PDF copy: ALJDEC decisions subject to certification as final

16F-2013.032-ACY · State Board of Accountancy · 2019-09-13

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

In the Matter of No. 16F-2013.032-ACY No. 16F-2015.020-ACY Certified Public Accountant Certificate No. 3559-R ADMINISTRATIVE LAW JUDGE Issued to: ROBERT SEMPLE, DECISION Respondent; and

Certified Public Accounting Firm Registration No. 933-B Issued to: SEMPLE, MARCHAL & COOPER, LLP, Respondent Firm.

HEARING: October 15, 2018, and October 16, 2018, with the record held open until December 17, 2018. APPEARANCES: Respondents Robert Semple and Semple, Marchal & Cooper, LLP were represented by Lisa Gervase and D. Jay Ryan. The Arizona State Board of Accountancy was represented by Assistant Attorney General Scott Donald. ADMINISTRATIVE LAW JUDGE: Tammy L. Eigenheer _____________________________________________________________________ FINDINGS OF FACT 1. Robert Semple (Respondent) is the holder of Certified Public Accountant (CPA) Certificate No. 3559-R, issued by the Arizona State Board of Accountancy (Board). Respondent Semple, Marchal & Cooper LLP (Firm) is the holder of CPA Firm Registration No. 933-B, issued by the Board. 2. Respondent is a Member and Partner in Charge of Firm and is responsible for Firm’s audit practice. 3. This matter involves Respondent and Firm’s work for and interactions with Integrated Information Systems, Inc. (IIS) prior to and during its progression through a bankruptcy proceeding.

Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826 4. By 2005, ISS accumulated approximately $90 million in net operating losses that could be carried forward to offset against income for federal income tax purposes.

5. At some point, Respondent became aware that Geneva Holdings, Jim

Marincovich, and Sam Robinson, Firm’s clients, were “looking for a loss corp.”

Reviewing their other clients, Respondent was unable to find a corporation that met

the clients’ needs.

6. Respondent knew James Garvey, Jr., President, Chief Executive Officer,

Director, and majority stockholder of IIS, through a private real estate transaction.

Respondent knew IIS had some operating loss carryovers and offered an introduction

between Mr. Garvey and the clients in December 2005. At that time, Firm did not have

any professional relationship with IIS.

7. To facilitate the possible transaction between the clients and IIS, Firm

began reviewing information for the prior years’ tax returns for IIS.

8. By February 2006, Firm began performing various accounting services for

IIS valued at between $12,000.00 and $15,000.00.

9. In May 2006, during the negotiation period of the financial transactions, creditors forced IIS into Chapter 7 Involuntary Bankruptcy, which was converted to a Chapter 11 Reorganization in August 2006. 10. Respondent was notified that, because of the bankruptcy, the possible transaction between IIS and Geneva Holdings, Mr. Marincovich, and Mr. Robinson fell apart. 11. In or about July 2006, counsel for IIS prepared a draft declaration for Respondent to review and finalize prior to submitting to the Bankruptcy Court regarding Firm’s possible conflicts and/or connections. 12. On or about August 10, 2006, an email exchange indicated that the agreement between IIS and Geneva Holdings, Mr. Marincovich, and Mr. Robinson had been finalized. Respondent was not copied on that email.

13. After hours on Thursday, August 24, 2006, counsel for IIS filed an updated list of creditors that included Geneva Holdings, Mr. Marincovich, and Mr. Robinson. Counsel for IIS did not notify Respondent of the updated list of creditors.

14. On or about August 30, 2006, IIS filed with the Bankruptcy Court a

Debtor’s Application to Employ Accounting Firm (Application) in Case No. 2:06-bk-

01257-RTB (Bankr. D. Ariz. 2012) requesting leave to hire Firm for accounting

services.

