UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37222 / May 16, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 783 / May 16, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9004 ______________________________ : : ORDER INSTITUTING CEASE-AND- : DESIST PROCEEDING PURSUANT TO In the Matter of : SECTION 21C OF THE SECURITIES : EXCHANGE ACT OF 1934, MAKING Milton Mermelstein, CPA and : FINDINGS AND IMPOSING A CEASE- : AND-DESIST ORDER; AND ORDER Frank E. Stephan, Jr., CPA : INSTITUTING PROCEEDING PURSUANT : TO RULE 102(e) OF THE : COMMISSION'S RULES OF PRACTICE, Respondents.: MAKING FINDINGS AND IMPOSING ______________________________: SANCTIONS I. The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist administrative proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Milton Mermelstein ("Mermelstein"), certified public accountant ("CPA"). Accordingly, IT IS HEREBY ORDERED that said proceeding be, and hereby is, instituted. The Commission also deems it appropriate that a public administrative proceeding be instituted against Mermelstein, CPA, pursuant to Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice-[1]- and against Frank E. Stephan ---------FOOTNOTES---------- -[1]- Rule 102(e) of the Commission's Rules of Practice provides in pertinent part that: "the Commission may deny, temporarily or permanently, the privilege of appearing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter...(ii) to be lacking in character or integrity or have engaged in unethical or improper professional conduct, or (iii) to have willfully violated...any provision of the federal securities laws." ==========================================START OF PAGE 2====== ("Stephan"), CPA, pursuant to Rule 2(e)(1)(ii) of the Commission's Rules of Practice. Accordingly, IT IS HEREBY ORDERED, that said proceeding be, and hereby is, instituted. In anticipation of the institution of this administrative proceeding, Mermelstein and Stephan have submitted Offers of Settlement, which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings or conclusions herein, except that Mermelstein and Stephan admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, Mermelstein and Stephan consent to the entry of this Order Instituting Cease-and- Desist Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934 Making Findings and Imposing a Cease- and- Desist Order; and Order Instituting Proceeding Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Sanctions ("Order") and to the entry of the findings and imposition of the sanctions as set forth below. II. FINDINGS On the basis of this Order and the Offers of Settlement of Mermelstein and Stephan, the Commission makes the following findings:-[2]- A. RESPONDENTS 1. Milton Mermelstein ("Mermelstein"), 56, is a Certified Public Accountant ("CPA") licensed in the State of California. Mermelstein is a partner at Glasser & Mermelstein ("G&M"). Mermelstein was the partner in charge of G&M's audits of Everlast Filtration Corp. ("Everlast") for 1989 and 1990. 2. Frank E. Stephan, Jr. ("Stephan"), 56, is a CPA licensed in the State of Illinois. Stephan worked as a temporary employee for G&M and was the on-site auditor on G&M's audit of Everlast for 1990. ---------FOOTNOTES---------- -[2]- The findings herein are made pursuant to Offers of Settlement from Mermelstein and Stephan and are not binding on any other person or entity named as a respondent in this or any other proceeding. B. BACKGROUND 1. Everlast Everlast is a Nevada corporation. During 1990-1992, Everlast's offices were located in Carlsbad, California, and Everlast was primarily engaged in the distribution of a patented oil filtration system. Everlast voluntarily filed for bankruptcy under Chapter 11 on May 10, 1994 (Bankr. S.D. Cal. Case No. 94- 05101-M11). During the period 1989-1992, Everlast's common stock was registered pursuant to Section 12(g) of the Exchange Act and was traded on the over-the-counter market. Everlast was formed as the result of a December 1989 reverse acquisition between Equity Reliance Corp., a public shell corporation, and Oil Refiner & Research Corp. ("ORRD"), a private company. From December 1989 through 1990, Everlast was a small company manufacturing and distributing engine oil filtration products, the patents for which (the "Patents") had originally been issued to the father of Everlast's then President. Then, on December 31, 1990, Everlast acquired interests in two parcels of land located near Branson, Missouri (the "Branson Property"). Everlast materially overstated the values of the Patents and/or the Branson Property in a Form 10 registration statement filed on October 1, 1990 (the "Form 10"), and a 1990 Form 10-K filed on May 6, 1991 (the "1990 Form 10-K"). Everlast's overstatement of the Patents' value overstated its total assets by as much as 179%, and Everlast's overstatement of the Branson Property's value overstated its total reported assets by as much as 478%. 