Securities and Exchange Commission v. Pros International, Inc., David M. Lamoreaux, Richard C. Landerman, Jack M. Johnston, George Craig Stayner

KELLY, Circuit BALDOCK and Before Judge. n OWEN, District Judges, and KELLY, Jr., Judge. Circuit PAUL and Ex- Plaintiff-appellant Securities (SEC) appeals from change Commission summary granting court’s order district defendant-appellee in favor of judgment denying permanent a George Stayner and juris- Stayner. Our injunction against Mr. §§ 1291 & 28 U.S.C. arises diction under 1292(a) and we affirm.

Background accountant, Stayner, a

Mr. certified misleading materially false preрared opin- unqualified an report expressing audit statements defendant ion on the financial The financial statements International. Pros assets, the value of Pros’ grossly overstated materially misleading description of giving The audit Pros’ financial condition. prepared had that Mr. indicates accepted generally with report in accordance when, fact, Mr. auditing standards independent verification of as- performed no management’s to discover sets and failed misrepresentations. Mr. as a defen-

The SEC named enforcement action in its securities dant other and several agаinst Pros International parties are who not individual defendants alleged violations of appeal. The suit this 10(b) Act, Exchange § of the U.S.C. 78j(b), promulgated § Rule thereun- 10b-5 17(a) 10b-5, der, § § 17 C.F.R. Act, § 77q(a), and 15 U.S.C. the Securities injunction against future sought permanent Stay- by Mr. laws violations of the securities ner. Counsel, Gen. Summergrad, Eric Associatе Counsel, negligently that he

