UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 40290 / July 31, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1059 / July 31, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9663 : In the Matter of : : ORDER INSTITUTING PUBLIC : ADMINISTRATIVE PROCEEDINGS Maria Mei Wenner, CPA : PURSUANT TO RULE 102(e) OF THE : COMMISSION'S RULES OF : PRACTICE, MAKING FINDINGS AND : IMPOSING REMEDIAL SANCTIONS Respondent. : I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice [17 C.F.R. 201.102(e)(1)(ii) and (iii)] against Maria Mei Wenner (Wenner).[1] In anticipation of the institution of these administrative proceedings, Wenner 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, Wenner, by her Offer, admits to the facts contained in paragraphs III(a) through (c) below, and consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant To Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order). II. Accordingly, IT IS ORDERED that public administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice be, and hereby are, instituted. III. On the basis of this Order and the Offer submitted by Wenner, the Commission finds that:[2] THE RESPONDENT a.Wenner is a resident of San Francisco, California. Wenner was, at all relevant times, a certified public accountant (CPA), certified in the State of California. b.From 1990 to at least September 1994, Wenner was the Chief Financial Officer (CFO) of Carme, Inc. (Carme). As CFO, she was responsible for compiling Carme's sales and financial data to be forwarded to Carme's parent company, International Research and Development Corporation (IRDC), for inclusion in IRDC's consolidated financial statements and periodic reports filed with the Commission. ENTITIES INVOLVED c.IRDC was incorporated under Delaware law in 1970. Its principal offices were located in Mattawan, Michigan. IRDC owned Carme and two other subsidiaries and was engaged in pre-clinical and clinical safety evaluation studies of drugs. At all relevant times, IRDC's common stock was registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) and traded over-the-counter on NASDAQ until May 1995, when it was delisted. IRDC filed periodic reports with the Commission on Forms 10-Q and 10-K pursuant to Section 13 of the Exchange Act and the rules and regulations promulgated thereunder. These periodic reports contained IRDC's consolidated financial statements. IRDC filed for bankruptcy in 1995 as a result of the fraudulent scheme discussed below. d.Carme was incorporated in 1975 under Nevada law. Its principal offices are located in Novato, California. It is engaged in the manufacture and sale of specialty natural skin care products through wholesalers for distribution to retail outlets. Carme was acquired by IRDC in January 1990. It was sold to an unrelated entity on or about September 27, 1995. Carme is not registered with the Commission in any capacity. e.Axel Kraft International, Ltd. (Axel Kraft) is a Canadian corporation formed in 1982 and wholly owned by one individual. Its principal offices are located in Ontario, Canada. Axel Kraft is not registered with the Commission in any capacity. THE FRAUDULENT SCHEME f.From at least June 1993 through at least September 1994, the President of IRDC and Carme, Carme's Executive Vice President, its Sales Manager and Wenner engaged in a scheme to defraud by booking millions of dollars in fictitious sales to various customers of Carme, including Axel Kraft. As a result of these activities, Carme's accounts receivable, sales and earnings were materially overstated during the relevant period. Those figures were included in IRDC's consolidated financial statements, thereby causing IRDC to materially overstate, among other things, its accounts receivable, revenue, net earnings and earnings per share in IRDC's Forms 10-Q and 10-K filed with the Commission during the period of June 1993 through September 1994. Advance Billings g.The President of IRDC and Carme initiated the scheme beginning in the second quarter of 1993. He directed Carme's Executive Vice President to create approximately $300,000 in advance billings and include them in Carme's sales figures for the quarter. As a result, Carme's Executive Vice President and Sales Manager created and caused others to create approximately $300,000 in invoices to approximately 20 existing customers. Those customers were not contacted prior to the invoices being prepared and had not agreed to purchase the products listed on those invoices. Furthermore, the products were never delivered to the customers. Nevertheless, the fictitious sales were included in Carme's total sales figures and accounts receivable for the quarter. h.With knowledge that the sales reflected on those invoices were fictitious, Wenner made and caused to be made entries in Carme's books and records reflecting that the fictitious sales had actually occurred. Wenner also instructed Carme's accounts receivable clerks not to call customers listed on the invoices regarding the amounts due for the fictitious sales in order to prevent anyone from discovering the true nature of the fictitious sales. Wenner then prepared and sent to IRDC's Director of Accounting and de facto Chief Financial Officer monthly accounts receivable reports and quarterly financial statements for Carme which included the fictitious sales figures. Those sales