CBA Item IV.D. September 14-15, 2017...CBA Item IV.D. September 14-15, 2017 Discussion and Possible Action on Proposed Legislation to Amend Business and Professions Code Section 5100

CBA Item IV.D. September 14-15, 2017

Discussion and Possible Action on Proposed Legislation to Amend Business and

Professions Code Section 5100 to Further Define that for Purposes of

Subsections (d), (h), and (l) that Certified Copies of Records of the Disciplinary or Other Actions Taken Against a Licensee Shall be Conclusive Evidence of the

Events Related Therein for Purposes of Determining Discipline

Presented by: Dominic Franzella, Chief, Enforcement Division

Purpose of the Item The purpose of this agenda item is to provide the California Board of Accountancy (CBA) with the opportunity to discuss whether certified copies of disciplinary orders taken by other agencies can be relied on as conclusive evidence of the facts related therein, and, if so, a possible legislative amendment to Business and Professions Code section (BPC) section 5100. The amendment would clarify that for purposes of subsections (d), (h), and (l) the orders, decisions, findings, or other discipline documents from another state, country, or agency shall be conclusive evidence for determining disciplinary matters.

Consumer Protection Objectives The CBA maintains an enforcement program to ensure that the CBA meets its mission of consumer protection. A vital function performed as part of the enforcement process by the CBA is pursuing proper enforcement action, including appropriate discipline against a licensee.

Action(s) Needed The action by the CBA is potentially twofold:

1. The CBA is being asked to further clarify its position regarding BPC section 141 regarding the “conclusive evidence” of the events documented in certified copies of the record of disciplinary actions taken by other agencies.

2. If the CBA’s position is to remain consistent with BPC section 141, then staff are requesting that the CBA approve the proposed legislative language to amend BPC section 5100 to further clarify this position, and direct staff to seek inclusion in a 2018 omnibus bill or, if necessary, seek an author to carry a legislative bill.

Background Recently, the CBA adopted a Decision In the Matter of the First Amended Accusation Against Jerome S. Kaiser Certified Public Accountant Certificate No. 98813, Case No.

Discussion and Possible Action on Proposed Legislation to Amend Business and Professions Code Section 5100 to Further Define that for Purposes of Subsections (d), (h), and (l) that Certified Copies of Records of the Disciplinary or Other Actions Taken Against a Licensee Shall be Conclusive Evidence of the Events Related Therein for Purposes of Determining Discipline Page 2 of 8

AC-2016-60, OAH No. 2016090932 (Attachment 1, including the First Amended Accusation) that took effect June 15, 2017. The result of this recently adopted decision may greatly impact the process by which the CBA handles matters involving discipline by other agencies, most notably the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and other state boards of accounting.

Background on the SEC Order On or about April 9, 2015, in In the Matter of Airtouch Communications, Inc., Hideyuki Kanakubo, and Jerome Kaiser, CPA, Administrative Proceeding File No. 3-16033, the SEC issued an “Order Making Findings, and Imposing Remedial Sanctions and Cease and Desist Order.” (Attachment 2)

The matter involved fraudulent financial misstatements by AirTouch, a Newport Beach, California issuer, its founder and former president and CEO Kanakubo, and its former CFO and corporate secretary Kaiser, CPA, in the company’s voluntarily filed Form 10-Q for the third quarter of 2012, and to an investor in connection with a $2 million loan made to the company in the fall of 2012.

In the third quarter of 2012, AirTouch improperly recognized net revenues of $1.031 million based on $1.24 million of inventory shipped to a Florida entity. This revenue recognition was improper because, as Kanakubo and Kaiser knew, or were reckless in not knowing, a fulfillment and logistics agreement executed contemporaneously with the Florida entity’s purchase order – and upon which the purchase order was conditioned – relieved that entity of any obligation to pay AirTouch unless and until an AirTouch customer purchased the inventory. Kanakubo and Kaiser also knowingly, recklessly or negligently made false representations and omissions about this revenue to an AirTouch investor and lender. This conduct in inflating the revenues and obtaining financing was also deceptive and constituted a scheme to defraud.

In early 2013, AirTouch filed a Form 8-K disclosing its intention to restate net revenues for the third quarter of 2012, based on the erroneous revenue recognition.

As a result of the conduct described above, Respondent Kaiser willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.


In view of the foregoing, the SEC deemed it appropriate, in the public interest to impose the sanctions agreed to in Kaiser’s offer. Without admitting or denying the SEC’s findings,1 Kaiser consented to the entry of the SEC’s Order, which provided that:

• Kaiser shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder.

• Kaiser is prohibited, pursuant to Section 8A(f) of the Securities Act and Section 21C(f) of the Exchange Act, for 10 years following the date of entry of this Order, from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

• Kaiser is denied the privilege of appearing or practicing before the Commission as an accountant.

• After 10 years from the date of this Order, Kaiser may request that the SEC consider his reinstatement by submitting an application to resume appearing or practicing before the SEC.

• The SEC Order required Kaiser to pay the SEC a civil penalty of $60,000 and disgorgement of $15,000 within 365 days of entry of the Order.

Background on CBA Case On January 9, 2017, the CBA Executive Officer (EO), acting as the Complainant, brought the First Amended Accusation against Kaiser. The First Amended Accusation alleged two causes for discipline: (1) Kaiser had subjected his license to disciplinary

1 In Kaiser’s matter, he entered into an order with the SEC in which he neither admitted nor denied the findings included in the order. The SEC maintains a policy related to culpability language for its consent decrees. The SEC will not enter into a consent decree if a defendant or respondent denies the allegations in the complaint or order for proceedings. SEC Rule 202.5(e) states:

The [SEC] has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.


action under BPC section 141 (Attachment 3), and (2) Kaiser had subjected his license to disciplinary action under BPC section 5100, subdivisions (h) and (l) (Attachment 7). Both causes for discipline were the result of Kaiser being disciplined and suspended from appearing or practicing before the SEC.

The matter was heard before an Administrative Law Judge (ALJ) on January 17-18, 2017. At the conclusion of the hearing, the ALJ issued a Proposed Decision, which the CBA remanded back to the ALJ to correct. On May 16, 2017, the CBA adopted the Corrected Proposed Decision as its Decision (Kaiser Decision), with an effective date of June 15, 2017.

The Kaiser Decision found cause to discipline Kaiser’s license pursuant to BPC sections 141 and 5100, subdivisions (h) and (l), in that the SEC took disciplinary action against him, and suspended him from practicing as an accountant before the SEC (see Attachment 1, Decision, LEGAL CONCLUSIONS, Cause Exists to Discipline Respondent’s License, paragraph 9, page 18). The Decision included an Order that revoked Kaiser’s license; however, the revocation was stayed and he was placed on probation for three years with various terms and conditions.

On or about May 26, 2017, the CBA EO filed a petition for reconsideration titled Complainant’s Petition for Reconsideration of Decision and Order to Correct Error of Law and Determine the SEC’s Findings to be “Conclusive” as Required by Bus. & Pro. Code § 141 (Attachment 4). (Carl W. Sonne, Deputy Attorney General, who is the AG’s Office Liaison to the CBA and who prepared the petition for reconsideration, will be at the meeting to answer questions.)

As communicated in the title for the petition for reconsideration, the primary thrust of the petition was to correct what the staff, in consultation with the AG’s Office, believed to be an error in law in the Decision that concluded that the findings of the SEC that Kaiser committed securities fraud were not, in fact, “conclusive” related to the CBA’s case.

In the Kaiser Decision proposed by the ALJ, and adopted by the CBA, the ALJ allowed Kaiser to present evidence and argument to show that the SEC was wrong to determine that he committed securities fraud. Further, the ALJ found Mr. Kaiser’s testimony to be credible. As communicated in the petition for reconsideration, staff believed that the inaccurate finding by the ALJ (see Attachment 1, Decision, LEGAL CONCLUSIONS, Evaluation, paragraph 16, pages 20-21) nullified the Complainant’s right to rely upon BPC section 141 that mandates that the SEC’s findings “shall be conclusive evidence of the events related therein.”

The CBA voted not to grant the petition for reconsideration.


Comments The Kaiser Decision adopted by the CBA, in which Kaiser was allowed to impeach and challenge the findings of another prior, final agency decision, communicates to the Officer of the Attorney General (AG’s Office) and staff that they may not rely upon the findings of these agencies as “conclusive” for purposes of determining discipline as mandated by the Legislature. Instead, the AG’s Office and staff must be prepared to investigate and prove the underlying facts found by the agency in order to refute the denials and defenses that licensees may interpose following the issuance of an order.