(James Mr. concedes H. Doty, Jacob R. General federal securities Counsel, provisions of the Stillman, Mi- violated Associate Gen. Stay- granted Mr. court Lenett, laws. The district him on G. Senior Counsel chael summary judgment de- DC, motion for brief), ‍​‌​‌‌‌​​​​​‌​‌​‌​‌‌‌​‌​​​‌‌‌‌‌‌‌​​‌​​​​​‌​‌​​​​​‍S.E.C., plain- ner’s Washington, The court motion. nied the Commission’s tiff-аppellant. York, Owen, by designation. n Tho sitting Senior United New Richard Honorable Judge District of Southern District States 17(a)(2) 10(b) 17(a)(1) § §§ Stayner violated & justify injunction found that Mr. or will an (3) scienter, through negligence, readily but lacked more than a negligent violation of 17(a)(2) (3). However, § or prerequisite which is a for a violation of if there is a 17(a)(1) 10(b), § sufficient that the likely or Rule 10b-5. The mo- violation is recur, injunction may justified for a tion was denied. be even 17(a)(2) (3). negligent § for a violation of or Discussion SEC, 680, 700-01, Aaron v. 446 U.S. 100 1945, 1957-58, (1980). S.Ct. 64 L.Ed.2d 611 grant summary We review the novo, judgment construing de all evidence factors, Applying these the district drawing any light and inferences in a most injunction court’s denial of the did not consti party opposing summary favorable tute an abuse of discretion. Mr. was Inc., judgment. Liberty Lobby, v. Anderson knowing not a participant in a fraudulent 242, 249-52, 106 2505, 2510-12, 477 U.S. S.Ct. Although scheme. clearly his actions were (1986); 56(c). 91 L.Ed.2d 202 Fed.R.Civ.P. negligent, reckless, probably and there has However, once we determine that the issue is been no that Mr. intended ripe summary disposition, for we review the Haswell, to defraud investors. See 654 F.2d grant perma district court’s or denial of a at 700. The SEC and the dissent remind us injunction nent for abuse of discretion. that Mr. violated several basic audit Grant, Co., United States v. W.T. 345 U.S. ing promulgated by AICPA,1 standards 629, 635-36, 894, 898-99, 73 S.Ct. 97 L.Ed. including general requiring standard in (1953); Bonastia, 908, 1303 v. 614 SEC F.2d dependence and the field work standard re (3rd Cir.1980). 913 quiring that gather the auditor evidence to support ‍​‌​‌‌‌​​​​​‌​‌​‌​‌‌‌​‌​​​‌‌‌‌‌‌‌​​‌​​​​​‌​‌​​​​​‍opinion an on the financial state injunction An based on the violation 1, § ments. See No. SAS AU 150.02. This appropriate of securities laws is if the SEC injunction, alone is insufficient to warrant an demonstrates reasonable and substantial required beyond because we are to look al defendant, enjoined, likelihood that the if not n willviolate leged professional violations of standards and securities laws the future. See determine “whether there is a reasonable 20(b), 77t(b); § § Securities Act 15 U.S.C. defendаnt, enjoined, likelihood that the if not 21(d), 78u(d); § Exchange Act 15 U.S.C. again engage illegal will in the conduct.” Bonastia, See 614 at F.2d 912. Determination of Bonastia, 614 F.2d at 912. The mere fact requires likelihood of future violations that the Defendant will remain an accountant factors, analysis of several such as the seri injunction. is insufficient for The SEC’s violation, degree ousness of the of scien authority general regula does not extend to ter, occupation pres whether defendant’s will where, accounting profession tion of the opportunities ent for future violations and here, as there is no evidence that future whethеr recognized wrong defendant has likely, guess violations are we will not second gives ful conduct and sincere assurances the district court.2 Youmans, against future violations. v. SEC (6th 413, Cir.) denied, 729 F.2d 415 cert. 469 A can have severe 1034, 507, U.S. 105 S.Ct. 83 L.Ed.2d 398 professional consequences economic and (1984); Blatt, 1325, SEC 583 F.2d 1334 n. Thermodynam an accountant. See SEC v. (5th Cir.1978). Although single ics, Inc., (10th Cir.1972) 29 no factor 464 F.2d 457 cert. determinative, previously denied, is we have 927, 1358, held 410 U.S. 93 S.Ct. (1973). degree heavily” of scienter “bears on Stayner’s L.Ed.2d 588 Mr. violation Haswell, 698, the decision. SEC v. practitioner 654 F.2d isolated. He is sole whose (10th Cir.1981). knowing A practice primarily violation of preparing is limited in- any wrongdоing by 1. American Institute of Certified Public Accoun- Mr. in connection tants. Therefore, companies. Stayner’s Mr. those single work for Pros remains incident of recognize Stayner engaged We that Mr. in au- wrongdoing. presented pattern We with no are diting accounting companies work for other practice wrongdoing, or nor evidence of re- Lamoreaux, connected with David and that the potential public compa- cent or future work for suspended trading companies SEC on two of the nies. years Stayner’s two after Mr. involvement. However, allege the SEC fails to or document International, Inc. еrrors in the audit His tax returns. come negligence and gross (formerly Corporation) from report resulted Ad-Print profit from the He did not inexperience. City, Utah Lake Salt only transaction, charged a fraction accompanying Bal- examined the have cost, and never have a full audit should what Internatiоnal, Inc. of PROS ance Sheet He has since discontin- payment. received (formerly Corporation) as of No- Ad-Print reports for com- preparing audit ued 1985, 31, December vember current no panies. There is evidence Operations and the related Statements likely present opportunitiеs occupation is Deficit, and Retained Sources Uses for future violations. Equi- Changes in Funds and Stockholders’ recognized the Stayner has also Mr. My periods then exami- ty ended. conduct, and assured wrongful nature his of gener- in with nation was made accordance not that this situation will court the district and, auditing ac- ally accepted standards by supports his assurances again. He occur of the ac- cordingly, included such tests practice to tax return limit his agreeing to auditing counting and such other records work. necessary I in procedures as considered foregoing, we find that no on the Based the cirсumstances. fact exists and that genuine of material issue its discretion ‍​‌​‌‌‌​​​​​‌​‌​‌​‌‌‌​‌​​​‌‌‌‌‌‌‌​​‌​​​​​‌​‌​​​​​‍the court did not abuse district my opinion, In the financial statements unlikely determining that Mr. is in present fairly finan- to above the referred in the future. the securities laws to violate International, position Inc. cial of PROS (formerly Corporation) of Ad-Print as No- AFFIRMED. 