SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17083 \ August 1, 2001
Accounting and Auditing Enforcement Release No. 1431 \ August 1, 2001
SECURITIES AND EXCHANGE COMMISSION v. WILLIAM F. BUETTNER, MARK D. KIRSTEIN AND AMY S. FRAZIER (US District Court for the Eastern District of Pennsylvania, 01-CV-3898)
The Securities and Exchange Commission announced today that it filed a complaint in the United States District Court for the Eastern District of Pennsylvania charging three senior Coopers & Lybrand, LLP ("Coopers," now PricewaterhouseCoopers, LLP) certified public accountants with securities fraud in connection with their audit of the consolidated financial statements of Allegheny Health, Education and Research Foundation ("AHERF") for the year ending June 30, 1997. Named as defendants are William F. Buettner, the engagement partner on the audit; Mark D. Kirstein, the senior manager on the audit; and Amy S. Frazier, the manager on the audit in charge of, among other things, auditing accounts receivable and bad debt reserves.
The Commission's complaint alleges that defendants Buettner, Kirstein and Frazier actively participated in a fraudulent scheme by AHERF, at its height the largest nonprofit healthcare organization in Pennsylvania, to mask its deteriorating financial condition. In so doing, the defendants participated in the creation and issuance of, and failed to correct unqualified audit opinions on AHERF's 1997 consolidated financial statements and AHERF's 1997 supplementary consolidating and combining financial information. For its fiscal year 1997, AHERF reported net income when, in reality, it was operating with a substantial net loss.
The scheme involved the fraudulent transfer of $99.6 million of reserves from the books of a recently-acquired entity to the books of a group of AHERF-related entities collectively known as the Delaware Valley Obligated Group ("Delaware Valley"). The transferred reserves were used by Delaware Valley to either increase its own reserves or to reduce expenses related to the write-off of uncollectible accounts receivable. The defendants played an active role in the fraud by, among other things, helping AHERF plan fraudulent transfers of reserves and then conducting the 1997 audit in a manner intended to hide both the fraud and their involvement in it. Furthermore, they failed to expand their audit to address the improper transfers, or to investigate evidence of other non-GAAP transfers, as required by GAAS.
Ultimately, the defendants knowingly or recklessly caused Coopers to issue false and misleading unqualified audit opinions and related documents for 1997 that enhanced the credibility of AHERF's reported financial statements. The audited financial statements with attached consolidating schedules were made available to, among others, investors in AHERF-related bonds. The audit opinions falsely state, among other things, that the audit was conducted in accordance with Generally Accepted Auditing Standards ("GAAS") and that the financial statements were in accordance with Generally Accepted Accounting Principles ("GAAP") and fairly presented AHERF's financial condition. The financial statements, issued by AHERF in February 1997, materially misrepresented that AHERF and Delaware Valley had net income of $21.9 million and $23.7 million, respectively, for fiscal year 1997. Absent the fraud, AHERF and Delaware Valley would have posted substantial net losses of approximately $37.7 million and $35.9 million respectively.
On July 21, 1998, AHERF filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of its subsidiaries in the U.S. District Court for the Western District of Pennsylvania. By the time of the bankruptcy filing, one or more of the obligated groups were responsible for repaying a total of more than $900 million of outstanding AHERF Bonds. Subsequently, on September 2, 1998, AHERF issued a press release in which it acknowledged that its audits consolidated financial statement for 1997 were inaccurate. In the release, AHERF stated that "[n]o further reliance should be placed on the financial statements or the [Coopers] report thereon."
The complaint charges defendant Buettner with violating, and defendants Kirstein and Frazier with violating or aiding and abetting Buettner's violations of, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief and an order requiring the defendants to pay civil penalties.
See SEC v. David W. McConnell and Charles P. Morrison, SEC Litigation Rel. No. 16534, Accounting and Auditing Enforcement Rel No. 1254 (May 2, 2000) and SEC Lit. Rel. No. 16885, Accounting and Auditing Enforcement Rel. No. 1365 (Jan. 1, 2001); In the Matter of Albert Adamczak, CPA, Exchange Act Rel. No. 42743 (May 2, 2000); In the Matter of Stephen H. Spargo, CPA, Exchange Act Rel. No. 42742 (May 2, 2000); In the Matter of Allegheny Health, Education and Research Foundation, Exchange Act Rel. No. 42992 (June 30, 2000); In the Matter of Charles P. Morrison, CPA, SEC Litigation Rel. No. 16885, Accounting and Auditing Enforcement Rel. No. 1365 (Jan. 1, 2001).