As set forth in Attachment 4, the petition for reconsideration relied upon two primary court cases – Claire v. State Board of Accountancy (1992) 10 Cal.App.4th 294, and Marek v. Board of Podiatric Medicine (1993) 16 Cal.App.4th 1089, – which preceded the legislative adoption of BPC section 141 – and provided further support for the AG’s Office and staff’s evaluation of the other agency’s decisions.2

In Clare, despite Clare’s refusal to admit wrongdoing in the consent decree, the CBA initiated disciplinary proceedings against him under BPC section 5100, subdivision (g) (now subdivision (h)). At the administrative hearing, Clare “was not permitted to relitigate the facts upon which the disciplinary order was founded,” but was able to testify in mitigation of the charges (emphasis added).3

In Marek, the Court found:

[T]o permit an inquiry into the underlying conduct which led to the consent decree would burden California with the physical and financial task of investigating allegations of misconduct by its licensees in foreign jurisdictions and then brining in witnesses and evidence to this state to prove its case at an administrative hearing.

In the Kaiser Decision, Kaiser was allowed to impeach and challenge the findings of the SEC.

While the Kaiser Decision adopted by the CBA is not a precedential decision, it does exist in the public domain as a public record. It is a decision that attorneys that practice in the area of administrative law can look to and argue for at hearings before ALJs. Further, as part of its operations within the Enforcement Division, staff seeks to ensure that it adapts to effectively implement the direction of the CBA given in the Kaiser Decision.

2 For the purposes of objectivity, Attachment 5 is Respondent’s Opposition to Complainant’s Petition for Reconsideration of Decision and Order. 3 Clare argued that the CBA’s use of his compromise agreement with the Federal Home Loan Bank Board was improper and unconstitutional and constituted improper use of “collateral estoppel.” The Court rejected this argument.


Under the CBA’s present procedures for cases involving administrative actions by other agencies these matters are treated similarly to criminal convictions. Staff secure the records associated with the matters, prepare written reports (drawing from the findings/background included in the administrative order), and prepare a referral to the AG’s Officer for the preparation of an accusation.

As part of the Enforcement Division’s present procedures, staff do not perform an investigation of the underlying facts identified in the orders imposed by the agencies. The reason for not performing a review of the underlying facts are twofold:

1. BPC section 5100, specifically subsections (d), (h), and (l), provide that orders imposed by other agencies are sufficient to establish a prima facie case for unprofessional conduct and the imposition of formal discipline.

2. Staff rely on BPC section 141 which states, in pertinent part, that “[a] certified copy of the record of the disciplinary action taken against the licensee by another state, an agency of the federal government, or another country shall be conclusive evidence of the events related therein.” (Emphasis added)

Upon the filing of an accusation and receipt of a Notice of Defense, staff, working through the AG’s Office, will engage Respondents regarding possible settlement. As part of the settlement process, staff will review the order, including the administrative action taken by the agency; any aggravating, mitigating, or rehabilitation criteria (as provided for in the CBA’s Disciplinary Guidelines and Model Orders (Attachment 6, excerpts from guidelines for sections specific to the aforementioned criteria)), and offer settlement terms commensurate and consistent with similar matters previously adopted by the CBA in the interest of consumer protection.

Prior to the Kaiser Decision, staff had believed it was reasonable and appropriate to rely on the certified copy of the record of disciplinary action issued by other agencies as conclusive evidence of the events related therein, as provided for in BPC section 141 and affirmed by the courts. Further, prior to entering into consent order/stipulations, or orders that result from an administrative hearing, the matters are investigated by those agencies and due process is afforded in accordance with the agencies requirements.

In the Kaiser matter before the SEC, the SEC took the testimony (under penalty of perjury) of about a dozen participants in the underlying matter. The proposed exhibit list for the SEC (which did not occur because the parties reached a settlement) total approximately 180 exhibits, and the SEC hired two different experts. The Respondents in the SEC matter, which included Kaiser, also hired three experts.

In addition to reliance on the certified copy of the record of disciplinary action issued by other agencies, there are logistical issues with investigating and “proving-up” these


types of matters. For example, SEC and PCAOB have nationwide jurisdiction and, consequently, their disciplinary matters frequently involve work that was performed all, or in part, in another state or country. Out-of-state (and out-of-country) travel is heavily restricted and would greatly impede CBA staff from being able to conduct an investigation into these matters.

Additionally, the CBA, as a practical matter, cannot compel witnesses who reside out-ofstate to appear at an administrative hearing in California. There are procedures after filing an accusation to memorialize the testimony of non-California witnesses, but it is a time consuming, and lengthy process, rarely employed in administrative cases. It would be even more difficult in the investigative stage of a matter to memorialize the testimony of material non-California witnesses prior to filing an accusation.

Further, independently investigating these matters would require management to redirect staff from investigating other matters. It would also likely require increased referrals to the AG’s Office during the investigative stage of the enforcement process to assist in taking testimony under oath and preparing subpoenas. This would significantly increase the cost of investigations to the CBA, which could also impact costs sought for recovery from licensees. It also would undoubtedly materially delay the filing of any accusation.

Should the CBA conclude that that a certified copy of the record of the disciplinary action taken against the licensee by another state, an agency of the federal government, or another country shall be conclusive evidence of the events related therein, staff request that the CBA adopted the proposed language in Attachment 7. As presently written, BPC section 5100(d), (h), and (l) do not clarify that certified copies of discipline documents from other agencies or states can be used as conclusive evidence of the matters stated therein. Staff usually rely on BPC section 141 for this purpose. Further, BPC section 5100 (d), (h), and (l) do not address the evidentiary effect of other agencies or states’ disciplinary orders.

Amending BPC section 5100 would allow the CBA to use certified copies of the record of disciplinary action from other agencies as conclusive evidence for disciplinary matters, without reference to section 141. Staff have provided proposed legislative language to amend BPC section 5100.

Fiscal/Economic Impact Considerations Should the CBA believe that certified copies of disciplinary orders by other agencies do not represent conclusive evidence of the events contained in the certified copy of the record of disciplinary action, the Enforcement Division will need to adjust its case management to “prove-up” and fully investigate these matters, as deemed appropriate.


In Fiscal Year 2016/17, the CBA investigated 74 cases based on disciplinary action taken against a license by another state, an agency of the federal government, or another country. The complexity of these matters would require technical staffing to perform the investigations, likely require contracting expert consultants because of the complexity of the matters, issue subpoenas and take testimony under oath during the investigative process (i.e., investigative hearings), and potentially take depositions after the filing of accusations, thereby substantially increasing costs associated with the AG’s Office, and delaying the resolution of the cases.

Recommendation Staff recommend that the CBA clarify for purposes of BPC section 5100, specifically subsections (d), (h), and (l), that certified copies of the record of disciplinary or other actions taken against a licensee shall be conclusive evidence of the events related therein for the purposes of determining discipline.

Staff also recommend that the CBA approve the proposed legislative language found in Attachment 7 to amend BPC section 5100 to further clarify this position, and direct staff to seek inclusion in a 2018 omnibus bill or, if necessary, seek an author to carry a legislative bill

Attachments 1. Decision In the Matter of the First Amended Accusation Against: Jerome S. Kaiser

Certified Public Accountant Certificate No. 98813, Case No. AC-2016-60, OAH No. 2016090932 (including the First Amended Accusation)

2. In the Matter of Airtouch Communications, Inc., Hideyuki Kanakubo, and Jerome Kaiser, CPA, Administrative Proceeding File No. 3-16033, SEC “Order Making Findings, and Imposing Remedial Sanctions and Cease and Desist Order”

3. Business and Professions Code Section 141 4. Complainant’s Petition for Reconsideration of Decision and Order to Correct Error of

Law and Determine the SEC’s Findings to be “Conclusive” as Required by Bus. & Pro. Code § 141

5. Respondent’s Opposition to Complainant’s Petition for Reconsideration of Decision and Order

6. CBA Disciplinary Guidelines and Model Orders – Excerpts of the Mitigating, Aggravating, and Rehabilitation Criteria

7. Proposed Amendments to Business and Professions Code Section 5100 – Disciplinary Proceedings

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BEFORE THE CALIFORNIA BOARD ·OF ACCOUNTANCY

DEPARTMENT OF CONSUMER AFFAIRS

STATE OF CALIFORNIA

In the Matter of the First Amended Accusation Agalnst:

Case No. AC-2016-60 · JEROME S. KAISER .

