UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38395 / March 13, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 897 / March 13, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9272 ______________________________ : ORDER INSTITUTING PUBLIC In the Matter of : ADMINISTRATIVE PROCEEDING : PURSUANT TO RULE 102(e) OF THE DUANE V. MIDGLEY, C.P.A., : COMMISSION'S RULES OF PRACTICE, : MAKING FINDINGS AND IMPOSING Respondent : REMEDIAL SANCTION _____________________________: I. The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and it hereby is, instituted pursuant to Rules 102(e)(1)-[1]- and 102(e)(3)-[2]- of ---------FOOTNOTES---------- -[1]- Rule 102(e)(1) provides, in pertinent part, that: "The Commission may censure a person or 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) To be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) To have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder." -[2]- Rule 102(e)(3)(i) provides, in pertinent part, that: "The Commission, with due regard to the public interest and without preliminary hearing, may, by order, temporarily suspend (continued...) ==========================================START OF PAGE 2====== the Commission's Rules of Practice against Duane V. Midgley ("Midgley"). II. In anticipation of the institution of this proceeding, Midgley has submitted an offer of settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose 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 Commission's findings contained herein, except that he admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, and that a Final Judgment Of Permanent Injunction And Other Relief has been entered against him as set forth in section III.B below, Midgley consents to the issuance of this Order Instituting Public Administrative Proceeding Pursuant To Rule 102(e) Of The Commission's Rules Of Practice, Making Findings And Imposing Remedial Sanction ("Order"). III. On the basis of this Order and the Offer, the Commission makes the following findings: A. THE RESPONDENT Midgley, age 63, resides in Salt Lake City, Utah, and is a certified public accountant. In an unrelated earlier action, Midgley was, and remains, suspended from appearing or practicing before the Commission for a period of at least three years, pursuant to former Commission Rule 2(e)(1)(ii), now Rule 102(e)(1)(ii). In the Matter of Duane Midgley, C.P.A., Exchange Act Release No. 36229, AAER No. 709, Administrative Proceeding File No. 3-8728 (September 14, 1995). B. THE COMMISSION'S INJUNCTIVE ACTION In early December 1991, Midgley was retained as the ---------FOOTNOTES---------- -[2]-(...continued) from appearing or practicing before it any . . . accountant . . . who has been by name: (A) Permanently enjoined by any 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. . . ." ==========================================START OF PAGE 3====== independent auditor for two new investment companies (i.e., mutual funds) known as Public Funding Portfolios, Inc. ("PFP") and American Vision Funds, Inc. ("AVF") (collectively the "Funds"), which Funds became registered with the Commission shortly thereafter. On December 17 and 27, 1991, Midgley signed unqualified audit reports regarding, respectively, PFP's December 2, 1991, and AVF's December 27, 1991, initial Statements of Assets and Liability ("Balance Sheets"). On September 16, 1996, the Commission filed an action against Midgley in the United States District Court for the District of Utah seeking an injunction and other relief based on his violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Section 34(b) of the Investment Company Act of 1940 ("Investment Company Act"). The Complaint in that action alleged that Midgley violated the federal securities laws by issuing materially false and misleading audit reports on the Funds' Balance Sheets which, with Midgley's explicit written consent, were filed with the Commission in the Funds' Investment Company Act registration statements. In addition, the Complaint alleged that Midgley issued an unqualified review report on AVF's January 24, 1992, updated Balance Sheet which review report was false and misleading. Securities and Exchange Commission v. Duane V. Midgley, Civil Action No. 2:96CV-0783G (D. Utah)). On March 3, 1997, the Court entered, pursuant to Midgley's consent, a final judgment of permanent injunction and ordered him to pay a civil penalty of $5,000 pursuant to Section 21(d)(3)(B)(ii) of the Exchange Act and Section 42(e)(2)(B) of the Investment Company Act. C. THE FRAUDULENT AUDIT AND REVIEW REPORTS 1. In each of his two audit reports concerning the Funds, Midgley falsely stated that he had examined the Balance Sheet in accordance with Generally Accepted Auditing Standards ("GAAS"), and that the Balance Sheet presented fairly that Fund's financial position as of the date of the Fund's Balance Sheet, in conformity with Generally Accepted Accounting Principles ("GAAP"). 2. PFP's and AVF's Balance Sheets did not conform to GAAP in that they falsely represented that the Funds each had been capitalized with approximately $200,000 of "cash equivalents." In fact, the Funds did not own the assets as of the dates of the Balance Sheets. Moreover, even assuming that the Funds had owned the assets as of the Balance Sheet dates, the assets were in fact grossly overvalued because: a. The assets consisted of unmarketable shares in an inactive shell corporation, IT Bancorp. Group of Companies, Inc. ("IT Bank"), with no ==========================================START OF PAGE 4====== current or prospective operations, not "cash equivalents," as represented by the Balance Sheets. b. The assets had not been fairly valued in good faith by the Funds' directors, as required by the Investment Company Act. The Funds' Balance Sheets further failed to conform to GAAP in that they failed to disclose the cost of the Funds' investments in the IT Bank shares, and they failed to disclose the two persons who controlled the Funds. 3. Midgley's representations that he had audited the Funds' Balance Sheets in conformity with GAAS were also false in that he failed to: a. Obtain adequate technical training so that he could competently perform the audits. b. Adequately plan the audits. c. Obtain sufficient competent evidential matter regarding the date the Funds acquired the securities, how they were valued, and whether they were in fact "cash equivalents." d. Issue an adverse or qualified opinion stating that the Funds' Balance Sheets in fact were not presented in conformity with GAAP. e. Exercise due professional care. 4. On January 24, 1992, Midgley signed an unqualified review report on an updated AVF Balance Sheet dated January 24, 1992, falsely stating that he had reviewed AVF's Balance Sheet in accordance with standards set forth by the American Institute of Certified Public Accountants ("AICPA") and had determined that no material modifications needed to be made to that Balance Sheet to bring it into conformity with GAAP. In fact, in order for AVF's updated Balance Sheet to conform to GAAP, modifications materially lowering the $5,550,000 value AVF then placed on its unmarketable IT Bank stock and the $64,200,000 value AVF placed on its similarly unmarketable promissory note holdings were necessary, as well as disclosure of AVF's control persons and that the IT Bank stock was not, in fact, a "publicly traded stock." ==========================================START OF PAGE 5====== IV. Based on the foregoing, the Commission finds that Midgley: A. Engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii); B. Willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 34(b) of the Investment Company Act within the meaning of Rule 102(e)(1)(iii); and C. Was permanently enjoined on March 3, 1997 from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 34(b) of the Investment Company Act in the action entitled Securities and Exchange Commission v. Duane V. Midgley, Civil Action No. 2:96CV-0783G (D. Utah). V. The Commission therefore deems it appropriate and in the public interest to accept Midgley's offer of settlement. Accordingly, IT IS HEREBY ORDERED that effective immediately, Midgley is denied the privilege of appearing or practicing before the Commission as an accountant. By the Commission. Jonathan G. Katz Secretary