UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39124 / September 24, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 963 / September 24, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9432 ORDER INSTITUTING CEASE-AND-DESIST In the Matter of PROCEEDING PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND ELLIOT STUMACHER, ADMINISTRATIVE PROCEEDING PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS AND IMPOSING Respondent. SANCTIONS I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a cease-and-desist proceeding pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and an administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice<(1)> be, and hereby are, instituted against Elliot Stumacher ("Stumacher"). <(1)> Rule 102(e)(1) of the Commission's Rules of Practice, 17 C.F.R.  201.102(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 (i) not to possess the requisite qualifications to represent others ... (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. ======END OF PAGE 1====== II. In anticipation of the institution of these proceedings, Stumacher has submitted an offer of settlement ("Offer"), which the Commission has determined to accept. 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, Stumacher, without admitting or denying the findings herein, and admitting the jurisdiction of the Commission over him and over the subject matter of these proceedings, consents to the entry of this Order Instituting Cease-and-Desist Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934 and Administrative Proceeding Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Sanctions ("Order").<(2)> III. FINDINGS On the basis of the Order and the Offer of Settlement, the Commission finds that:<(3)> A. Stumacher, age 38 of Woodmere, New York, currently owns, and during 1989, 1990 and 1991 ("Relevant Period") owned with another individual, who was not a certified public accountant ("CPA"), an accounting firm located in New York City named Jack Diamond & Co. Stumacher is not, and during the Relevant Period was not, a CPA. B. Packaging Plus Services, Inc. ("Packaging Plus"), a Nevada corporation with principal offices located in Plainview, New York, was, during the Relevant Period, engaged in the business of selling franchises for the operation of stores specializing in parcel packaging and shipping. During the Relevant Period, Packaging Plus's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded in the over-the-counter market. <(2)> On August 6, 1996, the Commission commenced a civil action ("Civil Action") against Stumacher in the United States District Court for the Eastern District of New York. SEC v. Beagelman, 96 Civ. 3899 (DRH). In its complaint, the Commission alleges that Stumacher violated Section 10(b) of the Exchange Act and Rule 10b-5, and seeks permanent injunctive relief. The conduct underlying the complaint is the same as that underlying the Order. As part of this settlement, the Commission has agreed to dismiss with prejudice its complaint against Stumacher in the Civil Action. <(3)> The Commission's findings herein are not binding upon any other person or entity in this or any other proceeding. ======END OF PAGE 2====== C. Violative Conduct For the year ended December 31, 1989, Packaging Plus recorded on its books and records certain franchise fee receivables and franchise fee revenue in contravention of generally accepted accounting principles ("GAAP").<(4)> As a result, in its financial statements for the year ended December 31, 1989 ("1989 Financial Statements"), Packaging Plus overstated by $153,602 its total reported franchise fee receivables of $1,210,353, and understated by $153,602 its reported net loss of $180,960. During the Relevant Period, Stumacher signed the name of Jack Diamond ("Diamond"), a CPA, to an audit report ("1989 Audit Report") that accompanied the 1989 Financial Statements. This was done without Diamond's authorization. The 1989 Financial Statements and the 1989 Audit Report were filed by Packaging Plus with the Commission on May 2, 1990, August 6, 1990, February 27, 1991 and April 15, 1991, in amendments to a Form 10 Registration Statement originally filed by Packaging Plus with the Commission on November 7, 1989. By signing Diamond's name without Diamond's authorization to the 1989 Audit Report that was filed with the Commission, Stumacher held himself out as a CPA when, in fact, Stumacher had never been a CPA. Stumacher also knowingly or recklessly misrepresented in the 1989 Audit Report that Diamond had conducted an audit of the 1989 Financial Statements in accordance with generally accepted auditing standards ("GAAS") when, in fact, Diamond had not, and that the 1989 Financial Statements were presented fairly in conformity with GAAP, when, in fact, they were not. D. Legal Analysis Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Section 10(b) of the Exchange Act and Rule 10b-5 proscribe, among other things, misstatements and omissions of material fact made in connection with the purchase or sale of securities. Information is material if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as having significantly altered the total mix of information available. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Information concerning the financial condition of a company is presumptively material. SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980); SEC v. Blavin, 557 F.Supp. 1304, 1313 (E.D. Mich. 1983), aff'd, 760 F.2d. 706 (6th Cir. 1985) (materiality of information relating to financial condition, solvency and profitability not subject to serious challenge). Violations of Section 10(b) of the Exchange Act and Rule 10b-5 require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 696 (1980). The Supreme Court has defined scienter as the "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Reckless 3 2 8 s <(4)> Section 4-01(a) of Regulation S-X requires that financial statements filed with the Commission comply with GAAP. 17 C.F.R. 210.4-01(a). ======END OF PAGE 3====== conduct also satisfies the scienter requirement of Section 10(b) of the Exchange Act and Rule 10b-5. IIT v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). False and misleading information in annual reports filed with the Commission satisfies the "in connection with" requirement of Section 10(b) of the Exchange Act and Rule 10b-5. See In re Ames Dept. Stores Inc. Stock Litigation, 991 F.2d 953, 962 (2d Cir. 1993); In re Leslie Fay Companies, Inc., Securities Litigation, 871 F.Supp. 686, 699 (S.D.N.Y. 1995). Accord McGann v. Ernst & Young, 102 F.3d 390 (9th Cir. 1996) cert. denied, ___ U.S. ___, 1997 US LEXIS 2455 (April 14, 1997). Auditors violate Section 10(b) of the Exchange Act and Rule 10b-5 when they prepare and certify fraudulent financial statements included in public filings. Auditors can also violate Section 10(b) of the Exchange Act and Rule 10b-5 by issuing opinions with no genuine belief in, or no basis for, statements made in the opinions. See Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, 474 U.S. 946 (1985). See also Herskowitz v. Nutri/System, Inc., 857 F.2d 179, 184 (3d Cir. 1988), cert. denied, 489 U.S. 1054 (1989). An audit which is "so flimsy as to lead to the conclusion that there was no genuine belief" to support an auditor's opinion is proof of reckless conduct. In re Phar-Mor, Inc. Securities Litigation, 892 F.Supp. 676, 686 (W.D. Pa. 1995). The Commission has determined that Stumacher willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 by signing without authorization Diamond's name to the 1989 Audit Report and by printing the 1989 Audit Report on stationery which read "Jack E. Diamond, Certified Public Accountant" (thereby misrepresenting that Diamond, a CPA, had audited the 1989 Financial Statements) when he knew or was reckless in not knowing that Diamond had not audited the 1989 Financial Statements, and when he knew or should have known that the 1989 Audit Report would be filed with the Commission. The Commission also has determined that Stumacher willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 by falsely representing in the 1989 Audit Report that the 1989 Financial Statements had been audited in accordance with GAAS and that the 1989 Financial Statements were presented fairly in conformity with GAAP. Qualification to Practice Before the Commission Section 2-01(a) of Regulation S-X 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." 17 C.F.R. 210.2-01(a). The Commission has determined that Stumacher is not duly registered and in good standing as a CPA under the laws of the place of his residence or his principal office. Thus, Stumacher does not possess the requisite qualifications to represent others as a certified public accountant before the Commission. ======END OF PAGE 4====== E. Finding By reason of the foregoing, the Commission finds that Stumacher willfully violated Section 10(b) of the Exchange Act and Rule 10b-5, and that Stumacher does not possess the requisite qualifications to represent others as a certified public accountant before the Commission. IV. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept Stumacher's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, effective immediately, that Stumacher: 1. pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5; and 2. pursuant to Rule 102(e)(1)(i) and (iii) of the Commission's Rules of Practice, be, and hereby is, denied the privilege of appearing or practicing before the Commission as an accountant. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 5======