Certified Public Accountant Certificate No. OAH No. 2016090932

98813,

Respondent.

DECISION

The attacheq Corrected Proposed Decision of the Administrative Law Judge is hereby accepted and adopted by the California Board of Accountancy as its Decision in the above-er:ttitled matter.

This Decision,shall become effective \__Ju_ru__ \S 1 2D l·l

DATED: JrY\L\4:1 \[R ~Dil · ~~ Alicia Berhow, Preside California Board of Accountancy

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dfranzellaTypewritten TextAttachment 1

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BEFORE THE

CALIFORNIA BOARD OF ACCOUNTANCY

DEPARTMENT OF CONSUMER AFFAIRS

STATE OF CALIFORNIA

In the Matter of the First Amended Accusation Against: Case No. AC-2016-60

JEROME S. KAISER, OAHNo. 2016090932

Certified Public Accountant Certificate No. 98813,

Respondent.

CORRECTED PROPOSED DECISION

Adam L. Berg, Administrative Law Judge, Office of Administrative Hearings, State of California, heard this matter on January 17 and 18, 2017, in San Clemente, California.

Carl W. Sonne, Deputy Attorney General, Department of Justice, State of California, represented complainant, Patti Bowers, Executive Officer of the California Board of Accountancy, Department of Consumer Affairs, State of California.

Mark Mermelstein and Kevin M. Askew, Attorneys at Law, represented respondent, Jerome S. Kaiser.

The matter was submitted on January 18, 2017.

The Proposed Decision was signed February 10, 2017, and was forwarded to the Department of Consumer Affairs.

By application dated March 27, 2017, Kristy Schieldge, Attorney III, Department of Consumer Affairs, requested that certain corrections be made to the Proposed Decision. A copy of that application and Proposed Decision were served on the parties.

No opposition was received by either party.

Pursuant to California Code of Regulations, title 1, section 1048, subdivision (a), the application was granted and an order of correction issued.

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FACTUAL FINDINGS

Background

1. On September 28, 2007, the board issued Certified Public Accountant Certificate No. 98813 to respondent. The certificate was in full force and effect at all times relevant to these proceedings. Respondent has no prior history of discipline imposed against his certificate.

2. On January 9, 2017, complainant, in her official capacity, signed the first amended accusation, alleging as the sole cause for discipline that respondent was disciplined and suspended from appearing or practicing before the United States Securities and Exchange Commission (SEC). Complainant seeks the discipline of respondent's certificate, the recovery of investigation and enforcement costs, and the assessment of an administrative penalty.

Respondent's Motion in Limine to Exclude Portions ofthe SEC's Order

3. Prior to the hearing, respondent filed two motions in limine to exclude portions of the. SEC's order related to the factual findings and the amount of discipline imposed by the SEC. First, respondent contended that the length of the suspension imposed by the SEC and the amount of monetary penalties and disgorgement should be redacted from the order. Respondent argued that these items are irrelevant to the issue of whether there is cause to discipline respondent's California license and the amount of discipline that should be imposed. Respondent noted that the amount of discipline imposed by a government agency is not a criterion contained in the board's disciplinary guidelines. Second, respondent contended that the factual findings contained in the order should be excluded because, in the consent order, respondent expressly did not admit or deny the factual allegations. Respondent argued that the factual findings are not entitled to collateral estoppel effect because the issues were never actually litigated. Respondent contended that the factual findings are also irrelevant to the issue of whether there is cause to discipline respondent's license. Third, even if relevant, respondent argued the factual findings are hearsay not subject to Government Code section 11513, subdivision (c). He claimed that because the factual findings were not made following a full hearing, but rather were allegations of the SEC's enforcement attorneys, they are not "the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs."

Respondent's motions were denied. Business and Professions Code section 141, subdivision (a); specifically provides, "A certified copy ofthe record of the disciplinary action taken against the licensee by ... an agency of the federal government ... shall be conclusive evidence of the events related therein." The plain language of the statute is unambiguous and clearly reflects the legislature intent for the disciplinary record- without limitation- to be admitted. To exclude portions of the order that provide a factual basis for the SEC's decision would contravene the plain statutory language. Thus, by statute, the

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SfiC's disciplinary order is admissible in its entirety, notwithstanding respondent's relevancy, collateral estoppel, and hearsay objections.

The Securities and Exchange Commission Order

4. On August 22, 2014, the SEC instituted proceedings against AirTouch Communications, Inc. (AirTouch), Hideyuki Kanakubo, and respondent. Respondent submitted an offer of settlement which the SEC accepted. Without admitting or denying the findings made by the SEC, respondent consented to the entry ofthe disciplinary order. The SEC noted that the findings contained in the order were made pursuant to respondent's offer of settlement and were not binding on any other person or entity in that or any other proceeding.

5. On Apri19, 2015, in In the Matter ofAirTouch Communications, Inc., Hideyuld Kanakubo, and Jerome Kcliser, CPA, Administrative Proceeding File No. 3-16033, the SEC issued an "Order making findings and imposing remedial sanctions and a cease-anddesist order pursuant to Section 8A of the Securities Act of 1933 and Sections 4C and 2lC of the Securities Exchange Act of 1934 and Rule 102(c) of the SEC's Rules of Practice as to Jerome Kaiser" (Order). Relevant portions of the Order are summarized below.

BACKGROUND

6. AirTouch was a Delaware corporation with its principal place of business in Newport Beach, California. AirTouch developed and sold telecommunications equipment designed to integrate mobile telephones into landline telephone systems within a consumer's home. Mr. Kanakubo was AirTouch's founder, president, and CEO. Respondent was AirTouch's chief financial officer (CFO) and corporate secretary. ·

7. In or around early 2012, AirTouch developed a new product, the "Ui50 SmartLinx", designed for sale to Mexico's largest provider of landline telephone services (the "Mexican Entity"). On July 30, 2012, AirTouch contacted a Florida provider of logistics and fulfillment services (the "Florida Entity") about the possibility of warehousing AirTouch's U250 SmartLinx product for possible sale to the Mexican Entity. AirTouch had never done business with the Florida Entity prior to July 30, 2012.

8. During contract negotiations related to this potential warehousing arrangement, the Florida Entity's CEO told Mr. Kanakubo that the Florida Entity was not buying any product from AirTouch, but rather would only warehouse the U250 SmartLinx inventory for eventual delivery to the Mexican Entity or other customers of AirTouch. AirTouch's salesperson relayed the same information to respondent. On July 30, 2012, respondent sent Mr. Kanakubo a Fulfillment and Logistics Agreement between AirTouch and the Florida Entity (the "Agreement"), asking him to immediately review and sign it, which Kanakubo did. The Agreement included, among other terms, the following prOVlSlOnS:

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Section 3 (Orders and Acceptance): [The Florida Entity]'s purchase orders are subject to purchase orders by [the Mexican Entity] and/or any other customer that maybe assigned from time to time by AirTouch. In the event [the Mexican Entity] or any of the customers does not fulfill the purchase orders and/ or cancels the orders, [the Florida Entity] shall have the right to return these products to AirTouch and obtain a full credit equal to the original purchase amount with no offsets or deductions or any kind.

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Section 5 (Resale to [the Mexican Entity] and/or Assigned Customers by AirTouch): [The Florida Entity] shall store the merchandise until shipment of the Products and shall invoice AirTouch for storage of the products, in/out control, invoicing, stock reconciliation, at 1.5% of the invoice value for the first 30 days and an additional!% for each additional 30 days.

Section 6 (Payment): [The Florida Entity] shall pay for Products in 90 days in accordance with the payment terms invoiced by AirTouch. However, [the Florida Entity] shall not be obligated to pay AirTouch until the Products have been received by [the Mexican Entity] and [the Florida Entity] has received full payment therefor, at which time then [the Florida Entity] shall pay AirTouch for the Products within 10 days thereafter. '

9. The same day, the Florida Entity issued a $1.7 4 million "purchase order" for 20,000 U250 SmartLinx (the "Purchase Order"). The Purchase Order stated a payment term of "Net 90" but also stated that its payment terms were "according to term sheet." The Agreement was the "term sheet." Respondent received emails where representatives of the Florida Entity described the Purchase Order as "conditional" upon AirTouch's execution of the Agreement. Kanakubo was also made aware that the Florida Entity would not issue the Purchase Order unless AirTouch first executed the Agreement.

