==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37843 / October 21, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 844 / October 21, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9171 _________________________ : ORDER INSTITUTING PUBLIC In the Matter of : PROCEEDINGS PURSUANT TO SECTION : 21C OF THE SECURITIES EXCHANGE GREG STEVEN KAPLAN : ACT OF 1934 AND RULE 102(e) OF THE : COMMISSION'S RULES OF PRACTICE, Respondent. : MAKING FINDINGS, AND IMPOSING _________________________: SANCTIONS I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted against Greg Steven Kaplan ("Kaplan") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1) of the Commission's Rules of Practice [17 C.F.R.  201.102(e)(1)]. / II. In anticipation of the institution of these proceedings, Kaplan has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings 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 or conclusions contained herein, except as to the Commission's // Paragraph (1) of Rule 102(e) provides, in pertinent part: The Commission may . . . 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 of and opportunity for hearing in the matter . . . (iii) to have willfully violated . . . any provision of the federal securities laws [15 U.S.C.  77a to 80b-20] or the rules and regulations thereunder. . . . ==========================================START OF PAGE 2====== finding of jurisdiction, which he admits, and prior to a hearing pursuant to the Commission's Rules of Practice, Kaplan consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Sanctions ("Order"). III. FINDINGS On the basis of this Order and the Offer submitted by Kaplan, the Commission finds / that: A. Summary Kaplan prepared and caused to be filed with the Commission consolidated financial statements contained in an annual and a quarterly report of Pace American Group, Inc. ("Pace American") that materially misstated estimates of loss reserves and thus operating results in the company's surety bond business. Kaplan also failed to disclose a special purpose report and its contents to Pace American's auditors in connection with the company's 1992 fiscal year-end audit. As a result, Kaplan violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder. B. Respondent Kaplan, age 32, was Pace American's chief financial officer from April 1991 until March 10, 1994, and an officer and director of American Bonding Company, Inc. ("American Bonding"), a Pace American subsidiary, which he joined as its accounting manager in July 1990. Kaplan was a licensed certified public accountant in the state of California, but has been on inactive status since 1994. C. Issuer Pace American is a Delaware holding company with its place of business in Boca Raton, Florida. Its principal subsidiaries were American Bonding, which primarily underwrote surety bonds for contractors, and American Sentinel Insurance Company, which sold commercial property and casualty insurance. Pace American's common stock became registered with the Commission pursuant to Section 12(g) of the Exchange Act in September 1992 after the company filed a registration statement on Form S-1 with the Commission and its common stock was listed on the NASDAQ National // The findings herein are made pursuant to Kaplan's Offer and are not binding on any other person or entity named as a respondent in this or any other proceedings. ==========================================START OF PAGE 3====== Market System. NASDAQ delisted the shares on August 18, 1994, due to the company's failure to file timely its Form 10-K for the fiscal year ended December 31, 1993, and to the resignation of its independent auditors. On November 20, 1995 the company filed a Form 15 to deregister from its obligation to file periodic reports with the Commission. D. Facts 1. Kaplan Failed to Provide a Special Purpose Report to Pace American's Auditors In March 1993, during an audit of Pace American's 1992 fiscal year-end consolidated financial statements ("1992 financial statements"), Kaplan asked American Bonding's accounting department to prepare a report measuring increases in actual and potential losses on claims outstanding at 1992 year- end on American Bonding bonds ("case reserves"). An estimate of case reserves was set by Pace American's claims department and was required by Pace American to measure its exposure on reported loss and loss adjustment expenses ("loss reserves") in the preparation of its 1992 financial statements. / American Bonding's comptroller drafted the report, shared it with American Bonding's chief financial officer around March 22, and then provided it to Kaplan. The report reflected that case reserves on a gross basis of $6.8 million and on a net basis of $3.1 million had developed on its outstanding bonds from January 1, 1993, up to March 22, 1993. / The existence of such substantial loss development indicated that Pace American needed to undertake further evaluation to determine whether and in what amount these loss increases were attributable to fiscal year-end 1992 and thus whether its loss reserves at year-end were adequate. Such evaluation would have revealed the need to substantially increase // Loss reserves estimate the ultimate costs of an insurance claim and include case reserves, incurred but not reported reserves and loss adjustment expenses. // Net losses are increases in loss reserves after reinsurance offsets are taken into account. When Pace American's 1992 results were initially reported in the Form 10-K filed with the Commission on March 31, 1993, the company used net numbers in establishing loss reserves. FASB Statement No. 113, "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts," issued in December 1992, defined the extent to which reinsurance could be offset against loss reserves. Although compliance with FASB 113 was not mandated until the end of 1993, the company implemented the new standard in May 1993, causing 1992 operating results to be restated, since much of the losses were no longer reducible by reinsurance offsets as prescribed in FASB 113. ==========================================START OF PAGE 4====== loss reserves in the 1992 financial statements. During the audit, American Bonding's chief financial officer asked Kaplan if the loss development report should be given to Pace American's auditors, Coopers & Lybrand, but Kaplan indicated that the claims department was still reviewing the overall situation and that he would decide whether to give the report to Coopers. However, Kaplan never provided or directed anyone at Pace American to furnish the report to Coopers during the audit. Kaplan also signed and provided to Coopers a management representation letter in connection with Pace American's year-end 1992 audit, which stated that all liabilities of which the company was aware were included in the 1992 financial statements, and that the reserves set forth in the letter were believed by management to be sufficient to provide for all unpaid losses and claims and loss adjustment expenses received or accrued at 1992 year-end. When he signed this letter, Kaplan was aware or should have been aware that these statements in the letter were misleading since they were not qualified by the disclosure of the existence of the special purpose report. In addition, during discussions with audit personnel Kaplan failed to make the auditors aware of the report's content. 