UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7256 / January 16, 1996 Securities Exchange Act of 1934 Release No. 36713 / January 16, 1996 Accounting and Auditing Enforcement Release No. 753 / January 16, 1996 Administrative Proceeding File No. 3-8662 __________________________________ : In the Matter of : : CEASE AND DESIST : ORDER AND : OPINION AND ORDER Ronald Effren, : PURSUANT TO RULE 2(e) Andrew S. Fink, and : OF THE COMMISSION'S Lee L. Engel, : RULES OF PRACTICE : Respondents. : : : ---------------------------------- I. In connection with these administrative proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and pursuant to former Rules 2(e)(1)(i), (ii) and (iii) of the Commission's Rules of Practice, Ronald Effren ("Effren"), Andrew S. Fink ("Fink"), and Lee L. Engel ("Engel") have submitted Offers of Settlement ("Offer") to the Commission, which the Commission has determined to accept. -[1]- Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying any of the findings or conclusions contained herein, except that they admit jurisdiction of the Commission over them and over the subject matter of this proceeding, Effren, Fink and Engel consent to the issuance of this Cease and Desist Order and Opinion and Order Pursuant to Rule 2(e) of The Commission's Rules of Practice ("Opinion and Order"). II. --------- FOOTNOTES --------- -[1]- The Order Instituting Cease and Desist Proceedings and Notice of Hearing Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 and Order Instituting Proceedings Pursuant to Rule 2(e) of the Commission's Rules of Practice in this matter was issued on April 7, 1995. -------------------- BEGINNING OF PAGE #2 ------------------- On the basis of this Opinion and Order, and the Offers submitted by Effren, Fink, and Engel, the Commission makes the following findings:-[2]- 1. Tradux Corp. ("Tradux"), a Delaware corporation, completed a blank check public offering in October 1987. Tradux's common stock was traded in the over-the-counter market and was quoted in the National Quotation Bureau, Inc.'s "Pink Sheets" through mid-1991. On February 27, 1990, Tradux registered its common stock with the Commission pursuant to Section 12(g) of the Exchange Act. 2. Effren, age 67, was the treasurer, chief financial officer and a director of Tradux from June 30, l989 through September 1, 1991. Effren is not a certified public accountant ("CPA"). From in or about January 1986 through on or about June 30, 1989, Effren was the treasurer and a director of Advisors Capital Technology Corp. ("Advisors"). 3. Fink, age 50, resides in Centerville, Massachusetts and has never been a CPA. 4. Engel, 58 years old, is licensed as a CPA in the State of Florida and operates as a sole practitioner. 5. Advisors was incorporated in 1984 and conducted a blank check offering in 1986. Advisors was engaged in numerous businesses, including the development of two language translation computer software programs which it acquired in 1988 through International Translation Systems, Inc. ("ITS"), then a newly formed wholly owned subsidiary of Advisors. 6. From January 1989 to February 1990, Tradux was required to file periodic reports pursuant to Section 15(d) of the Exchange Act, and from March 1990 to the present, Tradux has been required to file periodic reports pursuant to Section 13(a) of the Exchange Act. Both sections require that Tradux include in its periodic reports financial statements prepared in accordance with Regulation S-X. Violations of the Antifraud and Reporting Provisions by Tradux 7. Section 4-01(a) of Regulation S-X requires that financial statements filed with the Commission comply with generally accepted accounting principles ("GAAP"). GAAP required that Tradux's acquisition of International Translation Systems, Inc. ("ITS") on June 30, 1989 be accounted for at historical cost in a manner similar to that in "pooling of interests" accounting because Tradux and Advisors, the sole stockholder of ITS, were entities under common control. Effren made and caused Tradux to make material misrepresentations and omissions of material facts in connection with its accounting for the acquisition of ITS in its June 30, 1989 interim balance sheet, in that Tradux used the purchase method of accounting rather than the historical cost method of accounting mandated by GAAP. Tradux's June 30, 1989 --------- FOOTNOTES --------- -[2]- Any findings contained herein are solely for the purpose of these proceedings and are not binding on any other person or entity named as a respondent in any other proceeding. - -2 -------------------- BEGINNING OF PAGE #3 ------------------- interim balance sheet was included in Tradux's June 30, 1989 quarterly report on Form 10-Q, a Current Report on Form 8-K dated June 30, 1989, as amended (the "Form 8-K"), and the Post- Effective Amendment, each filed with the Commission. Tradux's improper accounting for the ITS acquisition similarly affected all subsequent financial statements filed by Tradux with the Commission. 8. Use of the purchase method of accounting caused Tradux to report goodwill as an asset which overstated Tradux's June 30, 1989 assets by $345,310; and caused Tradux to overvalue the 500,000 Tradux shares issued to Advisors, as partial consideration for ITS. As a consequence, Tradux's June 30, 1989 shareholders' equity was similarly overstated by $345,310 (the amount of goodwill). 