10. On July 31, 2012, the Florida Entity sent respondent the counter~signed Agreement and the Purchase Order in a single email. Before forwarding this email to AirTouch's controller, respondent deleted the Agreement as an attachment, and forwarded only the Pmchase Order.

11. AirTouch shipped approximately $1.24 million of inventory to the Florida Entity during the third quarter of2012, pmsuant to the Agreement and the Purchase Order. AirTouch recognized revenue on all $1.24 million of inventory shipped to the Florida Entity during the quarter.

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12. In October 2012, in connection with AirTouch's quarterly review, AirTouch's controller provided its outside auditor with a copy of the Purchase Order, but not the Agreement. The outside auditor did not receive the Agreement since respondent had never provided AirTouch's controller with the agreement.

13. When discussing the purported receivable AirTouch booked from the Florida Entity at board meetings, Mr. Kanakubo and respondent did not inform AirTouch's outside directors, including the chairma~ of the audit committee, that shipments to the Florida Entity were controlled by the Agreement. AirTouch did not receive any payment from the Florida Entity during the third quarter of2012, and likewise received no commitment from the Mexican Entity that it would buy product shipped to the Florida Entity, or otherwise.

AIRTOUCI'I' S FORM 1 0-Q FOR THE: THIRD QUARTER 2012

14. On November 14, 2012, AirTouch filed its Form 10-Q for the third quarter of 2012, reporting net revenues of$1,031,747. Without the revenue recognized on the inventory shipped to the Florida Entity, AirTouch would not have had any positive revenue for the quarter. Under Generally Accepted Accounting Principles ("GAAP"), revenue cannot be recognized unless it is "realized or realizable" and "earned." AirTouch's recognition of revenues for the inventory shipped to the Florida Entity did not comply with GAAP. Because AirTouch did not sell any product to the Florida Entity- the Purchase Order and the Agreement merely documented, for tracking purposes, the transfer of AirTouch inventory to the Florida Entity in contemplation of future sales - the revenue associated with shipments to the Florida Entity was not realized, realizable or earned.

15. AirTouch's revenue recognition policy, which was disclosed in the 10-Q and was consistent with the requirements of GAAP, permitted the recognition of revenue only where: "(1) persuasive evidence of an arrangement exists in the form of an accepted purchase order or equivalent documentation; (2) delivery has occurred, based on shipping terms, or services have been provided; (3) the company's price to the buyer is fixed or determinable, as documented on the accepted purchase order or similar documentation; and (4) collectability is reasonably assured." Given the terms of the Purchase Order and the

Agreement, AirTouch had no reasonable assurance of collectability from the Florida Entity

because AirTouch did not have a valid receivable to collect from the Florida Entity.

16. Mr. Kanakubo and respondent signed certifications intended to be made pursuant to the Sarbanes-Oxley Act of 2002, stating that the Form 1 0-Q fairly presented AirTouch's financial condition and results. Mr. Kanakubo and respondent knew, or were reckless in not knowing, that AirTouch's Fonn 10-Q contained materially false or misleading statements concerning reported net revenues and compliance with GAAP or AirTouch's revenue recognition policy.

17.. The false and misleading statements in AirTouch's Form 10-Q occurred in

connection with the purchase or sale of securities. The false and misleading statements in

AirTouch's Form 10-Q were material. These statements would have been viewed by a

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reasonable investor as significantly altering the total mix of available information, given that AirTouch would not have had any positive revenues for the quarter if it did not recognize the revenue from the Florida Entity. The Form 1 0-Q also reflected AirTouch' s largest revenues ever reported for a quarter.

18. Mr. Kanakubo and respondent each knew about the Agreement but did not provide it to others involved in AirTouch's financial reporting process, including the controller, the chairman of the audit committee, and the company's outside auditor. This and other deceptive conduct contributed to a revenue recognition scheme and operated as a fraud.

MISSTATEMENTS AND OMISSIONS MADE TO AN INvESTOR

19. In or around 2012, Mr. Kanakubo and respondent solicited a short term bridge ·loan from an existing AirTouch investor ("Investor A"), in exchange for a promissory note and a warrant to purchase 100,000 shares of AirTouch common stock. Investor A recommended the loan and warrant acquisition opportunity to a related entity, for which he served as the authorized agent during the due diligence process. On October 3, 2012, Mr. Kanakubo falsely told Investor A by email that the inventory to be shipped by AirTouch to the Florida Entity- which he mischaracterized as an "authorized fulfillment house" for the Mexican Entity -pertained to an existing purchase order from the Mexican Entity. Around the same time, respondent provided Investor A's representatives with the Purchase Order, but did not provide them with or disclose the existence of the Agreement. On October 17, 2012, AirTouch received the loan of $2 million from Investor A in exchange for a warrant to purchase its common stock.

20. On October 19, 2012, Mr. Kanakubo approved a $15,000 bonus payment to respondent for his work on raising capital. Mr. Kanakubo and respondent knew, or were reckless in not knowing, that their statements to Investor A concerning revenues from the Florida Entity were materially false and misleading. Mr. Kanakubo and respondent also failed to act with reasonable care because they did not ensure that Investor A was provided with all material information necessary to make their statements to him concerning the inventory shipped to the Florida Entity not misleading. Mr. Kanakubo' s and respondent's false and misleading statements to Investor A, and their failure to disclose the terms of the Agreement, were material. Kanakubo's and respondent's statements to Investor A, and the terms of the Agreement, would have been viewed by a reasonable investor as significantly altering the total mix of available information because, among other reasons, AirTouch had not sold any of the inventory warehoused with the Florida Entity to the Mexican Entity, and thus had no basis to represent that it expected to collect revenue from the Florida Entity.

21. Mr. Kanakubo and respondent persuaded Investor A over several months into loaning AirTouch $2 million based on a distorted view ofAirTouch's financial relationships with the Mexican Entity and the Florida Entity. They led Investor A to believe that AirTouch would receive a substantial financial commitment from the Mexican Entity, which would then provide AirTouch with sufficient cash flow for AirTquch to service and repay the

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loan. These inducements by Mr. Kanakubo and respondent, along with other deceptive conduct, contributed to an offering fraud scheme and a fraudulent transaction.

AlRTOUCH'S RESTATEMENT

22. In January 2013, AirTouch's board of directors commenced an internal investigation conceming the net revenues reported in the Form 1 0-Q for the third quarter of 2012. AirTouch's board of directors and its outside auditor subsequently received the Agreement, and determined to restate reported revenues for the third quarter of 20 12. AirTouchfiled a Form 8-K on February 7, 2013, announcing errors in revenue recognition and the intention to file an amended Fonn 10-Q. No amended Form 10-Q has been filed.

VIOLATIONS·

23. As a result of the conduct described above, respondent willfully violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section lO(b) and Rule lObS of the Securities and Exchange Act of 1934 (Exchange Act), which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

24. The SEC ordered respondent to cease and desist from committing or causing. any violations and any future violations of the Securities Act and the Exchange Act. It prohibited respondent from acting as an officer or director of any issuer that has a class of securities registered pursuant to the Exchange Act for a period of 10 years. Finally, the SEC denied respondent the privilege of appearing or practicing before the SEC as an accountant. After ten years from the date of the order, respondent could request that the SEC consider his reinstatement by submitting an application. The SEC ordered respondent to pay a civil money penalty in the amount of $60,000 within 365 days of the yntry of the order. Finally, the SEC ordered respondent pay disgorgement of $15,000, which represented the profits gained as a result of the misconduct.

Respondent's Testimony

BACKGROUND

25. Respondent is 57 years old. He has been married for 32 years, has four grown children, and three grandchildren. He received his Bachelor of Science degree in Accounting from Pepperdine and a Master of Science degree in Business Taxation from California State University, Northridge. Since 1983, he has worked for a number of companies as an accountant, controller, and CPO. Other than the discipline by the SEC, he has never had any accusations of misconduct. The following summarizes his testimony about his time .at AirTouch.

