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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2008-250
December 30, 2008


Susan Markel, Chief Accountant for Enforcement Division, to Leave SEC After 14 Years of Service

The Securities and Exchange Commission announced today that Susan G. Markel, Chief Accountant for the Division of Enforcement, will leave the agency in January to become a Managing Director in the Corporate Investigations practice of AlixPartners LLP, a global business advisory firm.

"For more than 14 years, Susan Markel has brought both expertise and insight to financial fraud investigations," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "Her instincts are superb and her investigative abilities are unparalleled. As the Chief Accountant for the Division, her leadership and integrity were tremendous assets to the Commission - and investors. We will miss her dedication, her friendship, and her skills and we all wish her the very best."

Ms. Markel said, "I have had the honor and privilege of working for investors while at the Commission for more than a decade. I also have had the honor and privilege of working with the best and brightest professionals whose hard work and dedication to the ideal of doing the right thing and acting as the investor's advocate are the cornerstones of our work. This is a great agency with a great history. I will miss the work, the challenges, the excitement of our mission - and I also will miss my friends and colleagues."

Ms. Markel joined the SEC staff in 1994 as a Staff Accountant in the Division of Enforcement. She became an Associate Chief Accountant in 2000 and became Chief Accountant for the Division of Enforcement in June 2003. During her tenure, Ms. Markel supervised and conducted a wide array of financial fraud, auditor independence and other investigations and enforcement activities.

Ms. Markel has participated in bringing several notable enforcement actions, including financial fraud cases against Xerox and six senior executives; KPMG (based on Xerox audits) and five audit partners; as well as the Cendant, WorldCom, and Cardinal Health matters. In addition to work on investigations, Ms. Markel also was deeply involved in several significant policy decisions and worked closely with other Commission staff including the Office of the Chief Accountant and the Division of Corporation Finance.

In 2000, Ms. Markel received the Commission's Andrew Barr Award and in 2006 the Commission's Distinguished Service Award, which recognized her for "…success in overseeing the accounting staff central to the investigations involving accounting and financial fraud - among the most challenging and important matters investigated by the Commission." In addition to being recognized by the Commission for her achievements, the Federal Bureau of Investigation also honored Ms. Markel for her tireless assistance, expert advice and keen insights in the Cendant securities fraud case. She graduated with a B.S. in accounting from the University of Akron and worked in public accounting and litigation support prior to joining the SEC staff. (Press Rel. 2008-305)

Congressionally-Mandated Study Says Improve, Do Not Suspend, Fair Value Accounting Standards

The Securities and Exchange Commission today delivered a report to Congress mandated by the Emergency Economic Stabilization Act of 2008 that recommends against the suspension of fair value accounting standards. Rather, the 211-page report by the SEC's Office of the Chief Accountant and Division of Corporation Finance recommends improvements to existing practice, including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.

As mandated by the Act, the report addresses the following six key issues:

  1. the effects of such accounting standards on a financial institution's balance sheet;
  2. the impacts of such accounting on bank failures in 2008;
  3. the impact of such standards on the quality of financial information available to investors;
  4. the process used by the Financial Accounting Standards Board in developing accounting standards;
  5. the advisability and feasibility of modifications to such standards; and
  6. alternative accounting standards to those provided in such Statement Number 157.

Among key findings, the report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. The report also observes that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicated that bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.

"The Office of the Chief Accountant and the Division of Corporation Finance, in consultation with the Department of the Treasury and the Federal Reserve, have produced a valuable study of many of the critical issues surrounding the use of fair value accounting in the extraordinary market conditions of the past year," said SEC Chairman Christopher Cox. "The study is the culmination of several months of extensive analysis, public roundtables and consultations with investor groups, accounting firms, banks, insurance companies, think tanks, and academics. It will be a useful source of information and guidance not only to policymakers in Congress but also to the independent standard-setters as they continue their work on these important issues. Deputy Chief Accountant James Kroeker, who directed the study, and the staff of the Office of the Chief Accountant and the Division of Corporation Finance deserve particular commendation for their work in producing this comprehensive study before the January 2 deadline set by Congress."