9. By reason of Tradux's acquisition of ITS, Tradux acquired the ownership rights to ITS's computer software programs. GAAP requires that, to the extent computer software is not "technologically feasible" at the time of acquisition, the costs thereof shall be expensed as research and development costs. On June 30, 1989, the date of the acquisition, and thereafter, the computer programs acquired by Tradux were not technologically feasible within the meaning of GAAP. Nevertheless, Tradux improperly recorded the computer software programs on its June 30, 1989 interim balance sheet as assets in the aggregate amount of $973,282, which caused Tradux to overstate its June 30, 1989 assets and shareholder's equity by $973,282. Tradux also overstated its June 30, 1989 shareholders' equity by $973,282. Tradux's June 30, 1989 interim balance sheet was included in Tradux's June 30, 1989 Form 10-Q, the Form 8-K, and the Post-Effective Amendment, each filed with the Commission. Tradux's improper accounting for the computer software programs similarly affected all subsequent financial statements filed by Tradux with the Commission. 10. On December 28, 1989, Tradux entered into a technology licensing agreement with Coral Companies. GAAP requires that revenue may not be recognized until an exchange has occurred, the earnings process is complete and the collection of the sale price is reasonably assured. Recognition of revenue involves consideration of two factors: (i) being realized or realizable, and (ii) being earned. Tradux improperly recognized $550,000 of revenue in connection with a licensing agreement dated December 28, 1989, entered into with Coral (the "Coral Agreement"). Pursuant to the Coral Agreement, Tradux agreed to license to Coral the marketing rights to the computer software programs in exchange for a cash payment, 500,000 shares of Coral common stock, and certain royalty payments. However, the licensing was contingent upon the development by Tradux of a 12,000 word vocabulary for the computer programs by August 1, 1990, with a ninety-day extension to November 1, 1990. The parties agreed that Coral would have the right to cancel the Agreement and Tradux would be required to return all consideration to Coral if the technology was not developed by Tradux as agreed by November 1, 1990. Pending development of the technology, the Coral stock certificates were held in an escrow account. Tradux's recognition of revenue with respect to the Coral Agreement as of December 31, 1989 was improper in light of the fact that the obligations on Tradux were far from complete as of such date. Tradux reported no other revenues as of December 31, 1989. - -3 -------------------- BEGINNING OF PAGE #4 ------------------- Effren's Conduct 11. From in or about June 1989 through in or about April 1991, Effren violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he, directly and indirectly, by the use of any means and instruments of transportation and communication in interstate commerce, any means and instrumentalities of interstate commerce, and of the mails, and of any facility of any national securities exchange, in the offer and sale, and in connection with the purchase and sale of any security, employed devices, schemes, and artifices to defraud; obtained money and property by means of, and otherwise made, untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in transactions, acts, practices and courses of business which operated and would operate as a fraud and deceit upon persons, in that he made material misrepresentations and omitted to state material facts in Tradux's financial statements filed with the Commission as part of Tradux's June 30, 1989 Form 10-Q, the Form 8-K, the Post- Effective Amendment, the September 30, 1989 Form 10-Q, the 1989 Form 10-K, the March 31, June 30, and September 30, 1990 Forms 10-Q, the 1990 Form 10-K, and the March 31 and June 30, 1991 Forms 10-Q (collectively, the "Exchange Act Reports"). As described above, such financial statements, which were prepared by Effren, contained material misstatements and omissions of material facts relating to Tradux's accounting for (i) the acquisition of ITS, (ii) the computer software programs, and (iii) the Coral Agreement. 12. From in or about June 1989 through in or about April 1991, Effren caused Tradux to violate Sections 13(a) and 15(d) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 15d-1, 15d-11, and 15d-13 thereunder as described in paragraph 11 above. Violations by Fink 13. Fink allegedly audited the January 31, 1989 year-end financial statements of ITS, which was acquired by Tradux in June 1989. Although he represented himself to be a CPA at the time of such audit, Fink has never been a CPA. 14. From in or about June 1989 through in or about October 1989, Fink willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he directly and indirectly, by the use of any means and instruments of transportation and communication in interstate commerce, any means and instrumentalities of interstate commerce, and of the mails, and of any facility of any national securities exchange, in the offer and sale, and in connection with the purchase and sale of any security, employed devices, schemes, and artifices to defraud; obtained money and property by means of, and otherwise made, untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in transactions, acts, practices and courses of business which operated and would operate as a fraud and deceit upon persons, in that Fink falsely held himself out as a certified public accountant in connection with his alleged audit of the January 31, 1989 year-end ITS financial statements and such financial statements and Fink's - -4 -------------------- BEGINNING OF PAGE #5 ------------------- audit report thereon (the "ITS Audit Report") were included in a Post-Effective Amendment and in a Form 8-K dated June 30, 1989, each filed with the Commission by Tradux. The inclusion of the ITS financial statements and the ITS Audit Report in Tradux's public filings violated Regulation S-X, which provides that the "Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office." 