26. Respondent began working for AirTouch in March 2010, as Vice President,

CPO, and Corporate Secretary. As CPO he was responsible for internal and external

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financial reporting, accounting operations, accounts receivable and payable, inventory accounting, human resource payroll, risk management, information technology, and legal. Once the company went public, respondent was responsible for capital raising and investor relations. This constituted the most significant portion of his time. Because AirTouch was a startup and the stock was thinly traded, it "had a voracious appetite" for capital. Respondent would frequently attend capital raising events, where he would put on presentations to prospective investors. Respondent estimated that in the summer and fall of2012, 75 to 80 percent of his time was focused on raising capital.

27. In 2012, AirTouch had to lay-off several employees, most significantly, its vice president of operations. This was significant because AirTouch was preparing to manufacture the U250 SmartLinx in China to ship to the United States, which required logistics that the vice president of operations would have been responsible for handling. Respondent and the CEO, Mr. Kanakubo, split the responsibilities. Mr. Kanakubo was responsible for logistics, which including obtaining warehouse space. Respondent was responsible for product scheduling.

28. Respondent explained AirTouch's distribution model as a three-step process. AirTouch contracted with a manufacturer in China to produce its product, a middleman in the U.S. to warehouse the product and handle logistics, and then a distributor to sell the product to the end-user. AirTouch used a distributor because it was very expensive to take products to an end-user directly. Because a product shipped from the manufacturer was not always ready to go to the distributor, AirTouch required a middleman to warehouse the product. Respondent explained that the middleman did not assume title of the product, but rather, would store the product until it was ready to be sold to the distributor. The middleman might also handle other logistics, such as processing returns from the customer. The vice president of operations was responsible for handling logistics agreements before he was laid-off.

29. Sometimes, AirTouch would contact with a company that would provide both distribution and warehouse services. However, respondent said the two functions would be segregated. For example, the product might be stored in separate buildings in order to ensure a separation between the warehousing function, where AirTouch retained ownership of the product, and distribution, where the distributor owned the product. In the case where a company was providing both warehousing and distribution services for AirTouch, there would be two separate contracts.

30. In mid-2012, AirTouch signed a supply agreement with Telmex1 to purchase AirTouch's SmartLinx U250 product. Telmex was the largest landline provider in Latin America. For AirTouch to be named as Telmex's official suppliers was significant, since Telmex was in the position to purchase a large volume of product. Respondent understood that Telmex wanted to initially purchase 2,000 units followed by 18,000 more. AirTouch was of the belief that Telmex would purchase 200,000 units in the first year.

·l The "Mexican Entity" frorri the SEC Order.

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31. In preparation for Telmex's order, AirTo1:1ch ordered 75,000 units from its

manufacturer in China. In response to what AirTouch believed would be a large order from

Telmex, AirTouch sought a company to warehouse and distribute the product. AirTouch ·

engaged in discussions with one such company, Celistics, which was interested in

warehousing and distributing the product, as well as contemplating an equity investment in

AirTouch.

32. In response to Celistics interest in providing an equity investment, AirTouch prepared a "Term Sheet for Investment in AirTouch Communications, Inc." The term sheet set forth the principal terms of a proposed investment in AirTouch through the purchase of AirTouch stock. As part of the $2 million investment, Celistics also wanted to be involved in distributing the product. Thus, at the time, respondent was of the belief that "term sheet" referred to the link between equity investment and distribution.

AIRTOUCH'S RELA'IJONSHIP WITH TMCELL

33. However, the relationship between AirTouch and Celistics did riot materialize and an agre~ment was not reached. As a result, AirTouch faced a problem because the first run of product was ready to be delivered, and AirTouch did not yet have a warehouse or distributor. AirTouch's sales representative Carlos Isaza suggested another company, TMCell.2 Respondent had no previous personal interaction with TMCell, but in the past, AirTouch entered into a distribution agreement with TMCell to move product to Peru.

34. At the end of July 2012, Mr. Isaza, who was located in Miami, was negotiating an agreement with TMCell. According to respondent, he had no knowledge about the specific conversations between Mr. Isaza and TMCell, and hefirst learned that a deal was being finalized on July 30. On July 30, 2012, at 4:10p.m., Mr. Isaza sentrespondent and Tom Quan, AirTouch's executive vice president for marketing, a:ri email stating, "I am in a meeting with the TMCell discussing about the term sheet. .. I will send you a draft which they feel ok. . .I'll call you in a few to explain better." Respondent said he never spoke to Mr. Isaza, but it was his understanding- at the time that TMCell was a firm that would perform the same role as Celistics - distributing the product, performing the logistics services, and potentially making and equity investment.

35. At 4:17 p.m.,3 Mr. Isaza forwarded respondent an email he received from , TMCell stating, "Please find attached the agreement that we agreed to. Please execute four

copies and then we will countersign and return two copies to you." The email contained an

2 The "Florida Entity" referenced in the SEC Order.

3 The time stamp on respondent's e-mail showed 11:17 p.m. However, considering the time in the context of the other e-mail communications, it was determined that the actual time was 4:17p.m.

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attachment, the Fulfillment and Logistics Agreement.4 Respondent testified that it was his belief at the time that this was an agreement with TMCell to warehouse the product. At 4:34 p.m., Mr. Isaza. forwarded respondent another copy of the agreement. At 4:37p.m., respondent forwarded this email and attachment to Mr. Kanakubo with the following note, "Please review immediately. Need to sign and send." Respondent testified that he did not open the attachment to review the agreement. Instead, since it was his belief that the agreement had to deal with logistics and warehousing, it was under Mr. Kanakubo's purview to review. At 4:40p.m., Mr. Kanakubo responded to respondent with the following: "It is the same as Cel.istics but like we discussed, we don't want to ship them to Miami, FL. The purchase order has to say FOB HKG and we ship directly to Mexico through LAX." At 4:42 p.m., Mr. Quan sent an email to respondent stating the agreement looked good and asking whether they "were good to go."

36. At 4:49p.m., Mr. Isaza forwarded respondent another email with an attached purchase order. Mr. Isaza noted in the email that the purchase order was only valid after the agreement was .executed. The attached purchase order was for 20,000 units with payment terms listed as "Net 90." The document noted the first shipment would consist of 8,000 units and "PMT terms according to term sheet." Respondent reviewed the attached purchas·e order, but again, he did not look at the attached agreement that he had forwarded to Mr. Kanakubo to review. Respondent testified that he believed that Mr. Kanakubo would focus on the agreement and respondent on the purchase order. Respondent's belief at the time was that TMCell was going to perform the same roles as Celistics, and that any purchase agreement was conditioned upon acqeptance of the logistics agreement. Thus, respondent believed that TMCell would distribute 20,000 units upon the condition that it also provides warehousing of the product. Based on Mr. Kanakubo's statement that the agreement was similar to the Celistics agreement, respondent thought that the only contingency to the

· purchase agreement was execution of the logistics agreement. At 5:03p.m., respondent emailed Mr. Isaza a copy ofthe fulfilment and logistics agreement signed by Mr. Kanakubo, and directed Mr. Isaza to get it ratified by TMCell. ·

37. Respondent reviewed the purchase order and determined that certain terms needed to be changed to indicate Hong Kong as the shipping port. At 5:04p.m., respondent emailed Mr. Isaza indicating his approval of the purchase agreement with this modification. Respondent testified that he believed the reference to "term sheet" in the purchase order had to do with any future investment TMCell would make in AirTouch equity. Respondentsaid he had no idea that the reference to "term sheet" actually referred to the fulfillment and logistics agreement Mr. Kanakubo had just executed. However, respondent admitted that he never inquired ofMr. Isaza what the term sheet meant or discussed with him the fulfillment agreement.

38.. In sum, respondent testified that on July 30 2012, he. believed TMCell had two out of three agreements: distribution and warehousing. He believed TMCell agreed to purchase 20,000 units and would warehouse the remaining 55,000 units that were being

4 The "Agreement" referenced in the SEC Order.

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manufactured. Respondent was under the belief that through the purchase agreement, TMCell had sold to TMCell 20,000 units, and AirTouch began invoicing TMCell for payment. At no time did TMCell respond that they had not in fact purchased the units, but were rather warehousing the units until purchased by Telmex. He. had no reason to believe that the logistics and fulfillment agreement, which he believed was a warehousing agreement, would have any impact on the purchase order.

