accounting Principles ("GAAP"). Chaitovsky and Glass knew, or were reckless in not knowing, that these representations were false. Specifically, Chaitovsky and Glass knew, or were reckless in not knowing, that AppOnline: (i) had mischaracterized its debt to the warehouse banks as a debt to the Skulsky Trust; (ii) improperly netted unrelated receivables against the sham liability to the Skulsky Trust to reduce the stated balance owed; (iii) improperly recorded ordinary operating expenses as nonrecurring expenses associated with the development of AppOnline's internet division; and (iv) failed to disclose the significant managerial role of Paul Skulsky, a convicted felon, in the operations of AppOnline. Chaitovsky and Glass knew, or were reckless in not knowing, that the audit of AppOnline's financial statements had not been conducted in accordance with GAAS.
- Chaitovsky and Glass knew that AppOnline had filed false financial statements with the Commission. Specifically, Chaitovsky and Glass knew that AppOnline's financial statements contained in the Form 10-QSB for the period ended September 30, 1999 were materially false in that they failed to include losses associated with the company's internet division. Chaitovsky and Glass took no steps to notify the board of directors of AppOnline, or any committee thereof, with regard to whether AppOnline had committed an illegal act.
- Based on the foregoing, the Commission finds that: (i) Chaitovsky and Glass have been permanently enjoined within the meaning of Rule 102(e)(3)(i) of the Commission's Rules of Practice "by … [a] court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder;" and (ii) Chaitovsky and Glass engaged in improper professional conduct and willfully violated, or willfully aided and abetted the violation of, provisions of the Federal securities laws and rules, for purposes of Rule 102(e)(1)(ii) and (iii) respectively, of the Commission's Rules of Practice. Specifically, Chaitovsky and Glass violated Sections 10(b) and 10A of the Exchange Act and Rule 10b-5, and aided and abetted violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1.
- In determining to accept the Offers, the Commission considered remedial acts promptly undertaken by Respondents and cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate to accept the Offers and impose the relief agreed to therein.
Accordingly, IT IS HEREBY ORDERED, effective immediately, that:
- Chaitovsky and Glass are suspended from appearing or practicing before the Commission as an accountant.
- After five years from the date of this order, Chaitovsky and Glass each may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
- a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that his work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or
- an independent accountant. Such an application must satisfy the Commission that:
||Chaitovsky or Glass, or the firm with which either is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an organization providing equivalent oversight and quality control functions ("equivalent organization");|
||Chaitovsky or Glass, or the firm, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or equivalent organization; and |
||As long as Chaitovsky or Glass appear or practice before the Commission as an independent accountant either will remain either a member of, or associated with a member firm of, the SEC Practice Section or equivalent organization, and will comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.|
- The Commission will consider an application by Chaitovsky or Glass to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependent on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to his character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
||Rule 102(e)(3)(i) of the Commission's Rules of Practice provides, in relevant part, that: [t]he Commission, with due regard to the public interest and without preliminary hearing may … suspend from appearing or practicing before it any … accountant ... who has been by name: (A) [p]ermanently enjoined by any court of competent jurisdiction, by reason of his or her conduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. Paragraph 1 of Rule 102(e) provides, in relevant part, that: The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: . . . (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.|
||The findings herein are made pursuant to the Offers and are not binding on any other person or entity in this or any other proceeding.|