15. Accordingly, pursuant to Rule 2(e)(1)(i) and (iii) of the Commission's Rules of Practice, the Commission has determined that Fink does not possess the requisite qualifications to represent others, and that he willfully violated the provisions of the federal securities laws set forth above. Improper Professional Conduct by Engel 16. On or about February 12, 1990, Tradux filed with the Commission a Form 10-K that contained financial statements for the year ended December 31, 1989. Engel issued an unqualified audit report on Tradux's financial statements for the year ended December 31, 1989, stating that his audit of such financial statements was conducted in accordance with generally accepted auditing standards ("GAAS") and that Tradux's financial statements were, in all material respects, fairly presented in conformity with generally accepted accounting principles ("GAAP"). Engel's audit report was included in Tradux's Form 10- K for the year ended December 31, 1989. 17. On or about April 1, 1991, Tradux filed with the Commission a Form 10-K that contained financial statements for the year ended December 31, 1990. This Form 10-K contained an unqualified audit report issued by Engel on those financial statements, stating that he had conducted his audit in accordance with GAAS and that Tradux's financial statements were, in all material respects, fairly presented in conformity with GAAP. Engel's Failure to Perform the Audits in Accordance with GAAS Engel's Audit Reports Improperly Stated that Tradux's Financial Statements Were Presented in Conformity with GAAP 18. Statement on Auditing Standards ("SAS") No. 1, promulgated by the American Institute of Certified Public Accountants ("AICPA"), requires that an audit report state whether the financial statements are presented in conformity with GAAP. AU Section 110.01. The audit reports issued and signed by Engel, and included in Tradux's 1989 and 1990 Forms 10-K, stated that Tradux's financial statements had been presented in conformity with GAAP, when, in fact, they were not. 19. As discussed below, Tradux improperly accounted for the acquisition of International Translation Systems, Inc. ("ITS") from an affiliate in June 1989 and Tradux improperly recognized revenue from a technology licensing agreement with Coral Companies ("Coral") in December 1989. As a result, Tradux materially overstated its assets, shareholders' equity and revenues in financial statements filed with the Commission. - -5 -------------------- BEGINNING OF PAGE #6 ------------------- 20. Specifically, on June 30, 1989, Tradux acquired from Advisors all of the outstanding shares of the common stock of ITS in exchange for 500,000 shares of Tradux common stock, a cash payment of $125,000, and a percentage of any future royalty payments received, if any, in connection with ITS's software programs. GAAP required that Tradux's acquisition of ITS be accounted for at historical cost in a manner similar to that in "pooling of interests" accounting because Tradux and Advisors were entities under common control. However, Tradux improperly accounted for the ITS acquisition by using the purchase method of accounting. The use of the purchase method of accounting caused Tradux to report goodwill as an asset which overstated Tradux's December 31, 1989 and 1990 assets by $345,310, and caused Tradux to overvalue the 500,000 Tradux shares that it had issued to Advisors as partial consideration for ITS. As a consequence, Tradux's December 31, 1989 and December 31, 1990 shareholders' equity was similarly overstated by $345,310. 21. By reason of Tradux's acquisition of ITS, Tradux acquired the ownership rights to ITS's computer software programs. GAAP requires that, to the extent computer software is not "technologically feasible" at the time of acquisition, the costs thereof be expensed as research and development costs. On June 30, 1989, the date of the acquisition, and thereafter, the computer programs acquired by Tradux were not technologically feasible as within the meaning of GAAP. Nevertheless, Tradux improperly recorded the computer software programs on its December 31, 1989 and December 31, 1990 balance sheets as assets in the aggregate amount of $973,282. Tradux similarly overstated its December 31, 1989 and December 31, 1990 shareholders' equity by $973,282. 22. Pursuant to the December 28, 1989 agreement with Coral, Tradux agreed to license to Coral the marketing rights to its computer software programs in exchange for a cash payment, 500,000 shares of Coral common stock, and certain royalty payments. However, the licensing agreement was contingent upon the development by Tradux of a 12,000 word vocabulary for the computer programs by August 1, 1990, with a ninety-day extension to November 1, 1990. The parties agreed that Coral would have the right to cancel the agreement and Tradux would be required to return all consideration to Coral if the technology was not developed by Tradux as agreed by November 1, 1990. Pending development of the technology, the stock certificates issued by Coral in consideration for the licensing rights were held in an escrow account. 