2. Kaplan Caused Pace American to Misstate Income and Provisions for Loss Reserves in its 1992 Annual Financial Statements and 1993 First Quarter Financial Statements Months after Pace American went public on September 22, 1992, Kaplan prepared, signed and caused the company's first audited financial statements to be filed with the Commission on March 31, 1993, in a Form 10-K for the 1992 fiscal year. The financial statements materially overstated income and understated liabilities by not properly recognizing the increases in the case reserves which would have been revealed from a further evaluation of the information reflected in the special purpose report. Kaplan allowed the company to issue these operating results and file the 1992 Form 10-K with the Commission even though he was aware or should have been aware that the disclosures concerning American Bonding's loss reserves were inaccurate. These material inaccuracies also caused the company's amended financial statements included in the Form 10-K/A filed on May 25, 1993, and the consolidated first quarter financial statements contained in the Form 10-Q/A filed on May 24, 1993, to be materially misstated. / The following table illustrates how the improper accounting for the loss reserves caused Pace American's financial statements // The company originally filed its first quarter 1993 Form 10- Q on May 17, 1993 without financial statements. ==========================================START OF PAGE 5====== to be materially misstated. All figures are expressed in millions. Financial Originally Reported Amended 1992 Results First Quarter Statements year-end 1992 to Adopt FASB 113 1993 Income (loss) Before Income Tax and Extraordinary items $5.2 $4.3 ($2.3) Overstatement/ (Understatement) $2.4 $3.7 ($3.7) % of Decrease in Pre-Tax Income (Loss) 46% 86% over 100% E. Legal Analysis Section 21C of the Exchange Act authorizes cease and desist proceedings against a person who causes a violation of the Exchange Act, or any rule or regulation thereunder, due to an act or omission the person knew or should have known would contribute to such violation. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the making of any untrue statement of material fact, or the failure to state a material fact necessary to make the statements made not misleading, "in connection with the purchase or sale of any security." Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in periodic reports filed with the Commission and trading thereafter occurs in the issuer's securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). To establish violations of Section 10(b) and Rule 10b-5, the Commission must also prove that the respondent acted with scienter. Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980). Those circuits that have considered the issue have generally held that recklessness satisfies the scienter requirement. See, e.g., SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985); SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C. Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). As chief financial officer Kaplan was responsible for the preparation of Pace American's financial statements which were included in filings with the Commission. He reviewed and signed the 1992 Form 10-K and amended Form 10-K/A, as well as the Form 10-Q/A for the first quarter of 1993. As described above, the 1992 financial statements and 1992 amended financial statements included in the 1992 Form 10-K and amended Form 10-K/A materially understated loss reserves and thus overstated operating results. In turn, financial statements in the Form 10-Q/A for the period ended March 31, 1993, materially overstated loss reserves and thus understated operating results owing to the delay in recognizing loss reserves properly allocable to 1992 until the ==========================================START OF PAGE 6====== 1993 first quarter. Kaplan knew or was reckless in not knowing that the loss development reflected in the special purpose report necessitated further evaluation, the results of which would have required a material increase in loss reserves in Pace American's 1992 financial statements. Rule 13b2-2 prohibits officers and directors from making materially false or misleading statements or omitting to state any material facts to an accountant in connection with an audit of the issuer's financial statements or the preparation of any filing or report with the Commission. As previously described, Kaplan failed to provide the special purpose report or the information on loss development contained in that report to Pace American's auditors although he knew or should have known that the loss development reflected in that report required a further evaluation, which would have revealed the need to recognize increased loss reserves in Pace American's 1992 financial statements. He also failed to disclose to the auditors the existence of substantial loss development in the management representation letter and during discussions with Coopers' employees. IV. CONCLUSION In view of the foregoing, Kaplan willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 in connection with Pace American's 1992 Form 10-K, 1992 amended Form 10-K/A and Form 10- Q/A for the first quarter of 1993 and Rule 13b2-2 in connection with the 1992 audit of Pace American's financial statements. V. ORDER Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Kaplan and impose the sanctions that are consented to in that Offer. Accordingly, IT IS HEREBY ORDERED that: A. Pursuant to Section 21C of the Exchange Act, Kaplan cease and desist from committing or causing any violation, and committing or causing any future violation, of Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Rule 13b2-2; B. Pursuant to Rule 102(e) of the Commission's Rules of Practice, Kaplan is denied the privilege of appearing or practicing before the Commission as an accountant; C. Five years from the date of this Order, Kaplan may apply to the Commission and request that he be permitted to resume ==========================================START OF PAGE 7====== appearing or practicing before the Commission as: 1. 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 Kaplan'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 Commission; or 2. 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: a. Kaplan, 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 Accountant's Division for CPA Firms ("SEC Practice Section"); b. Kaplan, or any firm with which he is or becomes associated, 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; and c. Kaplan 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; D. The Commission's review of any request or application by Kaplan to resume appearing or practicing before the Commission may include consideration of, in addition to the matter referred to above, any other matters relating to Kaplan's character, integrity, professional conduct, or qualifications to appear or practice before the Commission; and ==========================================START OF PAGE 8====== E. Kaplan shall comply with his cooperation agreement, as set forth in paragraph IV. of his Offer. By the Commission. Jonathan G. Katz Secretary