2. The Patents Everlast acquired: (1) a 75% interest in the Patents, valued at about $3,750,000, in 1989 in the reverse acquisition; and (2) the remaining 25% of the Patents, from a third party, in 1990 for a $250,000 note. In the Form 10, and 1990 Form 10-K, Everlast reported the Patents' value to be approximately $4 million. In the Form 10, the Patents comprised 64% of Everlast's total reported assets, and in the 1990 Form 10-K the Patents comprised about 18% of Everlast's total reported assets. Everlast improperly reported the approximate $4 million value for the Patents in its Form 10 and 1990 Form 10-K. Of the $4 million reported value, $250,000 was acquired by a note. Everlast obtained its initial 75% interest in the Patents, comprising about $3,750,000 of the $4 million reported value, in the reverse acquisition from ORRD, an entity under the control of Everlast's then President. ORRD, in turn, had acquired its interest in the Patents at zero cost from another entity under the control of Everlast's then President. Generally Accepted ==========================================START OF PAGE 3====== Accounting Principles ("GAAP") require that assets, such as the Patents, acquired in those circumstances should be recorded at the transferor's cost basis, which in this instance was zero. See American Institute of Certified Public Accountants ("AICPA"), Accounting Interpretations of Accounting Principles Board Opinion No. 16, 39. Therefore, in its Form 10, 1990 and Form 10-K, Everlast reported an overstated value of the Patents by at least $3,750,000. 3. The Branson Property In its 1990 Form 10-K, Everlast reported that on December 31, 1990, it issued preferred stock to acquire the Branson Property, which consisted of a 940 acre parcel and a 400 acre parcel of raw land. Everlast reported the Branson Property at $106 million, 84% of Everlast's total reported assets, based on an appraisal that was prepared for the previous owners. GAAP required that Everlast record the Branson Property at fair value, which, given the facts and circumstances cited below, was materially less than Everlast reported. At the time that Everlast reported the $106 million value for the Branson Property, that value was materially overstated. More specifically, among other things: (1) Everlast had originally placed a $17.9 million value on the Branson Property; (2) the preferred shares that Everlast exchanged for the Branson Property had little, if any, value because Everlast was cash poor, reported a $3.3 million loss for 1990, and did not have material operations; (3) few, if any, parties had showed interest in the Branson Property and the sellers hoped Everlast could make the $30,000 monthly payments as a last ditch effort to save the property from foreclosure; (4) Everlast held only an option to buy the 400 acre parcel for $650,000; (5) the appraisal upon which Everlast based the $106 million value was, according to the appraiser, created for earlier owners of the Branson Property and was not an appropriate basis for Everlast to use in valuing the Branson Property because it assumed: (a) total ownership of all the Branson Property; and (b) access to at least $50 million to develop roads, water lines and other amenities. In addition, in April 1991, prior to Everlast filing the 1990 Form 10-K, Everlast inquired of the Commission staff about the proper accounting for the Branson Property. The staff had emphatically told Everlast that the $106 million value "was not acceptable." D. MERMELSTEIN AND STEPHAN FAILED TO FOLLOW GENERALLY ACCEPTED AUDITING STANDARDS ("GAAS") Mermelstein caused G&M to issue a report dated May 15, 1990, and Mermelstein and Stephan caused G&M to issue a report dated April 19, 1991, on Everlast's 1989 and 1990 financial statements ==========================================START OF PAGE 4====== respectively. Both reports were unqualified, except for stating that records supporting the cost of developing the patented products were not available. Mermelstein, as the partner in charge of the audits, was ultimately responsible for the accuracy of the audit reports. 1. The Patents At the time Mermelstein and Stephan caused G&M to issue the reports, they understood, but failed to consider, that Everlast had obtained the 75% interest in the Patents from ORRD, an entity: that Everlast's President controlled; that Everlast acquired in a reverse acquisition; and that had acquired the interest in the Patents at zero cost. Mermelstein and Stephan relied on Accounting Principles Board Opinion No. 16 ("APB No. 16") in valuing the Patents. They failed, however, to further research, understand and consider relevant GAAP provisions which provide that, in the circumstances, Everlast's 75% interest in the Patents should have been valued at zero. 2. The Branson Property Mermelstein and Stephan improperly advised Everlast to base the reported value of the Branson Property on the $106 million appraisal. Indeed, Mermelstein told Everlast's Chief Financial Officer ("CFO") that if Everlast did not report the $106 million value, Everlast would be "wrong" and Mermelstein's firm would not issue an unqualified report. Mermelstein and Stephan relied on the appraised value without considering the 1987 AICPA Audit and Accounting Guide for the Use of Real Estate Appraisal Information (the "Guide"). They failed to consider, for example, that the appraisal assumed that: Everlast owned all of the Branson Property; and Everlast would fully develop the Branson Property at a cost of at least $50 million. Mermelstein and Stephan knew that Everlast was cash poor, lacking even a source of funds to continue the $30,000 monthly mortgage payments let alone to fully develop the Branson Property. Mermelstein recognized the absurdity of the value assigned to the Branson Property. However, neither Mermelstein nor Stephan attempted to reach a more reasonable valuation from the abundant, available evidence showing that $106 million was an inappropriate value for the Branson Property. ==========================================START OF PAGE 5====== E. APPLICABLE LAW 1. Antifraud Violations: Section 10(b) of the Exchange Act and Rule 10b-5 thereunder Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, "in connection with the purchase or sale of any security," to employ any device, scheme or artifice to defraud, to make untrue statements of material fact, to omit to state material facts or to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person through means or instruments of interstate commerce or the mails. Information is material if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Scienter is required to establish a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See Aaron v. SEC, 446 U.S. 680, 695 (1980). The Supreme Court has defined scienter as "a mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976). Recklessness satisfies the scienter requirement. See SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987). Recklessness is "an extreme departure from the standards of ordinary care, and which presents a danger of misleading [investors] that is either known to the defendant or is so obvious that the actor must have been aware of it." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990)(en banc), cert. denied, 499 U.S. 976 (1991). Mermelstein willfully violated the antifraud provisions of the Exchange Act when he rendered audit reports on Everlast's 1989 and 1990 financial statements. In the reports, he falsely represented that Everlast's financial statements were fairly presented in conformity with GAAP and that his firm's audits were conducted in accordance with GAAS. Mermelstein's conduct also occurred in connection with the purchase or sale of securities. Mermelstein caused G&M to issue inaccurate audit reports on Everlast's misstated financial statements, released to the public in Everlast's Form 10 and 1990 Form 10-K. At the time, Everlast's stock was traded on the over- the-counter market. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-61 (2nd Cir. 1968) ("in connection with" requirement satisfied when issuer makes public announcements while its stock is publicly traded), cert. denied, 394 U.S. 976 (1969). Moreover, Mermelstein also knew when he concluded that Everlast should value the Patents at $4 million and when he told Everlast's President and its CFO that Everlast would be "wrong" ==========================================START OF PAGE 6====== if it did not record the $106 million value for the Branson Property, that Everlast's financial statements were not presented in conformity with GAAP and that his audits were not conducted in accordance with GAAS. 2. Reporting Violations: Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with securities registered pursuant to Section 12 of the Exchange Act, such as Everlast, to file with the Commission annual reports on Form 10-K. Inherent in these requirements is that the filings be accurate; therefore, an issuer violates these provisions if it files a Form 10 or 10-K that contains materially false or misleading information. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 72 (D.C. Cir. 1980); SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Rule 12b-20 under the Exchange Act similarly requires that these reports contain any material information necessary to make the statements made in the reports not misleading. Mermelstein caused Everlast to violate Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Mermelstein possessed information showing that Everlast's value for the Patents was overstated in the 1990 Form 10-K. He further told Everlast's President and its CFO that Everlast would be "wrong" if it failed to report the $106 million value for the Branson Property in the 1990 Form 10-K, even though he had substantial evidence that such value was materially overstated. Mermelstein thereby caused Everlast's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1. 