SEC Charges Medical Supply Company and Executives for Accounting Fraud and Suspends Audit Professionals for Improper Professional Conduct
Litigation Release No. 25413 / June 8, 2022
Securities and Exchange Commission v. United Health Products, Inc., Douglas Beplate, and Louis Schiliro, No. 1:22-cv-03612 (D.N.J. filed June 8, 2022)
The Securities and Exchange Commission today charged medical supply company United Health Products, Inc., its former CEO and Chairman, Douglas Beplate, and its former COO, Louis Schiliro, with allegedly defrauding investors by materially inflating the company's financial results in its 2017 and 2018 SEC filings.
The SEC's complaint alleges that Beplate and Schiliro engineered two fraudulent sales transactions that they had UHP record and report in UHP's publicly-filed financial statements. As alleged in the complaint, in the first fraudulent sales transaction, in May 2017, Beplate and Schiliro procured a sham purchase order back-dated to March 2017 from a customer for product that was quickly cancelled and UHP never shipped. In the second allegedly fraudulent sale, Beplate and Schiliro orchestrated a purported December 2017 sale of a large amount of product to a customer who had never ordered it. The complaint alleges that Beplate and Schiliro took measures for UHP to report these fraudulent sales as revenue and receivables in UHP's 2017 and 2018 Forms 10-Q and 10-K, including repeatedly lying to and concealing the true facts from UHP's auditors.
The SEC's complaint, filed in the U.S. District Court for the District of New Jersey, charges UHP, Beplate, and Schiliro with directly violating or aiding and abetting violations of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, the reporting, books and records, and internal controls provisions of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder, and as to Beplate and Schiliro, the falsification or circumvention provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. The SEC's complaint also charges Beplate and Schiliro with lying to accountants in violation of Exchange Act Rule 13b2-2, and Beplate with violations of the certification provision of Rule 13a-14 and the insider security ownership filing requirements of Section 16(a) of the Exchange Act and Rule 16a-3 thereunder.
Without admitting or denying the complaint's allegations, UHP, Beplate and Schiliro consented to the entry of final judgments, subject to court approval, which would: (i) permanently enjoin each of them from violating the charged provisions; (ii) order civil penalties of $450,000 against UHP, $240,000 against Beplate, and $225,000 against Schiliro; (iii) impose permanent officer-and-director bars against Beplate and Schiliro; and (iv) order Beplate to reimburse UHP $1,010,976.15, representing profits from his sales of UHP stock, pursuant to the clawback provisions of Section 304(a) of the Sarbanes-Oxley Act of 2002.
In separate settled administrative proceedings, the SEC charged Steven Avis, the audit engagement partner, and Steven Hurd, the audit manager, of Haynie & Co., which audited UHP's 2017 financial statements. According to the SEC's order, Avis and Hurd failed to address numerous red flags in connection with UHP's fraudulent sales transactions when they signed off on the 2017 audit, and failed to, among other things, obtain sufficient appropriate audit evidence, exercise due professional care and skepticism, and investigate relevant information after Haynie issued its 2017 audit report.
The SEC's order finds that Avis and Hurd engaged in improper professional conduct within the meaning of Sections 4C(a)(2) and 4C(b)(2)(A) of the Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B)(1) and (2) of the Commission's Rules of Practice and were a cause of certain violations by UHP of the reporting provisions of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Without admitting or denying the findings, Avis and Hurd agreed to the entry of the order, which suspends them from appearing or practicing before the Commission as an accountant, with permission to apply for reinstatement after three years for Avis and one year for Hurd, imposes a cease-and-desist order against them, and orders Avis to pay a $20,000 civil penalty.
The SEC's investigation was conducted by Teresa A. Rodriguez, Jonathan M. Grant, Kenneth Gottlieb, Nancy A. Brown, Desiree M. Marmita, and Wendy B. Tepperman of the New York Regional Office. The case is being supervised by Lara Shalov Mehraban and Sheldon L. Pollock. The investigative team appreciates the assistance of Margaret Cain of the Office of Market Intelligence.