31,1985 30,1986 in and December vember conformity generally accepted ac- with OWEN, Judge, dissenting. District consistently counting principles applied. preparing In respectfully dissent. his Co.) (signed Craig & PROS,1 time, Stayner, at the Certi- audit of years2 Accountant for twelve who fied Public 8, 1986 December before, that had done work knew his SEC would be submitted to financial conclusions brought picture by Stayner had been into the company’s part of the the Commission as Lamoreaux,3 David his “fellow accountant” package, poten- that thereafter financial of the and Chief who was Chairman Board rely might in well on his tial investors PROS They had known Financial Officer PROS. representations determining in whether or years and each other for several Lamoreaux buy the conclusion of not to stock. At PROS given Stayner accounting work on a had “audit”, Stayner following the let- issued prior Stayner, it is occasions. number qualification: ter without concludе, expected to to receive reasonable give would income from work Lamoreaux & CO. CRAIG STAYNER Athough him in future. his letter recites the ACCOUNTANT CERTIFIED PUBLIC in accor- his examination was conducted that EAST, 5-C 150 SOUTH 600 SUITE accepted auditing generally stan- dance with CITY, LAKE UTAH 84102 SALT “GAAS”4) (called by dards accountants 359-7295 PHONE pre- position of that the finanсial PROS consistently conformity ap- with of Directors sented The Board enjoined permanently part been 3. Lamoreaux has was established as fraudulent activities herein. merge corporation, it scheme to revive shell company, another and sell shares in the following: include the 4. These entity рublic. merged Standard No. 2: In all matters relat- General independence ing assignment, in men- the to California, and had by 2. He is certified in Utah and maintained the auditor or tal attitude is to be years. for three auditors. been with Price Waterhouse accounting princi- accuracy accepted publiсly as to the plied generally disseminated (“GAAP”), represen- he knew that both ples information as to their financial conditions. false, Stayner check predecessor were did not company, tations As to PROS’ Ad-Print nothing according anything, and had done to Corporation, Stayner in gave December 1986 questiоned by the or GAAP.5 When GAAS qual- Ad-Print same certification without he said: SEC period ification for the 1983 and 1984 he gave position period had determined PROS for the [T]he 1985 and by equally any taken me in this examina- accounting input needed be without whatso- tion, merely accepted and that was to what the com- ever. Hе representa- engage- pany had done. And it was not an tions of Board of Directors of Ad-Print. ment to determine valuation or An accountant who audits a financial state- judgment of the board of directors. public company ment of a has what the Su- intangible value considered asset preme еmphasized Court special has is a unusually high, million and conceded $2.6 “public responsibility.” Ar- United States v. that he was “uncomfortable” with this valua- Co., Young 805, 817, thur & 465 U.S. However, although intangibles tion. 1495, 1503, (1984) (em- S.Ct. 79 L.Ed.2d 826 assets, entirety were almost the of PROS’ phasis in original). In view great of the nothing verify accepted ‍​‌​‌‌‌​​​​​‌​‌​‌​‌‌‌​‌​​​‌‌‌‌‌‌‌​​‌​​​​​‌​‌​​​​​‍did them. He place reliance investors on financial state- representation that that David Lamoreaux’s ments, scrutiny an auditor’s of those state- was what the Board had decided was the ments is necessary to that the “assure[] value,6 intangibles’ having reviewed the integrity of the securities markets will be Board of Director’s minutes.7 did 819,104 preserved-” Id. at S.Ct. at 1504. step, the not take next as Standard of Field- A of that “can great breach trust inflict requires,8 un- work No. 3 which would have damage on investors.” Touche Ross & by assigned convered the fact that the value S.E.C., (2d Cir.1979). 570, Co. v. 609 F.2d 581 was, large the Board to these assets in mea- system This is so because the of securities surе, contracts, on two one based which regulation country in necessarily this relies existed, never and the second was about to report on the company’s auditor’s therefore, Obviously, be cancelled. these val- fairly present financial statements its finan- ues, certifying which to in- was cial condition in conformance with estab- public, vesting grossly were and overstated accounting lished standards. materially misleading. and thus false Stayner’s performance Against background, Stayner in the PROS audit this violated by deliberately knowingly was not an isolated occurrence. He did au- that trust dis- diting accounting regarding precepts services at Lamo- the most fundamental request companies, profession reaux’s for other two of on a of occasions. Ac- number which, Capital cordingly, beyond merely Investment Services and Omni view this as far Corporation Capital suspended negligent departure were from from the standards of trading part ordinary in in questions accounting 1988 because of care in the field as lawyer Standard of Fieldwork No. 3: Sufficient com- value that PROS' "needed or wanted to petent through evidential to be have in the matter is obtained financial statements.” observation, inspection, inquiries, and confirma- opinion tions to afford a reasonable basis for an regarding perceived 7. [T]he role an auditor as I it at that on, the financial statements under exami- report gone [was] time what had that I felt nation. they that I needed to had valued it at 2.6. That their I didn't feel that was valuation. papers Stayner may pre- expertise up 5. Whatever work have I had the to come different letter, pared at the time he issued the "work valuation. papers" pre- over to the SEC were turned yourself Q. you reporting Who did consider pared subpoena after he had received an SEC to? they herein and еven confirm that did no point reporting A. I considered at that was given accept by more than valuations him others. board of directors and the shareholders of PROS. Indeed, Stayner acknowledged that Lamoreaux figure supra $2.6 told him that the million 8. See note 4. committing future violations of from If not indeed deliberate saw it. Court below Haswell, was, minimum, v. laws. S.E.C. Stayner, it at a so the securities by conduct (10th Cir.1981). satisfy fully the scienter re- F.2d