3. Record-Keeping Violations: Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder Section 13(b)(2)(A) of the Exchange Act requires every issuer that has securities registered pursuant to Section 12 of the Exchange Act, such as Everlast, to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that "no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A)." Mermelstein allowed Everlast to record a value for the Patents which was in contravention of GAAP and told Everlast that it would be wrong not to report the $106 million value for the Branson Property. In doing so, he caused Everlast to violate Section 13(b)(2)(A) of the Exchange Act by failing to keep books, records and accounts that accurately reflected Everlast's assets at the times it filed the Form 10 and the 1990 Form 10-K. ==========================================START OF PAGE 7====== Mermelstein also willfully violated Rule 13b2-1. When Mermelstein advised Everlast's President and its CFO to record the Branson Property at $106 million he caused them to falsify Everlast's books and records. F. MERMELSTEIN AND STEPHAN ENGAGED IN IMPROPER PROFESSIONAL CONDUCT Mermelstein and Stephan engaged in improper professional conduct, within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice, during the audits of Everlast's 1989 and 1990 financial statements by failing to comply with four of the ten basic standards of GAAS. Mermelstein and Stephan failed to: (1) adequately plan and/or supervise the audits; (2) obtain sufficient, competent evidence; (3) exercise due professional care; and (4) issue accurate audit reports. Additionally, Mermelstein failed to adequately supervise Stephan. 1. Failure to Adequately Plan and Supervise the Audits GAAS requires that audits be adequately planned and assistants be properly supervised. AU  311.01. In planning the audit, the auditors should, among other things: (1) identify areas requiring special consideration; (2) evaluate the reasonableness of estimates; and (3) make judgments about the appropriateness of the accounting principles applied. AU  311.06. Further, when planning the audit, the auditor must maintain an attitude of professional skepticism and assess the risk that errors and irregularities may cause the financial statements to contain a material misstatement. AU  316.05 & 316.20. Supervision includes keeping informed of problems encountered; assuring the work of subordinates is properly performed; and assuring that audit work supports the conclusions reached. AU  311.11 & 311.13. Mermelstein and Stephan failed to properly plan the audits of Everlast's financial statements. First, in the 1989 audit, Mermelstein knew that the Patents comprised 64% of Everlast's 1989 reported assets, but failed to provide the required special consideration. Mermelstein in the 1989 and 1990 audits, and Stephan in the 1990 audit, failed to evaluate the reasonableness of the value of the Patents and failed to make appropriate judgments about the accounting principles applied to valuing the Patents. They concluded that the Patents' valuation was correct under APB No. 16 even though: (1) they knew that the Patents had been historically owned by entities under the control of Everlast's President; (2) APB No. 16 explicitly is not applicable to exchanges of assets between entities under common control (see APB No. 16, 5); (3) an interpretation of APB No. 16 states that assets acquired in such an exchange, such as that in which ORRD acquired the Patents from another entity controlled by Everlast's President, should be valued at the transferor's basis (see AIN- ==========================================START OF PAGE 8====== APB No. 16, 39), which in this instance was $0; and (4) in the reverse acquisition between ORRD and Everlast, ORRD was the acquiring entity for accounting purposes and, therefore, the value of the Patents obtained in the reverse acquisition should have remained at $0. Furthermore, for 1990, Mermelstein and Stephan failed to provide special consideration to valuing the Branson Property even though they knew that the Branson Property comprised 84% of Everlast's reported assets. They influenced Everlast to value the Branson Property based on the appraisal without considering AU  336 relating to "Using the Work of a Specialist" and more specifically the Guide, which provided the most explicit, relevant and cogent guidance available. Had they considered the Guide, Mermelstein and Stephan would have: (1) planned steps to ensure that they understood the underlying assumptions and methodology supporting the appraisal (Guide, pages 17-20); (2) considered that the Branson Property may be overvalued because the appraisal was not based on sales of comparable properties (Guide, page 21); and (3) considered that Everlast did not have the financial resources, or likely financial prospects, to make the necessary improvements to the Branson Property in a reasonable period (Guide, pages 20-21). Moreover, in spite of the $106 million value assigned to the Branson Property, neither Mermelstein nor Stephan demonstrated a skeptical attitude in planning and performing the audit. Both auditors knew that Everlast owned only an option to acquire the 400 acre parcel for $650,000. Mermelstein, in particular, had substantial doubts about the Branson Property's value. Yet, neither Mermelstein nor Stephan planned procedures to understand the appraisal's assumptions and how those assumptions applied to Everlast. Mermelstein, as the partner in charge of the audits, had final responsibility for assuring that the engagements were properly planned and supervised. As such, he was responsible for assessing the consequences of significant accounting and auditing issues. See AU  311.12. Yet, Mermelstein provided virtually no constructive, professional leadership to Stephan and no skeptical insight or assessment of the issues. 