EVENTS AFTER THE TMCELL TRANSACTION

39. . Respondent disputed that he did anything to intentionally hide the logistics and fulfillment agreement from the controller as found by the SEC. Respondent said he sent the purchase order to controller to record. Respondent did not forward the logistics agreement to the controller, but he placed an electronic copy on the shared drive and a hard copy in the file cabinet. Respondent said he did not forward the logistics agreement to the. controller because under normal circumstances, then~ would be no accounting impact of a logistics agreement or fulfillment. Thus, there was no reason for the controller to have it, and he went ahead and filed the electronic and hard copies himself. He denied any attempt to conceal from her that company had entered into a separate logistics agreement.

40. Respondent attended a board meeting on November 12, 2012, where the TMCell transaction was discussed. The transaction was significant for AirTouch as it provided a relationship to move product to Telmex. The board was informed that the transaction was recorded as receivable with recognizing revenue. Thus, the board was informed that AirTouch booked $1.7 million in revenue from TMCell. However, respondent testified that he never thought for a moment that it should not have been booked as a receivable.

41. AirTouch sent TMCell the first invoice on July 31,2012, for $696,000 for 8,000 units shipped on that date. The payment term was "Net 90," reflecting 90 days for payment. There was no indication on the invoice that TMCell was not obligated to pay for equipment lmtil purchased by Telmex. AirTouch sent similar invoices to TMCell for products shipped on August 31, September 30; and October 31, 2012. Respondent said AirTouch never received any correspondence from TMCell stating that the invoice was not accurate or objecting to invoices. These invoices were all recorded in AirTouch's third quarter financial statement. Again, respondent said he never had an idea that these sales were not properly recorded when he certified the third-quarter financials. The fact that TMCell never raised an issue after receiving three invoices further confirmed his belief.

On cross examination, respondent was asked if he ever discussed with TMCell why they had not begun to make payments. Respondent said that AirTouch wanted TMCell to become a significant business partner and it was trying to develop that relationship. He met with representatives of TMCell in December 2012, but the only discussions related to developing partnerships and moving product through Latin America.

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42. When it came time to file the Form 1 0-Q, respondent submitted it to outside

auditors, the board's audit committee, and then legal counsel for review. During the review,

the outside auditors requested to review the purchase order for the TMCell transaction.

Respondent said the outside auditor never requested to see the term sheet referenced in the

purchase order or the fulfillment agreement. After these reviews, respondent certified and

filed the Form 10-Q.

43. After AirTouch filed the Form 10-Q, respondent said its stock price actually

fell. Even after AirTouch filed the intent to restate in February 2013, the stock price did not

change. Thus, respondent was not aware of any loss to a stockholder based on the

misstatement in the Form 10-·Q.

44. In December 2012, respondent prepared what he titled a tenn sheet, similar to

the term sheet prepared for Celistics, outlining the terms and conditions by which TMCell

would provide financing. He sent this to TMCell for its review. Telmex never purchased

any of the SmartLinx product and TMCell never made a·capital investment.

RELATIONSHIP WITH INVESTOR TONY TANG

45. Respondent adamantly denied that he attempted to deceive the person referred

to as "Investor A" in the SEC's finding. Investor 1 was Tony Tang, an investment officer at

a large bank. Mr. Tang was· considering investing $2·million in AirTouch on behalf of his

wife's family. Based on data Mr. Tang provided, respondent produced a repayment schedule

whereby Mr. Tang would receive payment for each unit sold. Under the schedule, Mr. Tang

would receive $58,000 from the sale to TMCell. Respondent said that the· total repayment

potential was $3.8 million. Thus, the $58,000 from the TMCell sale accounted for only a

small fraction of Mr. Tang's projected returns. Thus, respondent disagreed with the SEC's

finding that he intended to mislead :M:r. Tang. Respondent explained that no astute investor

would make a $2 million investment to only get $58,000 in return.

AIRTOUCH' S RESTATEMENT

46. In January 2013, the AirTouch board questioned why AirTouch was not

collecting on its accounts receivable from TMCell. As ofDecember 31,2012, $851,620 of

the total receivable of $1.75 million was past due. Steve Rauch, a board member at

AirTouch and chairman of audit committee, initiated an investigation and prepared a report.

According to the report, he reviewed AirTouch's third-quarter transactions. He questioned

respondent as to whether there were any written agreements or side deals related to the

TMCell transaction. Respondent arranged a conference call with Mr. Isaza and Mr. Quan,

where the fulfillment agreement was mentioned. After reviewing the agreement, Mr. Rauch

recognized that TMCell was not obligated to pay AirTouch until TMCell had sold product

and collected from a third party. Accordingly, Mr. Rauch concluded that AirTouch should

not have recorded revenues from TMCell until it had sold and collected money from the third

party. Mr. Rauch determined it was necessary to reverse the third-quarter reported revenues.

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47. Respondent agreed after reading logistics and fulfillment agreement that financial statements were misleading and had to be restated. Respondent was surprised to see language governing purchase of product in a logistics or fulfillment agreement, which he had never s~en before. Respondent said he received a $15,000 bonus from AirT ouch in October 2012. However, he.denied that it had anything to do with the TMCell transaction. He held options on AirTouch stock that were never exercised and are now worthless.

RESPONDENT'S TIME AFTER AIRTOUCH

48. Respondent said having to issue a restatement was "career shattering." It impacted his career professionally and financially. Mr. Kanakubo resigned from AirTouch in January 2013; respondent resigned in March or Apri12013 when AirTouch failed to meet payroll for four or five pay periods. R~spondent said he stopped being paid in January 2013. Subsequently, he was terminated from two different positions because of the SEC's allegations. Respondent had a loss of income and a gap in his health coverage. His wife was hospitalized for four months and he incurred a $100,000 hospital bill.

49. Respondent has not paid any of the SEC's civil penalty or disgorgement. He testified that when he consented to the order, he was informed that the SEC could not negoti

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Reference Letters

52. Respondent submitted a letter from Timothy Whitaker. Mr. Whitaker met respondent in 1989 at church. Mr. Whitaker is vice president of operations for a company in Whittier, and respondent has consulted as a CPA with that company. He described respondent as knowledgeable and capable. Mr.Whitaker wrote that he is aware of the SEC's action, yet he has known respondent to be honest with a high level of integrity in business.

53. Kevin McGlensey participated in hiring respondent as CFO at ORXYE Energy International in 2006, where Mr. McGlensey was president. He wrote that respondent did excellent work and could always be trusted to provide honest information to the board of directors. In the rare occasion respondent made a mistake, he was quick to admit the error and assume respondent. Mr. McGlensey was aware of the SEC's action, but believes respondent is a credit to the profession who acts with integrity personally and professionally.

54. Brett Souza is a partner with a law office in Irvine who has known respondent for over 10 years. The two met when they both volunteered to provide professional services for two churches that were merging. Mr. Souza also provided legal assistance to AirTouch during the time respondent was CFO. Mr. Souza is aware of the SEC's action but does not believe it reflects respondent's 30 years as a professional accountant. He wrote that respondent places a high value on family and is a man of character and integrity. He believes respondent is competent CPA and excellent representative of the profession.

Evaluation ofthe Evidence

55. Respondent's testimonywas credible. 5 He testified ina thoughtful, careful, and precise manner. There were no indicators of deception. Although he disputed the SEC's findings that he intentionally or recklessly engaged in wrongdoing, he expressed contrition over what he believes he did wrong and exhibited thoughtful introspection.

Enforcement and Prosecution Costs

56. Complainant submitted two declarations and requested cost recovery under Business and Professions Code section 5107. Dominic Franzella, Enforcement Chief, certified that the board incurred $1,780.71 in total costs related to the board's investigation. However, the declaration failed to "describe the general tasks performed, the time spent on

~ 5 The credibility of respondent has been evaluated pursuant to the factors set forth in

I - Evidence Code section 780: The demeanor and manner of the witness while testifying; the I

character of the testimony; the capacity to perceive at the time the events occurred; the

I character of the witness for honesty; the existence ofbias or other motive; other statements of the witness which are consistent or inconsistent with the testimony; the existence or-i absence of any fact to which the witness testified; and the attitude of the witness toward the proceeding in which the testimony has been given.

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each task and the method of calculating the cost" as required by regulation. (Cal. Code Regs., tit. 1, § 1042, subd. (b)(l).) Therefore, investigative costs are not awarded.