figures were included in IRDC's consolidated financial statements and Form 10-Q for the quarter ended June 30, 1993, which overstated IRDC's accounts receivable and revenue by over $260,000, its net earnings by 62% and its net earnings per share by 67%. The revenue and net earnings figures were included in a press release issued to the public. i.During the third quarter of 1993, at the direction of the President of IRDC and Carme, Carme's Executive Vice President and its Sales Manager created and caused others to create almost $970,000 in additional fictitious invoices to over 50 additional customers of Carme, which were recorded in Carme's total sales figures and accounts receivable for the quarter. Again, these customers were not contacted prior to the invoices being prepared and they never agreed to purchase the products listed on the invoices. Similarly, the products were never delivered to the customers. j.With knowledge that the sales reflected on those invoices were fictitious, Wenner made and caused to be made entries in Carme's books and records reflecting that the fictitious sales had actually occurred. Wenner also arranged for the fictitious sales to remain on Carme's list of accounts receivable and, during the following months, instructed accounts receivable clerks not to call these customers regarding the amounts due. Wenner then prepared and sent to IRDC's Director of Accounting and de facto Chief Financial Officer monthly accounts receivable reports and quarterly financial statements for Carme which included the fictitious accounts receivable and sales figures. Those accounts receivable and sales figures were then included in IRDC's consolidated financial statements and Form 10-Q for the quarter ended September 30, 1993, which overstated IRDC's accounts receivable by $1.2 million, its revenue by nearly $1 million, its net earnings by 325% and its net earnings per share by approximately 350%. The revenue and net earnings figures were included in a press release issued to the public. k.In October and November 1993, due to the difficulties in maintaining a fraud involving 70 customers and in anticipation of the year-end audit of IRDC and its subsidiaries, the President of IRDC and Carme directed Carme's Executive Vice President to reverse the more than $1.2 million of fictitious sales previously booked as advance billings and to use just one customer to carry out the scheme. As a result, by November 30, 1993, Wenner made entries in Carme's books and records reversing the previously booked fictitious accounts receivable and sales. Thus, the fictitious sales from the advance billings were not included in Carme's year-end sales figures and accounts receivable. However, those sales were replaced with other fictitious sales to a single customer. Transactions Involving Axel Kraft l.At the request of Carme's Executive Vice President, Carme's Sales Manager contacted Axel Kraft, a foreign company, who agreed to participate in the scheme. Prior to that time, Axel Kraft had purchased, on average, approximately $20,000 in various products from Carme per month. However, during November and December 1993, at the direction of the President of IRDC and Carme, Carme's Executive Vice President and its Sales Manager created or caused the creation of twelve invoices reflecting more than $800,000 in month-end purchases by Axel Kraft in each month, for a total of more than $1.6 million. Axel Kraft did not order the products listed in those invoices and never agreed to pay for them. In addition, those products were never delivered to Axel Kraft. m.Nevertheless, with knowledge that the sales listed on the Axel Kraft invoices were fictitious, Wenner made and caused to be made entries in Carme's books and records reflecting that the sales had actually occurred. Wenner also prepared and sent to IRDC monthly accounts receivable reports and quarterly financial statements for Carme including those fictitious sales figures. Those figures were included in IRDC's consolidated financial statements for the 4th quarter of 1993 and in IRDC's 10-K for the year ended December 31, 1993, which overstated IRDC's accounts receivable and revenue by more than $1.6 million, its net earnings by 1382% and its net earnings per share by 1800%. The revenue and earnings figures were also included in a press release issued to the public. n.Carme's legitimate sales continued to decrease during the first and second quarters of 1994. As a result, at the direction of the President of IRDC and Carme, Carme's Executive Vice President and its Sales Manager created or caused the creation of invoices to be prepared reflecting approximately $300,000 and $450,000 in additional fictitious sales to Axel Kraft on the last day of each of these quarters, respectively. These amounts were then included in Carme's total sales figures, revenue and accounts receivable. Again, Axel Kraft never ordered or agreed to pay for the items listed on the invoices, and the products were never delivered to Axel Kraft. o.Again, with knowledge that the sales listed on the Axel Kraft invoices for the first and second quarters of 1994 were fictitious, Wenner made and caused to be made entries in Carme's books and records reflecting that the sales had actually occurred. Wenner also prepared and sent to IRDC's Director of Accounting and de facto Chief