23. Tradux improperly recognized $550,000 of revenue from the licensing agreement with Coral during the year ended December 31, 1989. GAAP provides that revenue is to be recognized when an exchange has occurred, the earnings process is complete and the collection of the sale price is reasonably assured. The recognition of revenue involves consideration of two factors: (i) whether revenue is realized or realizable, and (ii) whether it is earned. Tradux's recognition of revenue in 1989 resulting from its agreement with Coral was improper because of the unfulfilled contingency in the agreement to produce a marketable product by November 1, 1990. Since Tradux's obligations pursuant to its agreement with Coral were far from complete as of December 31, 1989, the revenue that Tradux recognized from its agreement with Coral was neither realized or realizable, nor earned as of such - -6 -------------------- BEGINNING OF PAGE #7 ------------------- date. Tradux reported no other revenue during the year ended December 31, 1989. Inadequate Planning 24. GAAS provides that an audit must be adequately planned. AU Section 311.01. Audit planning involves developing an overall strategy for the expected conduct and the scope of the audit. AU Section 311.03. In planning the audit, the auditor should consider the nature, extent, and timing of work to be performed and should prepare a written audit program. AU Section 311.05. The audit program should set forth the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. Id. Engel's workpapers do not include a written audit program and otherwise fail to indicate that the audit was adequately planned. See In Re James C. Andrus, C.P.A., Exchange Act Release 31267, AAER No. 424 (September 30, 1992) (adequately planned audit engagements include a written audit program or strategy of expected conduct). Failure to Gather Sufficient Competent Evidential Matter in the Audits of the December 31, 1989 and the December 31, 1990 Financial Statements 25. An auditor must obtain sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements under audit. AU Section 326.01. Evidence obtained from an independent source outside the entity which is being audited provides greater assurance of reliability than evidence obtained from the entity being audited. AU Section 326.19.a. The confirmation of accounts receivable is a generally accepted auditing procedure. AU Section 331.01, (superseded by AU Section 330.34). 26. With respect to Tradux's accounting for the acquisition of ITS, Engel failed to determine whether Advisors and Tradux were entities under common control. Similarly, with respect to the recording of the computer software programs as assets, Engel knew that the computer software programs were in a developmental stage. However, Engel failed to accumulate evidence sufficient to ascertain whether the computer software programs were technologically feasible, as defined by GAAP. Accordingly, Engel was unable to assess the appropriateness of Tradux's accounting for the acquisition of ITS or of its computer software programs. Finally, Engel failed to substantiate Tradux's method of accounting for the Coral licensing agreement with available documentary evidence, such as the agreement, and he failed to confirm the Tradux receivable from Coral at December 31, 1989. Improper Audit Reports 27. An auditor's report is required to state whether the audit was conducted in accordance with GAAS and that the financial statements were prepared in conformity with GAAP. AU Section 508.08. Engel failed to obtain sufficient competent evidential matter in the course of auditing Tradux's December 31, 1989 and December 31, 1990 financial statements. An inability to obtain sufficient competent evidential matter constitutes a restriction on the scope of the audit which may require an auditor to disclaim or qualify an opinion. AU Section 508.17. A disclaimer of opinion is appropriate when the auditor has not performed an audit in sufficient scope to form an opinion on the - -7 -------------------- BEGINNING OF PAGE #8 ------------------- financial statements. AU Section 508.42. Moreover, Tradux's financial statements were not prepared in accordance with GAAP. Regardless, Engel signed unqualified audit reports as to Tradux's December 31, 1989 and December 31, 1990 financial statements. Accordingly, Engel issued improper audit reports. Failure to Exercise Due Professional Care 28. An auditor must exercise due professional care in performing an audit and preparing the audit report. AU Section 230.01. As described above, Engel failed to exercise due professional care in the performance of his audits of Tradux's December 31, 1989 and December 31, 1990 financial statements by: 1) opining that these financial statements were prepared in conformity with GAAP, and audited in accordance with GAAS, when, in fact, they were not; 2) inadequately planning the audits; 3) failing to obtain sufficient competent evidential matter; and 4) improperly issuing unqualified audit reports. 