The Emergency Economic Stabilization Act of 2008 directed the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, to study mark-to-market accounting standards as provided by the FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements. The Act, which was signed into law on Oct. 3, required that the study be completed within 90 days.

While the report does not recommend suspending existing fair value standards, it makes eight recommendations to improve their application, including:

  • Development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets, including consideration of the need for guidance to assist companies and auditors in addressing:

    • How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed
    • How the impact of a change in credit risk on the value of an asset or liability should be estimated
    • When should observable market information be supplemented with and/or reliance placed on unobservable information in the form of management estimates
    • How to confirm that assumptions utilized are those that would be used by market participants and not just a specific entity
    • Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.
  • Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.

  • Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.

  • Assessment by the FASB of whether the incorporation of credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided currently in practice.

The report also recommends that FASB reassess current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP. The report finds that under existing accounting requirements, information about impairments is calculated, recognized and reported on basis that often differs by asset type. The report recommends improvements, including: reducing the number of models utilized for determining and reporting impairments, considering whether the utility of information available to investors would be improved by providing additional information about whether current declines in value are consistent with management expectations of the underlying credit quality, and reconsidering current restrictions on the ability to record increases in value (when market prices recover).

In conducting the study, data was obtained and analyzed from a broad-based population that included a cross-section of financial institutions. In addition to empirical analysis, the SEC staff obtained valuable input from a broad cross section of market participants through a public comment letter process and by hosting a series of three public roundtables to obtain a wide range of views and perspective from all parties. (Press Rel. 2008-307)


In the Matter of Stewart Enterprises, Inc., Kenneth C. Budde, CPA, and Michael G. Hymel, CPA

On December 29, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order (Order) against Stewart Enterprises, Inc. (Stewart), Kenneth C. Budde, CPA (Budde) and Michael G. Hymel, CPA (Hymel).

The Order finds that, from 2001 through 2005, Stewart, the second largest publicly traded provider of death care services in the United States, and Budde, Stewart's former chief financial officer and chief executive officer, and Hymel, Stewart's former chief accounting officer, made repeated public filings with the Commission that materially misrepresented Stewart's revenue recognition policies and methodologies with respect to the sale of cemetery merchandise made prior to the need for a funeral (pre-need cemetery merchandise). Stewart misleadingly represented that it utilized a straightforward delivery method to recognize revenue for the sale of pre-need cemetery merchandise, by which, upon delivery, Stewart would recognize as revenue the full contract amount paid by the customer. However, Stewart could not actually identify the pre-need contract amount and instead created an estimate of the amount of revenue to be recognized. Stewart's failure to disclose this methodology of estimating revenues in its public filings with the Commission rendered its financial statements not in conformity with Generally Accepted Accounting Principles. Only when required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and informed by its outside auditor that it would no longer issue unqualified audit opinions if this estimated methodology continued to be used did Stewart finally shift to a revenue recognition system no longer reliant on estimates. Errors arising from the assumptions underlying Stewart's methodology for estimating revenues resulted in an overstatement of net revenue from 2001 through 2005 by more than $72 million, overstated annual net earnings before taxes during this period by amounts ranging from 10.76% to 38.76%, and were the primary basis for a subsequent material restatement of earnings.

Based on the above, the Order ordered Stewart to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; ordered Budde to cease and desist from committing or causing any violations and any future violations of Exchange Act Rule 13a-14 and cease and desist from causing any violations and any future violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and ordered Hymel to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Stewart, Budde and Hymel consented to the issuance of the Order without admitting or denying any of the findings contained therein. (Rel. 34-59172; AAE Rel. 2913; File No. 3-13320)

SEC Halts $23 Million Ponzi Scheme and Affinity Fraud Targeting Haitian-American Investors

The Commission announced that on Dec. 29, 2008, it filed an emergency action to halt a Ponzi scheme and affinity fraud conducted by Creative Capital Consortium, LLC and A Creative Capital Concept$, LLC (collectively, Creative Capital), and its principal, George L. Theodule. According to the Commission's complaint, the defendants raised at least $23.4 million from thousands of investors in the Haitian-American community nationwide through a network of purported investment clubs Theodule directs investors to form. Also on Dec. 29, 2008 Judge Donald M. Middlebrooks, U.S. District Judge for the Southern District of Florida, issued an order placing Creative Capital under the control of a receiver to safeguard assets, as well as other emergency orders, including temporary restraining orders and asset freezes.

