ALJDEC decisions subject to certification as final

14F-2009.106-ACY · State Board of Accountancy · 2013-11-26

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: November 8, 2013 APPEARANCES: The Arizona State Board of Accountancy was represented by Assistant Attorney General Seth T. Hargraves. Tom Hirsch appeared personally. Harish P. Shah appeared personally. ADMINISTRATIVE LAW JUDGE: Brian Brendan Tully _____________________________________________________________________ FINDINGS OF FACT 1. The Arizona State Board of Accountancy (“Board”) is the state agency authorized to regulate the practice of public accounting by certified public accountants in the State of Arizona. 2. Tom Hirsch (“Mr. Hirsch”) is the holder of Certified Public Accountant Certificate No. 2730-E issued by the Board. This certificate enables Mr. Hirsch to practice as a certified public accountant in the State of Arizona. 3. Harish P. Shah (“Mr. Shah”) is the holder of Certified Public Accountant Certificate No. 8181-E issued by the Board. This certificate enables Mr. Shah to practice as a certified public accountant in the State of Arizona. 4. The Board also issued Certified Public Accounting Firm Registration No. 2371-L to Mr. Hirsch and Mr. Shah for their business, Hirsch & Shah, L.L.C. (“Firm”). Mr. Hirsch and Mr. Shah are the Firm’s sole owners. 5. On or about July 14, 2009, the Board opened a complaint investigation into Mr. Hirsch, Mr. Shah, and the Firm after receiving information that Mr. Hirsch and Mr. Shah were under investigation by the Arizona Corporation Commission’s Securities Division (“ACCSD”). The ACCSD’s investigation involved allegations that Mr. Hirsch and Mr. Shah had engaged in acts, practices, and transactions that constituted violations of the Securities Act of Arizona. 6. On or about July 28, 2009, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against Mr. Hirsch, Mr. Shah, Berta Walder, Howard Walder, and Radical Bunny, L.L.C. in U.S. District Court for the District of Arizona in Case No. CV09-1560-PHX-SRB (“District Court Case”), charging that they had made false and misleading statements to hundreds of investors about the safety and performance of investment in a mortgage lending scheme, thereby committing securities fraud. 7. The Board subsequently received additional complaints from some of the individual investors. 8. The matters were assigned to the Board’s Accounting and Auditing Standards Committee (“Committee”) for investigation. 9. On April 12, 2011, in the District Court Case, U.S. District Judge Susan R. Bolton issued an Order (“April 12, 2012 Order”) finding that Mr. Hirsch and Mr. Shah committed fraud in the offer or sale of securities and fraud in connection with the purchase or sale of securities. According to the April 12, 2011 Order, Mr. Hirsch and Mr. Shah, acting with scienter, made material misrepresentations and omissions related to the securities they were offering to sell and actually selling to investors. 10. In the April 12, 2011 Order, Judge Bolton wrote the following: The individual Defendants continue to assert in their briefs . . . that they were not selling securities, so the Court is not persuaded that they have recognized the wrongful nature of their conduct or made any sincere assurances against future violations. Finally, two of the individual Defendants are CPAs, which increases the likelihood of future violations occurring.[1]

