U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18818 / August 3, 2004
Accounting and Auditing Enforcement
Release No. 2073 / August 3, 2004
SECURITIES AND EXCHANGE COMMISSION v. WILLIAM F. BUETTNER, MARK D. KIRSTEIN AND AMY S. FRAZIER , (US District Court for the Eastern District of Pennsylvania, 01-CV-3898)
The Commission today announced that on July 28, 2004, the Honorable Norma L. Shapiro, United States District Court Judge, Eastern District of Pennsylvania, entered Final Judgments against defendants William F. Buettner, Mark D. Kirstein, and Amy S. Frazier -- members of the Coopers & Lybrand, LLP (now PricewaterhouseCoopers, LLP) engagement team that audited the consolidated financial statements of Allegheny Health, Education and Research Foundation ("AHERF") for the year ending June 30, 1997:
- The Final Judgment as to defendant Buettner permanently enjoins him from violating section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and requires him to pay a civil money penalty of $40,000.00.
- The Final Judgments as to defendants Kirstein and Frazier enjoin them from participating as a member of the engagement team of any independent auditing firm that issues audit reports in connection with the financial statements of any public or private entity for a two-year period.
The defendants consented to the entry of the final judgments without admitting or denying the allegations of the Second Amended Complaint ("complaint").
According to the allegations of complaint, Buettner, Kirstein, and Frazier, certified public accountants, served respectively as the engagement partner, the senior manager, and the manager on the failed audit of AHERF -- at its height the largest nonprofit healthcare organization in the Commonwealth of Pennsylvania. The Commission's complaint also alleged that each of them actively participated in a fraudulent scheme to mask AHERF's deteriorating financial condition. In so doing, the defendants participated in the creation and issuance of, and failed to correct, audit reports that contained unqualified opinions concerning AHERF's 1997 consolidated financial statements and AHERF's 1997 supplementary consolidating and combining financial information. For its fiscal year 1997, AHERF reported net income when, in reality, it was operating at substantial net loss.
The scheme, as alleged in the complaint, involved the fraudulent transfer of $99.6 million of reserves from the books of a recently-acquired entity to the books of a group of AHERF-related entities collectively known as the Delaware Valley Obligated Group ("Delaware Valley"). The transferred reserves were used by Delaware Valley to either increase its own reserves or to reduce expenses related to the write-off of uncollectible accounts receivable. According to the complaint, Buettner, Kirstein and Frazier played an active role in the fraud by, among other things, helping AHERF plan fraudulent transfers of reserves and subsequently conducting the 1997 audit in a manner intended to hide both the fraud and their involvement in it. Furthermore, they failed to expand their audit to address the improper transfers, or to investigate evidence of other transfers that violated Generally Accepted Accounting Principles ("GAAP"), as required by Generally Accepted Auditing Standards ("GAAS").
Ultimately, the complaint charged that the defendants knowingly or recklessly caused Coopers and Lybrand to issue false and misleading audit reports containing unqualified opinions that enhanced the credibility of AHERF's reported financial statements. The audited financial statements with attached consolidating schedules were made available to, among others, investors in AHERF-related bonds. The audit reports falsely state, among other things, that the audit was conducted in accordance with GAAS and that the financial statements were in accordance with GAAP and fairly presented AHERF's financial condition. The financial statements, issued by AHERF in February 1997, materially misrepresented that AHERF and Delaware Valley had net income of $21.9 million and $23.7 million, respectively, for fiscal year 1997. Absent the fraud, AHERF and Delaware Valley would have posted substantial net losses of approximately $37.7 million and $35.9 million respectively.
On July 21, 1998, AHERF filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of its subsidiaries in the U.S. District Court for the Western District of Pennsylvania. By the time of the bankruptcy filing, one or more of the obligated groups were responsible for repaying a total of more than $900 million of outstanding AHERF Bonds. Subsequently, on September 2, 1998, AHERF issued a press release in which it acknowledged that its audits consolidated financial statement for 1997 were inaccurate. In the release, AHERF stated that "[n]o further reliance should be placed on the financial statements or the [Coopers] report thereon."
The Commission also announced that, based upon the District Court injunction, it had instituted and simultaneously settled a Rule 102(e)(3) proceeding against Buettner. With Buettner's consent, the Commission suspended him from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after a period of four years.
See SEC v. William F. Buettner, Mark D. Kirstein and Amy S. Frazier, Litigation Rel. No. 17708; Accounting and Auditing Enforcement Release No. 1624 (Sept. 4, 2002); SEC v. William F. Buettner, Mark D. Kirstein and Amy S. Frazier, Litigation Rel. No. 17083; Accounting and Auditing Enforcement Release No. 1431 (Aug. 1, 2001); In the Matter of Charles P. Morrison, CPA, SEC Litigation Rel. No. 16885, Accounting and Auditing Enforcement Rel. No. 1365 (Jan. 1, 2001); In the Matter of Allegheny Health, Education and Research Foundation, Exchange Act Rel. No.42992 (June 30, 2000); SEC v. David W. McConnell and Charles P. Morrison, SEC Litigation Rel. No. 16534, Accounting and Auditing Enforcement Rel No. 1254 (May 2, 2000); In the Matter of Albert Adamczak, CPA, Exchange Act Rel. No. 42743 (May 2, 2000); In the Matter of Stephen H. Spargo, CPA, Exchange Act Rel. No. 42742 (May 2, 2000).