The Commission's complaint alleges that starting in at least November 2007, Theodule, directly and through Creative Capital, raised at least $23.4 million from thousands of investors, mostly Haitian-Americans. As part of the scheme, the defendants direct investors to form investment clubs solely for the purpose of funneling funds to Theodule and Creative Capital. Theodule solicits investors for Creative Capital by guaranteeing a 100% return on their investment within 90 days based on his claimed successful trading of stocks and options. The defendants also solicit investors by claiming that Creative Capital's trading profits are used to fund new business ventures, some of which benefit the Haitian community in the United States and Haiti, and others in Sierra Leone. In truth, Theodule has lost at least $18 million trading stocks and options just over the last year. In addition, Creative Capital merely repaid earlier investors with monies collected from new investors in typical Ponzi scheme fashion. Finally, the Complaint alleges, Theodule has commingled investor funds with his personal funds and misappropriated at least $3.8 million for himself and his family.

In addition to the emergency relief obtained today, the Commission's complaint seeks disgorgement of the defendants' ill-gotten gains, civil penalties, and permanent injunctions barring future violations of the antifraud provisions of the federal securities laws.

The Commission acknowledges the assistance of the State of Florida's Office of Financial Regulation in connection with this matter.

The SEC's investigation is continuing. [SEC v. Creative Capital Consortium, LLC, et. al., Case No. 08-81565-CIV-Hurley/Hopkins (S.D. Fla.)] (LR-20840)


A summary in yesterday's Digest entitled "SEC Revokes the Registration of Rica Foods' Securities and Files a Settled Financial Fraud Case Against Rica Foods and Its Former CEO" included an inaccurate revocation date. The summary should have appeared as follows:

SEC Revokes the Registration of Rica Foods' Securities and Files a Settled Financial Fraud Case Against Rica Foods and Its Former CEO

On December 30, the Commission revoked the registration of each class of registered securities of Rica Foods, Inc. (Rica Foods) for failure to make required periodic filings with the Commission.

Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, Rica Foods consented to the entry of an Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Rica Foods, Inc. finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of Rica Foods securities pursuant to Section 12(j) of the Exchange Act.

Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:

No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .

The Commission also announced today that it filed settled civil injunctive actions against Rica Foods and its former Chief Executive Officer, Calixto Chaves. According to the Commission's complaint, between 1998 and 2004, while serving as CEO of Rica Foods, Chaves engaged in pervasive self-dealing resulting in millions of dollars in related-party transactions which Rica Foods failed to disclose in its Commission filings, and the improper valuation of millions in assets Chaves caused Rica Foods to purchase from him and his family. Rica Foods and Chaves each consented, without admitting or denying the allegations in the Commission's complaint, to the entry of a Final Judgment of Permanent Injunction and Other Relief (Final Judgment).

The Final Judgment will permanently enjoin Rica Foods and Chaves from violating Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 12b-20, 13a-1 thereunder; and Chaves from violating Section 13(b)(5) of the Exchange Act, and Rules 13a-14, 13b2-1, and 13b2-2, thereunder. The Final Judgment against Chaves will further order him to pay $50,000 in civil penalties, and permanently bar him from serving as an officer or director of a public company in the United States. [SEC v. Rica Foods, Inc. and Calixto Chaves, Case No. 08-23546-CIV-Hoeveler/Garber (S.D. Fla., filed Dec. 29, 2008)]. (Rel. 34-59174; File No. 3-13321)


Immediate Effectiveness of Proposed Rule Change

The Commission issued a notice of immediate effectiveness of a proposed rule change (SR-Phlx-2008-82) filed by NASDAQ OMX PHLX to clarify that written confirmations relating to options transactions do not need to specify the exchange or exchanges on which an option contract is executed. Publication is expected in the Federal Register during the week of December 22. (Rel. 34-59166)





Modified: 12/30/2008