15. On August 29, 2006, Respondent signed and submitted to counsel for IIS

the Declaration of Robert M. Semple Pursuant to F.R.B.P. 2014 & 2016 (Declaration)

stating, in relevant part, as follows:

Based upon an internal conflict check, [Firm] does not represent any person or entity holding an interest adverse to the Debtors or the Bankruptcy Estate . . . . To the best of my knowledge, neither I nor any other member or employee of [Firm] has any connection with the Debtor, any of the creditors, [or] any other party in interest in this Bankruptcy Case. Counsel for IIS including the Declaration with the Application submitted to the Bankruptcy Court on August 30, 2006. 15. Respondent testified that the Declaration was prepared by IIS’s bankruptcy counsel’s firm and Respondent reviewed it and made some minor changes prior to signing and submitting it. Respondent indicated that he completed his due diligence review of the Declaration prior to the date he signed it. Respondent asserted that IIS’s bankruptcy counsel knew of the discussions that occurred between IIS and Geneva Holdings, Mr. Marincovich, and Mr. Robinson, but assured Respondent that he had disclosed everything that needed to be disclosed in the Declaration. 16. Firm waived its fees that had accrued prior to the Application to eliminate any conflicts. 17. Based upon the Declaration by Respondent, IIS stated in the Application, in pertinent part, as follows: To the best of the Debtor’s knowledge, information and belief, [Firm] does not presently hold any interests adverse to the Debtor, its Bankruptcy Estate, its creditors, or any other party in interest herein in matters for which the Firm is proposed to be retained. [Firm] is a “disinterested person”, as defined in Section 101(14) and as required by section 327(a) of the Bankruptcy Code. The [Respondent’s] Affidavit, executed on behalf of [Firm] in accordance with Section 327 of the Bankruptcy Code and Rule 2014 of the Federal Rules of Bankruptcy Procedure, is filed contemporaneously herewith and incorporated herein by reference. The Debtor’s knowledge, information and belief regarding the matters set forth in this application are based, and made in reliance upon, [Respondent’s] Affidavit.

18. On or about October 7, 2009, Firm filed an Application for Allowance of Compensation and Reimbursement of Expenses (Application for Fees) requesting fees in the amount of $71,293.75 and costs in the amount of $150.00. 19. On or about October 28, 2009, IIS filed an objection on multiple grounds to the Application for Fees, and the Bankruptcy Court subsequently conducted an evidentiary hearing. 20. In May 2012, the Bankruptcy Court held an evidentiary hearing. During the hearing, Respondent was questioned why he did not disclose his or Firm’s connection with Geneva Holdings, Mr. Marincovich, and Mr. Robinson. Respondent responded, in relevant part, as follows: But I had no idea – and I still don’t know exactly when they got involved with IIS in the bankruptcy. I know there were discussions in May and the deal blew up when the bankruptcy was filed. The involuntary was filed, and as we knew it, it was off the table. The returns weren’t filed. This client was not in compliance. There were creditor claims. There was a secured creditor claim. And again, we didn’t have any further involvement with Geneva [Holdings] or [counsel] or any of those guys because it’s really not our, you know, it’s not what we do. We were asked to prepare tax returns. We were hired by IIS, and asked to focus on getting the returns done so that they could get a plan filed with Court. 21. On or about August 10, 2012, the Bankruptcy Court issued a Minute Entry regarding the Application for Fees and ordered counsel for Firm to serve and lodge an appropriate order. The Bankruptcy Court including the following statement in the Minute Entry:

To the court, the far more significant issue was the failure of [Firm] to fully disclose certain connections that it had when it sought to be appointed. . . . The failure to disclose its connections is more egregious because [Firm] has done a significant amount of bankruptcy work in many cases. Simply put, it should know better. This court has wide discretion in determining the sanction, if any, to be imposed for non-disclosure. Because the court has concluded that the amount of the sanction it will impose here is greater than any fee reduction that the court would have otherwise applied due to the debtor’s various objections, the court will not further address the debtor’s objections. As a sanction on [Firm] for its failure to fully disclose all of its connections as part of its application to be appointed, the court reduces the fees that might have otherwise been awarded to [Firm]. Accordingly, the application is granted, in part, awarding total fees of $57,500.00. Counsel for [Firm] shall serve and lodge an appropriate order. 22. On or about September 6, 2012, the Bankruptcy Court issued the order served and lodged by counsel for Firm in which the Bankruptcy Court awarded the reduced fee of $57,500.00. The September 6, 2012 order did not make any reference to a “sanction.” 23. On or about October 3, 2012, IIS filed a lawsuit in Arizona Superior Court, Case Number CV2012-055966, against multiple defendants including Respondent and Firm, claiming as causes of action accounting malpractice, breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, fraud, and punitive damages. 24. The following date, on or about October 4, 2012, Mr. Garvey filed a complaint (Complaint) with the Board against Respondent and Firm, including the following allegations: 1) after repeated requests they have not given us our business records 2) they lied to the bankruptcy court regarding their representation of interested parties 3) they concealed important tax obligations to induce us into a transaction 4) they forged documents appointing themselves as officers of a company we own without our knowledge 5) to conceal their actions, they lied under oath to the bankruptcy court Mr. Garvey included a copy of the Verified Complaint filed the previous day. 25. On or about October 11, 2012, the Board advised Respondent that the Complaint had been filed and requested a response to the allegations. The letter stated, in relevant part, as follows:

You are hereby requested to respond, by submitting your written response to the allegations of the complaint, within thirty days from the date of this letter. Please be advised that your failure to timely respond and/or submit the requested material may be considered a violation of A.A.C. R4-1-455.03(F), and grounds for disciplinary action against your certificate pursuant to A.R.S. § 32-741(A)(9) and (15). 26. Respondent did not submit a written response to the Complaint within 30 days of October 11, 2012. 27. The evidence suggested that Respondent called Board staff in response to the letter that notified Respondent of the Complaint. However, no evidence was submitted to establish when that telephone call was made by Respondent. 28. Ryan Edmonson, former Compliance Manager for the Board, testified that he recalled receiving a call from Respondent, but could not recall exactly when that occurred. Mr. Edmonson also recalled that during a Board meeting in January 2013, one of the Board committee members referenced “at least one violation for failure to respond.” CONCLUSIONS OF LAW 1. The Board has personal and subject matter jurisdiction over Respondent and Firm pursuant to A.R.S. §§ 32-701 et seq. and A.A.C. R4-1-101 et seq. 2. The Board has the authority to discipline Respondent and Firm pursuant to A.R.S. § 32-741 and A.R.S. § 32-742. 3. 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. A.A.C. R2-19-119(A). Failure to Timely Respond

4. A.R.S. § 32-741(A)(9) and (15)1 provided that after notice and an opportunity to be heard, the Board could impose discipline against a certificate holder for a “[k]nowing violation of any decision, order or rule issued or adopted by the board”

or “[f]ailing to respond or furnish information in a timely manner to the board or its

designated agent, if the information is legally requested by the board and is in the

registrant’s possession or control.”

5. A.A.C. R4-1-455.03(F) provided that, “[w]hen requested, certified public

accountants or public accountants shall respond to communications from the Board

within 30 days of the mailing of such communications by registered or certified mail.”

6. While the evidence presented at hearing established that Respondent

ultimately responded to the October 11, 2012 letter from the Board, no evidence was

submitted to establish that the response was made within 30 days.

7. Counsel for Respondent argued that, because the statute did not define

“timely,” the regulation requiring a response within 30 days went beyond the authority

of the statute and could not be a basis of discipline. Counsel appeared to assert that

any response would be considered timely because timely was undefined in the statute.

8. On the contrary, the very purpose of regulations is to clarify and give specificity to general statutes. To argue that a regulation cannot define a vague term in a statute would eviscerate the very purpose of regulations. 9. It is established law that wherever statutory authority conflicts with agency rule-making, the rule must yield to the statute. See Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., 177 Ariz. 526, 869 P.2d 500 (1994); Fullen v. Indus. Comm’n, 122 Ariz. 425, 595 P.2d 657 (1979); R.L. Augustine Constr. Co., Inc. v. Peoria Unified Sch. Dist. No. 11, 188 Ariz. 368, 370, 936 P.2d 554, 556 (1997); Ariz. Health Care Cost Containment Sys. Admin. v. Carondelet Health Sys., 188 Ariz. 266, 271-72, 935 P.2d 844, 849-50 (App. 1996). However, a regulation setting forth 30 days as the time frame necessary to constitute a “timely” response under the statute does not conflict with the statute. Citations to statutes and regulations that are the basis for the alleged violations are to those in effect at the time of the underlying acts. 10. Thus, the Board established that Respondent failed to timely respond to the Board’s October 11, 2012 letter regarding the Complaint. Respondent’s failure to respond constituted a violation of A.R.S. § 32-741(A)(9) and (15).