2. Failure to Obtain Sufficient Competent Evidence Auditors must obtain sufficient competent evidence to afford a basis for an opinion regarding the financial statements under audit. AU 326.01. The validity and sufficiency of required evidence depends on the circumstances and the auditors' judgment. AU  326.19 & .20. With respect to such judgment, an auditor must maintain an attitude of professional skepticism and assess the risk that errors and irregularities may cause the financial statements to contain a material misstatement. AU  316.05 & ==========================================START OF PAGE 9====== .20. An auditor must, therefore, have stronger grounds to sustain an opinion with respect to those items that are relatively more important and that have greater possibilities of material misstatement. AU  150.04. Accordingly, in instances involving a higher risk of misstatement an auditor is required to obtain more persuasive evidence. AU  316.14. With regard to the Patents, Mermelstein and Stephan gathered sufficient evidence to form a basis for an opinion but applied GAAP improperly and therefore reached an erroneous conclusion. With regard to the Branson Property, however, Mermelstein and Stephan failed to obtain sufficient evidence of the assumptions underlying the appraisal. The accounting profession has been particularly concerned that auditors do not blindly rely on appraisals. Indeed, AU  336 and the Guide, which Mermelstein and Stephan admit they never considered, contain very specific and thorough professional guidance on the auditor's use of, and reliance on, appraisals. Most specifically, the Guide required Mermelstein and Stephan to ascertain and understand the appraisal's underlying purpose, methodology and assumptions. Mermelstein and Stephan failed to obtain or understand such information. Mermelstein and Stephan, consequently, failed to obtain sufficient and competent evidence supporting Everlast's $106 million value for the Branson Property. Had they done so, they would have discovered that the appraisal was an inappropriate basis for valuing the Branson Property in Everlast's financial statements. 3. Failure to Exercise Due Professional Care Auditors must exercise due professional care in performing an audit and preparing the report. AU  230.01. The matter of due professional care concerns what the auditor does and how well he does it. AU  230.04. Mermelstein and Stephan failed to exercise due professional care when they: accepted Everlast's $4 million value for the Patents; and, in blind reliance on the appraisal, advised Everlast to report an approximate $106 million for the Branson Property. With regard to the Patents, Mermelstein and Stephan had sufficient evidence to determine that Everlast had not properly accounted for the Patents. They failed, however, to understand basic accounting literature relating to assets obtained in exchanges between entities under common control or through reverse acquisitions. Had they done so, they would have required that Everlast value the Patents at $0 for any amount in excess of the $250,000 represented by the note payable Everlast paid for a 25% interest in the Patents. With regard to the Branson Property, Mermelstein and Stephan ==========================================START OF PAGE 10====== failed to follow appropriate professional guidance, i.e., AU  336 and the Guide, that would assist them in planning and performing their audit of the Branson Property's value. Mermelstein and Stephan further failed to consider, among other things, that Everlast owned only an option to purchase the 400 acre parcel and lacked funds to develop the Branson Property. 4. Failure to Issue Accurate Audit Reports An auditor's report must express an opinion on the financial statements taken as a whole and must contain "a clear-cut indication of the character of the auditor's work." AU  508.04. An audit opinion that the financial statements are presented in conformity with GAAP may be expressed only if the auditor's evidence supports such a conclusion and the audit has been performed in accordance with GAAS. AU  508.07. Auditors should express qualified reports if they: (1) lack sufficient and competent evidence; (2) have restricted the scope of their audit; or (3) believe the financial statements contain departures from GAAP. AU  508.38. Auditors should disclaim an opinion if they have not performed a sufficient audit to support an opinion. AU  508.70. Alternatively, an auditor should issue an adverse opinion if the financial statements are not fairly presented in conformity with GAAP. AU  508.67. In any instance where an opinion is qualified, adverse or disclaimed, the auditor should disclose the reasons and, if appropriate, the effects thereof. AU  508.51, .68 & .71. More specifically, the Guide warns the auditor that uncertainties and unresolved issues in an appraisal may cause the auditor to disclaim an opinion, or express a qualified or adverse opinion. See Guide, page 26. The audit reports on Everlast's financial statements were prepared at Mermelstein's direction. The reports were unqualified