The deputy attorney general submitted a certification of costs for work performed by the Office of the Attorney General. Attached to that certification was a form entitled, "Matter Time Activity By Professional Type." The attachment contained a general description of the tasks performed, the time spent on the tasks, and the hourly rate charged for the work of each employee. The certification of costs submitted in this matter established that the Department of Justice billed $14,082.50 for time expended on this case. The certification of the time billed complied with the requirements of California Code of Regulations, title 1, section 1042, subdivision (b). The attorney general's certification also contained an .estimate claiming that an additional $680 would likely be billed for an additional4 hours for the further preparation of the case up to the commencement of the hearing. This estimate of costs did not comply with the regulations because it did not provide a general breakdown or reason that actual cost information was not available. Accordingly, only actual prosecution costs of $14,082.50 were established. The reasonableness of those costs is discussed below.

Respondent testified about his ability to pay costs. Respondent provided inforrtlation on his assets and debts. It is also noted that respondent has yet to pay the SEC penalty and disgorgement.

LEGAL CONCLUSIONS

Burden and Standard ofProof

1. Complainant bears the burden of proof of establishing that the charges in the accusation are true. (Evid. Code § 115.) The standard of proof in an administrative action seeking to suspend or revoke a professional license is "clear and convincing evidence." (Ettinger v. Bd. ofMedical Quality Assurance (1982) 135 Cal.App.3d 853, 856.) Clear and convincing evidence requires a finding of high probability. or evidence so clear as to leave no substantial doubt; it requires sufficiently strong ·evidence to command the unhesitating assent of every reasonable mind. (Katie V. v. Sup. Ct. (2005) 130 Cal.App.4th 586, 594.)

Statutory and Regulatory Authority

2. Business and Professions Code section 141 provides:

(a) For any licensee holding a license issued by a board under the jurisdiction of the department, a disciplinary action taken by another state, by any agency of the federal government, or by another country for any act substantially related to the practice regulated by the Califomia license, may be a ground for

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disciplinary action by the respective state licensing board. A certified copy of the record of the disciplinary action taken against the licensee by another state, an agency of the federal government, or another country shall be conclusive evidence of the events related therein.

(b) Nothing in this section shall preclude a board from applying a specific statutory provision in the licensing act administered by that board that provides for discipline based upon a disciplinary action taken against the licensee by another state, an agency of the federal government, or another country.

3. Business and Professions Code section 5100 provides the board may discipline a license for unprofessional conduct that includes the following:

(h) Suspension or revocation of the right to practice before any governmental body or agency.

[~] ... [~]

(1) The imposition of any discipline, penalty, or sanction on a registered public accounting firm or any associated person of such firm, or both, or on any other holder of a permit, certificate, license, or other authority to practice in this state, by the Public Company Accounting Oversight Board or the United States Securities and Exchange Commission, or their designees under the Sfl:_rbanes-Oxley Act of 2002 or other federal legislation....

4. Business and Professions Code section 5100.5, subdivision (a), provides the board may permanently restrict or limit the practice of a licensee or impose a probationary tertn or condition on a license, which prohibits the licensee from performing or engaging in any of the acts or services described in Section 5051.

Substantial Relationship

5. A board cannot revoke a professiona1license or certification unless the licensee's conduct relates to the fitness or competence to practice that profession. (Newland v. Bd. ofGovernors (1977) 19 Cal.3d 705, 711; Perrine v. Municipal Court (1971) 5 Cal.3d 656, 663.) Business and Professions Code section 141 requires the act to be substantially related to the practice of the profession. Thus, complainant must establish that a licensee's discipline by another agency is "substantially related;' to the qualifications, functions, or duties of a certified public accountant.

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6. Under California Code of Regulations, title 16, section 99, an act shall be considered substantially related to the qualifications, functions or duties of a certified public accountant "if to a substantial degree it evidences present or potential unfitness of a certified public accountant or public accountant to perform the functions authorized by his or her certificate or permit in a manner consistent with the public health, safety, or welfare." Such acts include but are not limited to those involving the following:

(a) Dishonesty, fraud, or breach of fiduciary responsibility of any kind;

[~] ... [~]

(d), Violation of any of the provisions of Chapter 1, Division III of the Business and Professions Code [Bus. & Prof. Code,§ 5000 et seq.].

7. The SEC disciplined respondent's license for a violation of section 17(a) of the Securities Act and sectionlO(b) of the Exchange Act. Section 17(a) of the Securities Act makes it unlawful to:

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or/

(3) to engage in anytransaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Section 1 O(b) of the Exchange Act makes unlawful:

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

8. A certified public accountant occupies a position of trust requiring the utmost --jI honesty and fidelity to ethical principles. The violations found by the SEC are substantially

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related to the qualifications, functions, or duties of an account. (Cal. Code Regs., tit.. 16, § 99, subds. (a) & (d).)

Cause Exists to Discipline Respondent's License

9. Cause exists to discipline respondent's certificate pursuant to Business and Professions Code sections 141 and 5100, subdivisions (h) and (1). Clear and convincing evidence established that the SEC, an agency of the federal government, took disciplinary action against respondent, and suspended him from practicing as an accountant before the SEC. The discipline was for conduct that is substantially related to the qualifications, functions, or duties of a certified, public accountant.

Appropriate Level ofDiscipline

10. Administrative proceedings to revoke, suspend, or impose discipline on a professional license or certification are noncriminal and nonpenal; they are not intended to punish the licensee, but rather to protect the public. (pull a v. Bd. ofRegistered Nursing (2012) 205 Cal.App.4th 1195, 1206.) "Protection of the public shall be the highest priority for the California Board of Accountancy in exercising its licensing, regulatory, and disciplinary functions. Whenever the protection of the public is inconsistent with other interests sought to be promoted, the protection of the public shall be paramount." (Bus. & Prof. Code, § 5000.1.)

11. California Code ofRegulations, title 16, section 99.1 states when considering the suspension or revocation of a permit, the board will consider the nature and severity of the act or offense; the total criminal record; the time that has elapsed since commission of the offense; whether the licensee has complied with any terms of'parole, probation, restitution or any other sanctions lawfully imposed against such person; evidence of expungement; and any evidence of rehabilitation submitted.

12. Under California Code ofRegulations, title 16, section 98, in reaching a decision· on a disciplinary action, the board shall consider the disciplinary guidelines entitled "Disciplinary Guidelines and Model Orders" (9th edition, 2013). Deviation from these guidelines and orders, including the standard terms of probation, is appropriate where the board in its sole discretion determines that the facts of the particular case warrant such a deviation, for example: the presence of mitigating factors; the age of the case; evidentiary problems.

13. The disciplinary guidelines provide the following aggravating factors to be

considered in imposing discipline:

1. Evidence that the violation was knowingly committed and/or was premeditated.

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2. Licensee has a history of prior discipline, particularly where the prior discipline is for the same or similar type of conduct.

3. Licensee's actions resulted in financial damage to his or her clients or other consumers. The amount of loss may be an additional aggravating factor.

4. Violation of CBA probation.

5. Failure to comply with a final citation order.

6. Failure to comply with a notice to appear before the CBA or its designated representatives. 7. Failure to comply with continuing education requirements as ordered by the CBA or its designated representatives pursuant to CCR section 87.5.

8. Evidence that the licensee has not cooperated with the CBA's investigation.

9. Misappropriation of entrusted funds or other breach of fiduciary responsibility.

10. Duration ofviolation(s).

11. Evidence that the licensee knew or should have known that his or her actions could ·harm his or her clients or other consumers.

12. Evidence that the licensee took advantage of his or her client for personal gain, especially if the licensee was able to take advantage due to the ignorance, age, or lack of sophistication of the client. ·

14. The disciplinary guidelines provide the following mitigating factors to be considered in imposing discipline:

1. The licensee has cooperated with the CBA's investigation, other law enforcement or regulatory agencies, and/or the injured parties.

2. The passage of considerable time since an act of professional misconduct occurred with no evidence of recurrence or evidence of any other professional misconduct.

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3. Convincing proof ofrehabilitation, including the factors in CCR section 99.1 as well as other relevant considerations.

4. Demonstration of remorse by the licensee.

5. Recognition by licensee of his or her wrongdoing and demonstration ofcorrective action to prevent recurrence.

6. Violation was corrected without monetary losses to consumers and/or restitution was made in full.

7. Ifviolation involved multiple licensees, the relative degree of culpability of the subject licensee should be considered.

15. Under the disciplinary guidelines, the minimum penalty for a violation of Business and Professions Code section 5100 subdivisions (h) and (1) stayed revocation with three years of probation. The maximum penalty is revocation.