29. Due care also imposes a responsibility upon the auditor to observe the standards of field work and reporting prescribed by GAAS. AU Section230.02. In addition, an auditor should exercise due care in planning, performing and evaluating the results of audit procedures, and maintain a level of professional skepticism sufficient to reasonably assure that material errors and irregularities will be detected. AU Section316.08. During the course of his audits of Tradux's December 31, 1989 and December 31, 1990 financial statements, Engel failed to exercise due care and to maintain a healthy degree of skepticism by ignoring facts and GAAP accounting pronouncements which contradicted Tradux's accounting for certain transactions. For example, Engel ignored the family relationships, the sharing of office space and expenses and other "red flags" which indicated that Tradux and Advisors may have been under common control. Similarly, with respect to the recording of the computer software programs as assets, Engel knew that the computer software programs were in a developmental stage, yet disregarded this fact in evaluating the manner in which the transaction was recorded. In addition, Engel failed to recognize that Tradux improperly recorded revenue on the agreement with Coral as of December 31, 1989, notwithstanding Coral's right to cancel the licensing agreement and the fact that the shares which Coral issued to Tradux were to be held in escrow pending Tradux's satisfaction of significant future obligations. 30. Accordingly, pursuant to Rule 2(e)(1)(ii) of the Commission's Rules of Practice, the Commission has determined that Engel engaged in improper professional conduct. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Effren's, Fink's, and Engel's Offers of Settlement. Accordingly, IT IS ORDERED that: - -8 -------------------- BEGINNING OF PAGE #9 ------------------- 1. Effective immediately, Effren cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing any violation or future violation of Sections 13(a) and 15(d) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 15d-1, 15d-11, and 15d-13 thereunder. 2. Effective immediately, Fink be permanently denied the privilege of appearing or practicing before the Commission as an accountant. 3. Effective immediately, Fink cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 4. Effective immediately, Engel be denied the privilege of appearing or practicing as an accountant before the Commission. 5. Eighteen months after the date of this Opinion and Order, Engel may apply to the Commission and request that he be permitted to resume appearing or practicing before the Commission as: a. a preparer or reviewer of financial statements required to be filed with the Commission or a person responsible for the preparation or review of financial statements required to be filed with the Commission provided that, in Engel's practice before the Commission, his work will be reviewed by the independent audit committee of the company or in some other manner acceptable to the staff of the Commission; b. an independent public accountant upon submission of an application to the Office of the Chief Accountant of the Commission containing a showing satisfactory to the Commission that: i) Engel, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section"); ii) Engel, or any firm with which he is or becomes associated, has received an unqualified report relating to his or its most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and iii) Engel 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. 6. The Commission's review of any request or application by Engel to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referred - -9 -------------------- BEGINNING OF PAGE #10 ------------------- to above, any other matters relating to Engel's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary - -10 -------------------- BEGINNING OF PAGE #11 ------------------- SERVICE LIST Rule 23 of the Commission's Rules of Practice provides that all amendments to moving papers, all answers, all motions or applications made in the course of a proceeding (unless made orally during a hearing), all proposed findings and conclusions, all petitions for review of any initial decision, and all briefs, shall be filed with the Commission and shall be served upon all other parties to the proceeding, including the interested Division of the Commission. The Opinion and Order Pursuant To Rule 2(e) of the Commission's Rules of Practice and Cease and Desist Order in the above-captioned matter has been sent to the following parties and other persons entitled to notice: Jonathan G. Katz, Secretary Securities and Exchange Commission Mail Stop 6-9 450 Fifth Street, N.W. Washington, D.C. 20549 The Honorable Lillian A. McEwen Administrative Law Judge Securities and Exchange Commission Mail Stop 11-6 450 Fifth Street, N.W. Washington, D.C. 20549 Securities and Exchange Commission Northeast Regional Office 7 World Trade Center 13th Floor New York, New York 10048 attn: Martin A. Kuperberg, Senior Associate Andrew S. Fink 58 Bernard Circle Centerville, Massachusetts 02632 Pro Se William Nortman, Esq. Nortman & Bloom 1101 Brickell Avenue, Suite 1400 Miami, Florida 33131 Attorney for Lee L. Engel Robert L. Seaman, Esq. 515 Madison Avenue, Suite 3200 New York, New York 10022 Attorney for Ronald Effren Ronald L. Effren Richmond C 421 Deerfield Beach, Florida 33442 Lee L. Engel 2761 Ocean Club Blvd. Hollywood, Florida 33019