Litigation Department Obtains Victory in SEC Administrative Proceeding Against Former “Big Four” Engagement Partner

January 13, 2011

Administrative Law Judge dismisses SEC allegations of improper professional conduct against Willkie client.

On December 28, 2010, Administrative Law Judge Robert Mahony dismissed the Securities and Exchange Commission’s allegations of improper professional conduct against Willkie’s client, a former "Big Four" accounting firm audit partner.

The case revolved around the 2004 audit of AA Capital Partners, a Chicago investment adviser, and its affiliated funds. The audit team identified a receivable consisting of four transfers to one of the adviser’s principals totaling just over $1.9 million, which the CFO represented to be a tax advance. AA Capital and its funds received clean audit opinions at the end of June 2005. During the next year's audit, the audit team noticed that the tax receivable had grown to over $5.7 million, and refused to issue the audit opinion. Shortly thereafter, in September 2006, the SEC placed AA Capital into receivership. Several criminal and civil investigations ensued resulting in criminal and civil pleas by AA Capital management, including a ten-year prison term for one of its principals.

The SEC Staff alleged that Willkie’s client and the audit team failed to sufficiently audit the tax advance transactions during the 2004 audit and that the funds’ financial statement disclosure regarding this advance did not comply with GAAP. The Staff sought to ban Willkie’s client from practicing as an accountant before the SEC, arguing that his conduct on the 2004 AA Capital audit was "highly unreasonable," the standard for sanctions under Commission Rule 102(e). Judge Mahony, however, found that the SEC failed to prove that Willkie’s client had violated GAAS and, although he did find that the audit client violated GAAP in its footnote disclosure, Judge Mahony ruled that Willkie’s client’s conduct was not "highly unreasonable" because of the judgment involved with financial statement disclosure.

The dismissal came after an eight day administrative hearing conducted in July and August 2010. The time for appeal has not run. The case was handled by partner Gregory Bruch; of counsel Julie Smith; and associates Jessica Matelis, Emily Rap, Brandon Boey and Janine D’Aniello.