Evaluation

16. Although respondent's license is subject to discipline by virtue of the SEC's discipline and suspension order, the disciplinary guidelines provide for a range of discipline and require consideration of the enumerated aggravating and mitigating factors. Complainant requested revocation, based on the SEC's "conclusive" findings that respondent engaged in fraudulent conduct with intent to deceive investors. Complainant contended that respondent may provide evidence of rehabilitation and mitigation, but may not seek to undermine or contradict the SEC's findings. On the other hand, respondent maintained that his conduct was not willful, fraudulent, or reckless, and he refuted the SEC's findings to the contrary. Respondent contended that barringhim from presenting evidence contradicting the SEC's findings, and accepting the consent order findings as conclusive evidence of the underlying conduct, would violate due process.

Cause to discipline respondent's CPA certificate is based solely on the fact that the SEC discipline occurred, and not upon any underlying conduct. (Marek v. Bd. ofPodiatric Medicine (1993) 16 Cal.App.4th 1089; Clare v. Bd. ofAccountancy (1992) 10 Cal.App.4th 294.) Both the Disciplinary Guidelines and California Code of Regulations, title 16, section 99.1, require consideration of factors that could only come from the facts underlying the misconduct. Although Business and Professions Code section 141 provides that the disciplinary order is "conclusive evidence of the events related therein," respondent's conflicting evidence, as well as evidence of mitigation and rehabilitation, can be considered by the factfinder in assessing the level of discipline.6 Of course, the factfinder is "free to

6 As the court in Clare noted, a statute must be read, consistent with the statutory language and purpose, such as to eliminate doubts as to the provision's constitutionality. (Clare, supra, at p. 303.)

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accept or reject [the·respondent's] explanation of the circumstances" sun-ounding the commission of the offense. (Matansky v. Bd. ofMedical Examiners (1978) 79 Cal.App.3d 293, 303.) However, the circumstances underlying the misconduct and respondent's explanation as to why he did or did not engage in the acts leading to the discipline are absolutely relevant in detennining the appropriate level of discipline. Accordingly, complainant's argument is rejected.

17. Rehabilitation is a "state of mind" and the law looks with favor upon rewarding with the opportunity to serve, one who has achieved "reformation and regeneration." (Pacheco v. State Bar (1987) 43 Ca1.3d 1041, 1058.) The evidentiary significance of an applicant's misconduct is greatly diminished by the passage of time and by the absence of similar, more recent misconduct. (Kwasnik v. State Bar (1990) 50 Cal. 3d 1061, 1070.) Similarly, the absence of prior discipline is an important mitigating circumstance, but it is only a particu"Iarly strong factor V\Then the professional has engaged a professional practice for a substantial period of time. (Waysman v. State Bar (1986} 41 Cal. 3d 452; 457). B:urther, fully acknowledging the wrongfulness of past actions is an essential step towards rehabilitation. (Seide v. Committee ofBar Examiners (1989) 49 Cal. 3d ' 933, 940.) However, the consistent refusal to retract claims of innocence in order to show remorse can also reinforce, rather than undercut, a showing of good character. (Hall v. Committee ofBar Examiners (1979) 25 Ca1.3d 730.) wli.ether the failure to retract claims of innocence will reinforce or undercut a respondent's claim of good character depends on the facts of each case.

18. Considering the factors in the disciplinary guidelines, and in light or respondent's credible testimony, revocation is not required for public protection. Respondent accepted responsibility for what he conceded was negligence for failing to read the fulfillment agreement and further investigating the "term sheet" provision in the purchase order. He has no history oflicense discipline, and the charged violation arose out of a single incident in an otherwise unblemished 35 year career. He appears to have taken the incident to heart, and there is little likelihood that it will be repeated in the future. A stayed revocation with probationary terms and conditions will be sufficient to protect the public.

Costs ofInvestigation and Prosecution

19. Business and Professions Code section 5107, authorizes an administrative law judge to direct a licensee who has violated the applicable licensing act to pay a sum not to exceed the reasonable costs of investigation and prosecution. The total costs of investigation and prosecution in this matter were $14,082.50.

In Zuckerman v. Board ofChiropractic Examiners (2002) 29 Ca1.4th 32, 45, the California Supreme Court set forth five factors to be considered in determining whether a particular licensee should be ordered to pay the reasonable costs of investigation and prosecution under statutes like Business and Professions Code section 5107. Those factors are: whether the licensee has been successful at hearing in getting charges dismissed or reduced, the licensee's subjective good faith belief in the merits of his or her position,

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http:14,082.50http:Cal.App.3d

whether the licensee has raised a colorable challenge to the proposed discipline, the financial ability of the licensee to pay, and whether the scope of the investigation was appropriate in light of the alleged misconduct. (Ibid.)

Respondent raised a colorable challenge to, and was able to obtain a reduction of the proposed discipline of revocation. Although complainant relied only on the SEC order in proving its case, given the complexity of the issues, the prosecution costs were not manifestly unreasonable. In light of these factors, and respondent's ability to pay costs, respondent is ordered to pay $5,000 in costs.

Administrative Penalty

20. Business and Professions Code section 5116 et seq. allow the board to order any licensee to pay an administrative penalty as part of any disciplinary proceeding. Complainant requested the imposition of an administrative penalty. When probation is ordered, an administrative penalty may be included as a condition of probation. With the exception of certain violations, any licensee may be assessed an administrative penalty of not more than $5,000 for the first violation. Under the disciplinary guidelines, cost recovery "ordered under Business and Professions Code section 5107 should not be a reason to reduce or eliminate the amount of administrative fines. The disciplinary guidelines provide the following criteria to be considered in assessing an administrative penalty:

1. Nature and extent of actual and potential consumer harm.

2. Nature and extent of actual and potential harm to clients.

3. Nature and severity of the violation.

4. The role of the person in tl,J.e violation.

5. The person's attitude toward his or her commission of the violations.

6. Recognition of wrongdoing.

7. Person's history of violations.

8. Nature and extent of cooperation with the CBA's investigation.

9. The person's ability to pay the administrative penalty.

10. The level of administrative penalty necessary to deter future violations.

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11. Nature and extent to which the person has taken corrective action to ensure the violation will not recur.

12. Nature and extent of restitution to consumers harmed by violations.

13. The violations involve sanctions by other government agencies or other regulatory licensing bodies, i.e. Internal Revenue Service, Securities and Exchange Commission, and Public Company Accounting Oversight Board. 14. Other aggravating or mitigating factors.

Considering these factors, an administrative penalty of $500 is appropriate.

ORDER

Certified Public Accountant Certificate No. 98813 issued to respondent Jerome Kaiser is revoked. However, revocation is stayed and respondent is placed on probation for three years upon the following terms and conditions:

1. Obey All Laws

Respondent shall obey all federal, California, other states' and local laws, · including those rules relating to the practice of public accountancy in California.

2. Cost Reimbursement

Respondent shall reimburse the Board $5,000 for its investigation and prosecution costs. The payment shall be made as follows: in quarterly payments (due with quarterly written reports), the final payment being due one year- before probation is scheduled to terminate.

3. Submit Written Reports

Respondent shall submit, within 10 days of completion of the quarter, written reports to the Board on a fonn obtained from the Board. The respondent shall submit, under penalty of perjury, such other written reports, declarations, and verification of actions as are required. These declarations shall contain statements relative to respondent's compliance with all the terms and conditions of probation. Respondent shall immediately execute all release of information forms as may be required by the Board or its representatives.

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4. Personal Appearances

Respondent shall, during the period of probation, appear in person at interviews/meetings as directed by the Board or its designated representatives, provided such notification is accomplished in a timely manner.

5. Comply With Probation

Respondent shall fully comply with the terms and conditions of the probation imposed by the Board and shall cooperate fully with representatives of the California Board of Accountancy in its monitoring and investigation of the respondent's compliance with probation terms and conditions.

6. Practice Investigation

Respondent shall be subject to, and shall permit, a practice investigation of the respondent's professio!!al practice. Such a practice investigation shall be conducted by representatives of the Board, provided notification of such review is accomplished in a timely manner. '

7. Comply With Citations

Respondent shall comply with all

Documents

CBA Item IV.D. September 14-15, 2017...CBA Item IV.D. September 14-15, 2017 Discussion and Possible Action on Proposed Legislation to Amend Business and Professions Code Section 5100