reckless as 10(b) Ob-5, Rule 1 as quirement of Holmes, 675 F.2d by in Hackbart v.

noted us (10th Cir.1982) at 1118: 10b-5, applying Rule purposes of For behavior is con- definition of reckless best departure from that is “an extreme duct care, ordinary and which the standards of buyers or danger misleading рresents the defen- that is either known to sellers McKINNEY, Plaintiff-Appellant, Millard that the actor must dant or is so obvious been aware of.” have omitted). (citations PATE, individually and in his offi John Carlson, effect, Inc. v. See to similar C.E. capacity cial as Commissioner of (10th Cir.1988)

S.E.C., at 1435: 859 F.2d 1429 County Board of Osceola Commission individually ers, Shannin, and in Jack may by a Proof of be satisfied scienter capacity Development recklessness, his official or conduct which County, Dept. Director of Osceola ordinary far the standard of falls short of County ‍​‌​‌‌‌​​​​​‌​‌​‌​‌‌‌​‌​​​‌‌‌‌‌‌‌​​‌​​​​​‌​‌​​​​​‍Board of Commis Osceola danger and which carries a of mis- care sioners, Collectively, Defendants-Appel petitioners leading purchasers such that lees. propensity have of its knew or must known to mislead. No. 91-3416. area, speaking in specifically And this Appeals, United States Court of Laing & Cruickshank

CL-Alexanders Eleventh Circuit. (S.D.N.Y.1990) Goldfeld, F.Supp. 158 at 163: Court stated June 1993. through establish scienter reckless- [T]o Pilacek, FL, Longwood, Thomas J. ness, enough plaintiff it to estab- is not plaintiff-appellant. preparation lish that the method of for the projections simply used was unreasonable. FL, Tallahassee, Shelley, E. Lewis for de- “plaintiff that the The must establish de- fendants-appellees. fendant the forecasts know- disseminated ing they were false or that the method of

preparation egregious was so as to render (citation

their dissemination reckless.” omitted). words, In recklessness other knowledge that it

connotes defendant’s speak. does not basis to have sufficient FOR REHEARING AND ON PETITION foregoing, Stayner’s Given the I view reck- SUGGESTION FOR REHEARING lessness, scienter, consequent being EN BANC clearly established on this record. Since this situation, hardly an isolated profession,9 remains would reverse TJOFLAT, FAY, Judge, Chief

and remand to the District Court with di- Before KRAVTICH, HATCHETT, ANDERSON, summary judgment to the rections to award EDMONDSON, COX, BIRCH, DUBINA, thereupon grant SEC and the Commission CARNES, Judges. enjoining Circuit it seeks BLACK Having give self-serving representations knowingly as to the violated his accountant's occasions, future, any weight. little if duties on at least two if not more

Case Details

Case Name: Securities and Exchange Commission v. Pros International, Inc., David M. Lamoreaux, Richard C. Landerman, Jack M. Johnston, George Craig Stayner

Court Name: Court of Appeals for the Tenth Circuit

Date Published: Jun 9, 1993

Citation: 994 F.2d 767

Docket Number: 91-4119

Court Abbreviation: 10th Cir.