11. On April 27, 2011, Judge Bolton issued a Final Judgment of Permanent Injunction and Monetary Relief against Defendants Tom Hirsch, Berta Walder, Howard Walder, and Harish Shah in the District Court Case (“April 27, 2011 Final Judgment”). The Final Judgment permanently restrained and enjoined the Defendants from violating Section 5 of the Securities Act of 1933 [15 U.S.C. § 77e]; Section 17(a) of the Securities Act of 1933 [15 U.S.C. § 77q(a)]; Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78j(b)]; and Section 15(a) of the Securities Exchange Act of 1934 [15 U.S.C. § 78o(a)]. 12. On or about May 20, 2011, the Defendants in the District Court Case filed a Notice of Appeal to the United States Court of Appeal for the Ninth Circuit to appeal the April 27, 2011 Final Judgment (“Appellate Case”). The Board received a copy of the Notice of Appeal on May 25, 2011. 13. At the Committee’s June 16, 2011 meeting, the Committee voted “to recommend that the Board offer a Decision and Order (By Consent) for relinquishment in lieu of disciplinary proceedings.”[2] 14. At the Board’s July 11, 2011 meeting, the Board voted to accept the Committee’s recommendation. 15. At the Board’s September 12, 2011 meeting, the Board voted “to modify the Decision and Order (By Consent) to include a suspension pending” the Appellate Case.[3] 16. At the Board’s October 17, 2011 meeting, the Board voted to offer Mr. Hirsch and Mr. Shah a “Decision and Order (By Consent) as amended.”[4] 17. At the Board’s November 14, 2011 meeting, the Board voted “to re-offer the Decision and Order (By Consent) with the exception to the start date of the suspension – the suspension shall remain as previously offered.”[5] 18. On or about November 21, 2011, Mr. Hirsch, Mr. Shah, and the Firm entered into an Interim Consent Agreement (“Agreement”) with the Board. Pursuant to the terms of the Agreement, Mr. Hirsch’s Certified Public Accountant Certificate, Mr. Shah’s Certified Public Accountant Certificate, and Firm’s Certified Public Accounting Firm Registration were suspended for a period of up to two years pending the appeal in the Appellate Case. The Agreement provided that if the outcome of Appellate Case resulted in the April 12, 2011 Order and April 27, 2011 Final Judgment being upheld, the suspensions would continue until the the Board would complete the disciplinary proceedings against Mr. Hirsch, Mr. Shah, and the Firm’s certificates. 19. On July 10, 2013, the U.S. Court of Appeals for the Ninth Circuit affirmed the April 12, 2011 Order and April 27, 2011 Final Judgment. Mr. Hirsch and Mr. Shah did not appeal the Ninth Circuit’s determination in the Appellate Case. Therefore, the U.S. Court of Appeals for the Ninth Circuit’s decision is a final judgment in this matter. 20. At the Board’s September 16, 2013 meeting, the Board voted “to file a Complaint and a Notice of Hearing for revocation of the registrants’ individual and firm CPA certificates.” 21. The evidence of record established that Mr. Hirsch and Mr. Shah committed fraud, misrepresentation, dishonesty, and violated federal securities law as determined by the federal courts. 22. At the hearing, Mr. Hirsch and Mr. Shah did not acknowledge their wrongful conduct that had been fully litigated in the federal courts. They attempted to collaterally attack the April 12, 2011 Order, the April 27, 2011 Final Judgment, and the Ninth Circuit’s final decision in the Appellate Case. However, they were instructed by the Tribunal that they could not collaterally attack the final judgment in the Appellate Case in these administrative proceedings. 23. Mr. Hirsch and Mr. Shah presented the testimony of two clients who continue to believe in them and continue to use their accounting services. CONCLUSIONS OF LAW 1. The Board has jurisdiction over Mr. Hirsch, Mr. Shah, and Firm and the subject matter in this case. 2. Pursuant to A.R.S. § 41-1092.07(G)(2), the Board has the burden of proof in this matter. The standard of proof is by a preponderance of the evidence. See A.A.C. R2-19-119(A). 3. The doctrine of collateral estoppel bar Mr. Hirsch and Mr. Shah from collaterally attacking the final judgment in the Appellate Case in this administrative proceeding.[6] 4. The April 12, 2011 Order, the April 27, 2011 Final Judgment, and the final judgment in the Appellate Case constitute grounds to impose disciplinary action against Mr. Hirsch and Mr. Shah pursuant to A.R.S. § 32-741(A)(7).[7] 5. The April 12, 2011 Order, the April 27, 2011 Final Judgment, and the final judgment in the Appellate Case constitute grounds to impose disciplinary action against Mr. Hirsch and Mr. Shah pursuant to A.R.S. § 32-741(A)(8).[8] 6. The evidence of record supports the revocation of Mr. Hirsch’s Certified Public Accountant Certificate No. 2730-E and Mr. Shah’s Certified Public Accountant Certificate No. 8181-E, pursuant to A.R.S. §§ 32-741 and 32-742. Mr. Hirsch and Mr. Shah continue to fail to acknowledge their wrongful conduct as noted by Judge Bolton, who expressed concern that they were certified public accountants at the time of their misdeeds. 7. The revocation of Mr. Hirsch’s Certified Public Accountant Certificate No. 2730-E and Mr. Shah’s Certified Public Accountant Certificate No. 8181-E warrants the revocation of Firm’s Certified Public Accounting Firm Registration No. 2371-L, pursuant to A.R.S. § 32-742(A) and (B)(1) and A.A.C. R4-1-455.03(D)(2). RECOMMENDED ORDER It is recommended that Mr. Hirsch’s Certified Public Accountant Certificate No. 2730-E be revoked on the effective date of the Order entered in this matter. It is further recommended that Mr. Shah’s Certified Public Accountant Certificate No. 8181-E be revoked on the effective date of the Order entered in this matter. It is further recommended that Mr. Hirsch and Mr. Shah shall be jointly and severally liable for reimbursing the Board’s costs for investigating and proceeding to hearing in this matter, pursuant to A.R.S. § 32-701(10)(g). It is further recommended that Firm’s Certified Public Accounting Firm Registration No. 2371-L be revoked on the effective date of the Order entered in this matter.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order shall be five (5) days from the date of the certification.

Done this day, November 26, 2013.

/s/ Brian Brendan Tully Administrative Law Judge

Transmitted electronically to:

Monica L. Petersen, Executive Director Arizona State Board of Accountancy ----------------------- [1] Exhibit 3 at 12. [2] Exhibit 6 at 4 A.. [3] Exhibit 8 at 7. [4] Exhibit 9 at 9. [5] Exhibit 10 at 8. [6] See Arizona Downs v. Superior Court of Arizona, 128 Ariz. 73, 76, 623 P.2d 1229, 1232 (1981). [7] A.R.S. § 32-741(A)(7) provides as follows:

After notice and an opportunity for a hearing, the board may revoke or suspend any certificate granted under this chapter and may take disciplinary action concerning the holder of any certificate for any of the following causes: . . . .

7. Final Judgment in a civil action if the court makes findings of accounting violations, dishonesty, fraud, misrepresentation or breach of fiduciary duty.

[8] A.R.S. § 32-741(A)(8) provides as follows:

8. Final judgment or order in a civil action or administrative proceeding if the court or agency makes findings of violations of any fraud provisions of the laws of this state or federal securities laws.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826