U.S. Securities & Exchange Commission
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U.S. Securities and Exchange Commission

Washington, D.C.

Securities Act of 1933
Release No. 8067 / March 6, 2002

Securities Exchange Act of 1934
Release No. 45509 / March 6, 2002

Accounting and Auditing Enforcement
Release No. 1513 / March 6, 2002

Administrative Proceeding
File No. 3-10716


The Securities and Exchange Commission today instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e) of the Commission's Rules of Practice against James E. Slayton.

The Division of Enforcement ("Division") and the Office of Chief Accountant ("OCA") allege that Slayton willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused and willfully aided and abetted Freestar's violations of Section 12(g) and Rule 12b-20 of the Exchange Act and engaged in improper professional conduct.

The Division and OCA allege that Slayton issued an audit report on the financial statements of Freedom Surf for the year ended December 15, 1999. Those financial statements reflected assets valued at $5.18 million, consisting entirely of equipment purportedly purchased from an entity in Costa Rica. The reported value of that equipment was supported by a fabricated appraisal, which Slayton relied upon in rendering his audit report. In that report, Slayton stated that Freedom Surf's financial statements fairly presented its financial condition in all material respects in conformity with generally accepted accounting principles ("GAAP") and that he conducted his audit in accordance with generally accepted auditing standards ("GAAS").

The Division and OCA also allege that the financial statements were materially false and did not present Freedom Surf's financial condition in conformity with GAAP. Freedom Surf purportedly purchased the equipment for 969,000 shares of its common stock and a promissory note for $335,000. Under GAAP, assets received by a corporation in return for stock must be recorded at fair value, which may be determined by reference either to the value of the assets received or the stock issued, whichever is more clearly evident. As Freedom Surf was a start-up at the time, with no public trading and no history of private arms-length transactions, the value of Freedom Surf's stock was not clearly evident. Freedom Surf, should, therefore, have determined the fair value of the assets received. Instead, Freedom Surf's officers devised a scheme to fabricate an appraisal falsely showing those assets to be worth over $5 million. Consequently, Freedom Surf's financial statements were not prepared in conformity with GAAP.

The Division and OCA further allege that Slayton did not conduct his audit according to GAAS because: Slayton failed to plan his audit by preparing audit programs or conducting audit risk assessments sufficient to determine matters requiring special consideration; Slayton failed to obtain sufficient competent evidential matter upon which to base his opinion; Slayton failed to exercise due professional care and maintain an attitude of professional skepticism to provide reasonable assurance of detecting both material errors and fraud in the financial statements; in relying on the appraisal, Slayton failed to determine whether the appraiser had the skill or knowledge to perform a valid appraisal and failed to understand the assumptions and methods used by the appraiser to ensure that the appraisal supported the values included in the financial statements; and issued an audit report containing an opinion without performing basic audit steps to provide a basis for that opinion.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide James E. Slayton an opportunity to dispute these allegations, and to determine what sanctions, if any, are appropriate.


Modified: 03/06/2002