except for stating that the costs of developing the Patents could not be determined. In rendering the reports, Mermelstein for 1989 and 1990, and Stephan for 1990, each falsely asserted that Everlast's financial statements were fairly presented in conformity with GAAP and that he had conducted the audit in accordance with GAAS. Mermelstein, as the partner in charge of the audits, was ultimately responsible for forming and issuing the audit reports. He caused the reports to be issued despite the fact that the audits failed to assure that Everlast properly accounted for the Patents and the Branson Property. Due to the materiality of the Patents and Branson Property to Everlast's reported assets, Mermelstein and Stephan should have disclaimed opinions or issued adverse opinions. They should have assured that the reports disclosed that: (1) Everlast violated GAAP by reporting an inappropriate value for the Patents which represented 64% of Everlast's 1989 reported assets; (2) Everlast violated GAAP by reporting an approximate $106 million value for the Branson ==========================================START OF PAGE 11====== Property, which comprised 84% of its 1990 reported assets, and which was approximately $100 million in excess of its fair value; and (3) Mermelstein and Stephan had failed to consider and follow AU  336 and the Guide when acquiring evidence relating to the Branson Property's value. ==========================================START OF PAGE 12====== G. CONCLUSION Accordingly, based on the foregoing, the Commission finds that Mermelstein willfully violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and caused Everlast's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; and Mermelstein and Stephan engaged in improper professional conduct, within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. III. OFFERS OF SETTLEMENT AND ORDER Based on the foregoing, the Commission deems it appropriate to accept the Offers of Settlement of Mermelstein and Stephan and accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that: Mermelstein cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. IT IS HEREBY FURTHER ORDERED, that, pursuant to Rules 102(e)(ii) and (iii) of the Commission's Rules of Practice, Mermelstein is denied the privilege of appearing or practicing as an accountant before the Commission, except that, after five years from the date of this Order, he may apply to the Office of the Chief Accountant of the Commission to resume appearing or practicing before the Commission as: A. a preparer or reviewer, or a person responsible for the preparation or review of financial statements required to be filed with the Commission provided that, in Mermelstein's practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the staff of the Commission; B. an independent accountant upon submission of an application to the Office of the Chief Accountant of the Commission containing a showing satisfactory to the Commission that: 1. Mermelstein, or any firm with which he is or becomes associated in any public accounting capacity, is and will remain a member of the SEC Practice Section of the AICPA's Division for CPA Firms ("SEC Practice Section") as long as he appears or practices before the Commission as an independent accountant; ==========================================START OF PAGE 13====== 2. Mermelstein, 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; 3. Mermelstein will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. IT IS HEREBY FURTHER ORDERED, that, pursuant to Rule 102(e)(ii) of the Commission's Rules of Practice, Stephan is denied the privilege of appearing or practicing as an accountant before the Commission, except that, after two years from the date of this Order, he may apply to the Office of the Chief Accountant of the Commission to resume appearing or practicing before the Commission as: A. a preparer or reviewer, or a person responsible for the preparation or review of financial statements required to be filed with the Commission provided that, in Stephan's practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the staff of the Commission; B. an independent accountant upon submission of an application to the Office of the Chief Accountant of the Commission containing a showing satisfactory to the Commission that: 1. Stephan, or any firm with which he is or becomes associated in any public accounting capacity, is and will remain a member of the SEC Practice Section as long as he appears or practices before the Commission as an independent accountant; 2. Stephan, 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; 3. Stephan will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. The Commission's review of an application from Mermelstein or from Stephan to resume appearing or practicing as an accountant before the Commission may include consideration of, in addition to the matters referred to in Section III. above, any other matters ==========================================START OF PAGE 14====== relating to the character, integrity, professional conduct, or qualifications of Mermelstein or Stephan to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 15======