Bankruptcy Court Declaration

11. A.R.S. § 32-741(A)(9) provided that after notice and an opportunity to be

heard, the Board could impose discipline against a certificate holder for a “[k]nowing

violation of any decision, order or rule issued or adopted by the board.”

12. A.A.C. R4-1-455.03(A)(1) and (3) provided that “[c]ertified public

accountants, public accountants or firms shall not commit any act that reflects

adversely on their fitness to engage in the practice or public accounting, including . . .

[v]iolations of any of the provisions of R4-1-455 through R4-1-455.04” or “[v]iolation of

any of these provisions of A.R.S. TItle 32, Chapter 6, Article 3, or any rule promulgated

under these statutes.”

13. A.R.S. § 32-741(A)(7) provided that after notice and an opportunity to be heard, the Board could impose discipline against a certificate holder for a “[f]inal judgment in a civil action if the court makes findings of accounting violations, dishonesty, fraud, misrepresentation or breach of fiduciary duty.” 14. The Board argued that, in accordance with Benevolent and Protective Order of Elks #2656 v. State of Arizona Department of Liquor Licenses and Control, 239 Ariz. 121 (Ariz. App. 2016), the “knowing” requirement did not require that Respondent knew he was committing a violation of the Board’s rules or regulations, but was only required to know he was committing the act. The Board asserted that Respondent knowingly signed the Declaration, thus violating A.R.S. § 32-741(A)(9) by knowingly violating the regulations cited supra. 15. However, signing the Declaration was not, in and of itself, a violation of any regulation. If any violation existed in signing the Declaration, it was in signing the Declaration with false or omitted information of the connections. One cannot conclude that Respondent was required to list every connection he had previously, only every connection that was relevant to the debtor at issue. Thus, the mere fact that Respondent had previous dealings with Geneva Holdings, Mr. Marincovich, and Mr. Robinson did not mean that he was required to disclose those. 16. As to that, the evidence was uncontroverted that Respondent had no

knowledge that IIS had entered into the agreement with Geneva Holdings, Mr.

Marincovich, and Mr. Robinson. In fact, the evidence implied that the agreement was

deliberately withheld from Respondent. Further, the updated list of creditors was filed

by IIS after Respondent had completed his due diligence.

17. Because there was no evidence that Respondent was aware of the

agreement between IIS and Geneva Holdings, Mr. Marincovich, and Mr. Robinson, the

Board failed to establish a violation of A.R.S. § 32-741(A)(9) through A.A.C. R4-1-

455.03(A)(1) and (3).

18. While the Bankruptcy Court made some statements regarding

Respondent’s failure to make certain disclosures in the Declaration, those statements

were not incorporated directly or by reference into the Minute Entry issued on

September 6, 2012. Therefore, the Bankruptcy Court did not enter any final judgment

making findings of accounting violations, dishonesty, fraud, misrepresentation or

breach of fiduciary duty. 19. Therefore, the Board failed to establish a violation of A.R.S. § 32- 741(A)(7). RECOMMENDED ORDER Based on the foregoing, IT IS ORDERED that on the effective date of the Board’s final order, the Board issue a Letter of Concern to Respondent Robert Semple and Firm Semple, Marchal & Cooper, LLP for the failure to submit a timely response to the Board. IT IS FURTHER ORDERED that the Complaint be dismissed as to all other charges. 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 will be five days from the date of that certification. Done this day, January 7, 2019. /s/ Tammy L. Eigenheer Administrative Law Judge

Transmitted electronically to: Monica L. Petersen, Executive Director Arizona State Board of Accountancy