Financial Officer monthly accounts receivable reports and quarterly financial statements for Carme for inclusion in IRDC's Forms 10-Q for the first and second quarters of 1994, knowing that such statements contained these fictitious sales figures. p.Moreover, in an attempt to prevent discovery and disclosure of the fictitious Axel Kraft receivables, Wenner "adjusted" or caused others to adjust the aging of the Axel Kraft receivable on Carme's Aged Receivable Reports, which was forwarded at the end of each month to IRDC's Director of Accounting and de facto Chief Financial Officer, to reflect that the Axel Kraft receivable was always current. As a result, the $1.6 million in fictitious Axel Kraft sales that were first recorded as accounts receivable in November and December 1993, were listed as current receivables in January 1994 and again in February 1994. Moreover, in March 1994, the $300,000 in additional sales were added to the "current" receivable due from Axel Kraft. The resulting $1.9 million receivable was also reflected as current at the end of March, April and May 1994. In June 1994, the $450,000 in additional sales were also added to the "current" receivable, bringing the total "current" Axel Kraft receivable to more than $2.4 million. q.As a result, these figures were included in IRDC's Form 10-Q for the quarter ended March 31, 1994, which overstated IRDC's accounts receivable by more than $1.9 million, revenue by over $300,000, net earnings by 56% and net earnings per share by 50%; and in IRDC's Form 10-Q for the period ended June 30, 1994, which overstated IRDC's accounts receivable by $2.4 million, revenue by nearly $450,000, net earnings by 134% and net earnings per share by 100%. The revenue and earnings figures were also included in press releases issued to the public. r.Thereafter, due to concerns that were raised by IRDC's primary lender about the nature and size of the Axel Kraft receivable, IRDC's Director of Accounting and de facto CFO improperly reclassified the Axel Kraft receivable as an "other asset" on its balance sheet prior to September 30, 1994, and included it as such in its September 30, 1994 Form 10-Q filed with the Commission. As a result, IRDC's Form 10-Q for the quarter ended September 30, 1994, overstated IRDC's prepaid expenses and other assets by $2.4 million. s.Subsequently, in January 1995, IRDC's Director of Accounting and de facto CFO discovered that the previously booked advance billings as well as the Axel Kraft sales were fictitious and reported his findings to IRDC's outside counsel and others. Shortly thereafter, IRDC fired the President of IRDC and Carme, Carme's Executive Vice President and its Sales Manager. Wenner had left Carme shortly before the others were terminated. IRDC then announced in a press release that Carme had accounting irregularities primarily as a result of the recording by Carme of sales of products which did not occur and that its results of fiscal 1993 and the first two quarters of 1994 would have to be restated, resulting in an estimated reduction of shareholders equity of approximately $1.2 million. Immediately following the press release, IRDC's common stock, which had been trading at $1.25 per share just prior to the release, fell to $0.50 per share. IRDC's common stock was subsequently delisted by NASDAQ. Cover Up of Scheme From the Independent Auditors t.During the period from at least December 1993 through February 1994, IRDC's independent auditors conducted their year-end audit of IRDC and its subsidiaries (1993 Audit). As part of the 1993 Audit, IRDC's auditors requested confirmation of the Axel Kraft receivable as of November 30, 1993. In order to hide their fraudulent scheme from the auditors, Wenner prepared and signed two confirmation requests to Axel Kraft. These requests made specific reference to the fictitious invoices previously created by Carme's Executive Vice President, its Sales Manager and Wenner for purported purchases by Axel Kraft from Carme during November 1993. As a result, Wenner represented to the auditors, at whose request the confirmations were obtained, that those fictitious invoices were legitimate. Wenner also caused representatives of Axel Kraft to sign and return the two confirmation letters to the auditors falsely stating that Axel Kraft owed Carme over $850,000 for those fictitious sales. u.In addition, in order to explain the substantial increase in sales to Axel Kraft, Wenner informed IRDC's independent auditors that Carme had reduced the number of its Canadian distributors from twelve to three, one of which was Axel Kraft, and omitted to state that the Axel Kraft sales were fictitious. v.Finally, Wenner signed a management representation letter to IRDC's independent auditors, in connection with the 1993 Audit, falsely representing, among other things, that Carme's financial statements were correct and presented in conformity with generally accepted accounting principles (GAAP); that Carme had title to all assets appearing in its balance sheet; that there had been no violations of any laws whose effects should be considered for disclosure in Carme's financial statements; that there were no irregularities involving management or employees who have significant roles in the internal control structure of Carme or which could have a material effect on Carme's financial statements, and that Wenner understood that the 1993 Audit was designed primarily for the purpose of expressing an opinion on the consolidated financial statements of IRDC taken as a whole. ACCOUNTING AND LEGAL ANALYSIS w.Pursuant to Rule 102(e)(1) of the Commission's Rules of Practice, the Commission may censure a person or temporarily or permanently deny a person the privilege of appearing or practicing before it if such person is found, after notice and opportunity for hearing, among other things, to have engaged in improper professional conduct or to have willfully violated or willfully aided and abetted violations of any provision of the federal securities laws or the rules and regulations thereunder. Improper professional conduct includes material departures from GAAP. Scott L. Jenson, C.P.A., Sec. Exch. Act. Rel. No. 33696, 56 SEC Docket 0474 (March 1, 1994)(Rule 102(e)(1) Proceeding). Wenner engaged in egregious intentional conduct contrary to GAAP and willfully violated the federal securities laws by intentionally creating fictitious accounts receivable and sales, using her knowledge of GAAP to prevent the discovery of the scheme and lying to Carme's auditors. Wenner Engaged in Improper Professional Conduct x.Wenner deliberately falsified books and records and financial statements. The result of Wenner's action was that the financial statements of IRDC contained false sales revenue and false account balances for accounts receivable and other assets. Financial statements containing such falsities obviously do not comply with GAAP as required by Regulation S-X [17 C.F.R. 210.1-01 et. seq.]. y.In fact, Wenner showed a complete disregard for professional standards. In addition to the above acts, she facilitated the provision of false confirmations of the fictitious sales to IRDC's independent auditors. Finally, she informed IRDC's auditors in a management representation letter that Carme's financial statements complied with GAAP, with full knowledge of the fact that those financial statements contained material misstatements as a result of her own conduct. **FOOTNOTES** [1]:Rule 102(e)(1) of the Commission's Rules of Practice, 17 C.F.R. 201.102(e), provides in pertinent part: 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 ... (ii) ... to have engaged in unethical or improper professional conduct, or (iii) to have willfully violated ... any provision of the Federal securities laws (17 U.S.C. secs. 77a to 80b-20), or the rules and regulations thereunder. [2]:The findings herein are made pursuant to Wenner's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. 1 Wenner Willfully Violated the Federal Securities Laws z.During the period from in or about June 1993 to in or about September 1994, Wenner willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, in that Wenner, in connection with the purchase or sale of the securities of IRDC, directly or indirectly, by the use of the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange: employed devices, schemes or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, practices or courses of business which operated as a fraud or deceit. As part of the aforesaid conduct, Wenner engaged in the acts and practices described in paragraphs III(f) through (v) above. aa.During the period from in or about June 1993 to in or about September 1994, Wenner willfully violated Rule 13b2-1 promulgated under Section 13(b)(2) of the Exchange Act in that Wenner, directly or indirectly, falsified or caused to be falsified, books, records or accounts subject to Section 13(b)(2)(A) of the Exchange Act. As part of the aforesaid conduct, Wenner engaged in the acts and practices described in paragraphs III(f) through (v) above. bb.During the period from in or about June 1993 to in or about September 1994, Wenner willfully violated Section 13(b)(5) of the Exchange Act in that Wenner knowingly circumvented or knowingly failed to implement a system of internal accounting controls or knowingly falsified books, records or accounts described in Section 13(b)(2) of the Exchange Act. As part of the aforesaid conduct, Wenner engaged in the acts and practices described in paragraphs III(f) through (v) above. cc.On July 22, 1998, the United States District Court for the Northern District of California, in the case of U.S. Securities and Exchange Commission v. Francis X. Wazeter, III, et. al., (C- 97-3566 CW), entered a Final Order of Permanent Injunction and Other Equitable Relief (Final Order) against Wenner, for violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder. Wenner consented to the entry of the Final Order, admitting the facts alleged in the Commission's Complaint against her. The Court also ordered that Wenner pay civil penalties in the amount of $50,000. That action was based upon the same conduct described above. IV. Based on the foregoing, the Commission finds that Wenner has engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii). The Commission further finds that Wenner willfully violated the provisions of the federal securities laws discussed in paragraphs III(z) through (cc) above, within the meaning of Rule 102(e)(1)(iii). Accordingly, IT IS ORDERED, effective immediately, that: Wenner be and hereby is denied the privilege of appearing or practicing before the Commission as an accountant. By the Commission. Jonathan G. Katz Secretary