PDF copy: ALJDEC decisions subject to certification as final

19F-2017.026-ACY · State Board of Accountancy · 2019-03-11

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

In the matter of No. 19F-2017.026-ACY

Certified Public Accountant Certificate ADMINISTRATIVE LAW JUDGE No. 17969-R DECISION Issued to:

ERIC M. KLEIN, Respondent.

HEARING: October 25, 2018 APPEARANCES: James Burr Shields, Esq., represented Eric M. Klein, CPA. Assistant Attorney General Scott Donald represented the Arizona State Board of Accountancy. ADMINISTRATIVE LAW JUDGE: Kay Abramsohn _____________________________________________________________________ Based upon the evidence of record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Recommended Order: FINDINGS OF FACT 1. The Arizona State Board of Accountancy (“Board”) is the authority for regulating the practice of Certified Public Accountants in the State of Arizona. 2. Eric M. Klein (“Respondent”) is the holder of Certified Public Accountant (“CPA”) Certificate No. 17969-R issued by the Board. Based on reciprocity as to his California license, this certificate enables Respondent to practice as a Certified Public Accountant in Arizona.1

3. Prior to August 28, 2016, Respondent held California CPA License No. 46150

(“CA License”) issued by the California Board of Accountancy (“CABA”).2

4. Through its Default Decision and Order (“The Default”) dated July 29, 2016,

CABA revoked Respondent’s CA License, effective on August 28, 2016.3

See A.R.S. § 32-725. See Board Exhibit 1; see also Administrative Record (Complaint/Notice of Hearing). At hearing, Respondent indicated that he completed his hours in 1986. See Board Exhibit 1. Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826 5. At administrative hearing, hearing, Respondent stipulated that CABA had revoked Respondent’s CA License No. 46150. 6. The basis for The Default was a failure to respond to the CABA Accusation

dated May 31, 2016 that had been mailed to a California address of record.

7. In The Default, CABA further noted that it was authorized to revoke

Respondent’s license based on alleged violations (as set forth in the Accusation)

which it indicated were supported in a “Default Decision Evidence Packet.”4 The

Default indicated violations of particular California Code and CABA rules for, as

follows,:

(a) unprofessional conduct;

(b) knowing preparation, publication, or dissemination of false, fraudulent, or

materially misleading financial statements, reports, or information;

(c) obtaining money, property, or other valuable consideration by fraudulent

means or false pretenses;

(d) engaging in repeated negligent acts in the practice of public accountancy or

in the performance of bookkeeping operations;

(e) willfully violating the California Accountancy Act and rules and regulations promulgated by the CABA under the authority of the California Accountancy Act ; and (f) failing to be truthful to the CABA at a hearing on October 23, 2014. 8. On October 17, 2017, the Superior Court of San Bernardino, State of California, denied Respondent’s Petition for Writ of Administrative Mandamus.5 Among other orders, the Court ordered that CABA had not deprived Respondent of due process by issuing The Default after Respondent had failed to timely file a Notice of Defense and that the investigatory information considered by CABA had provided sufficient evidence in support of The Default.6

This hearing record does not contain a copy of the CABA “Default Decision Evidence Packet.” See Board Exhibit 4. The content of such evidence, a “Default Decision Investigatory Packet,” is not known to this hearing record. 9. At some point, the Board received a notification from one Betsy Jackson7 regarding the circumstance of CABA having revoked Respondent’s CA License.8 The next day, the Board received a notification from one Rhonda Sands

regarding the same circumstance.9

10. Through the Board’s investigative process, Respondent cooperated with the

Board and provided the background information on the CABA circumstances.

See Respondent’s Exhibit 1. While the Board offered a Consent Decree to

Respondent to voluntarily revoke his CPA certificate, Respondent proposed that

the Board act under its statutory grant of discretion to determine some other

discipline based on the circumstances that had unfolded regarding and during

the CABA’s investigation. Id. Respondent was later able to access some of the

account information that he understood to have been questioned in the

California investigation, which he provided to the Board. See Respondent’s

Exhibit 2.

11. At administrative hearing herein, Respondent was able to specifically detail the

transactions that had been at issue for CABA, testifying that the transfers and

payments were each made with regard to payment for LifeCo expenses.10 12. This matter was not resolved informally and, on August 28, 2018, the Board issued its Complaint and Notice of Hearing (“Complaint”) to Respondent, proposing to revoke Respondent’s CPA Certificate, setting an administrative hearing, and providing opportunity for an appeal and an informal conference. 13. Respondent filed an Answer on September 17, 2018, admitting to the factual allegations in the Complaint and acknowledging the applicability of A.R.S. § 32- 741(A), which authorizes the Board to suspend or revoke a certificate and take disciplinary action. Therein, Respondent noted that that the Board has discretion regarding revocation and suspension, and he further argued that the

This is a presumed spelling; the hearing record does not contain a copy of the notification. Witness testimony. At hearing, Respondent indicated that the two women were partners. The CA Board was investigating activity of thirteen transactions (from February 16, 2010 to March 30, 2010) of funds regarding LifeCo. See Board Exhibit 3 at Bates 20 (paragraph #16). CABA had erred in its revocation and that Respondent had not violated any decision or rule issued by the Board and had not, at any time, engaged in any “discreditable act.”

14. The Board argued that the circumstances leading to and regarding the CABA

revocation are not relevant. However, because the Board has been given

statutory discretion in regard to suspension, revocation, or taking other

disciplinary action, Respondent’s circumstances should be considered in the

administrative process.

15. At hearing, Respondent presented the testimony of Respondent’s former long-

time California-based employer,11 Shahvand Aryana. Mr. Aryana credibly

testified regarding Respondent’s employment at Aryana Management and

Respondent’s responsibilities in various positions including forensic auditor,

accountant, and Chief Financial Officer for various Aryana companies.12 Mr.

Aryana described Respondent as transparent and honest, and testified that

Respondent signed on all the Aryana business checks and all bank accounts,

with never a penny missing anywhere. Respondent worked for Aryana

Management until sometime in 2011 or 2012; he was not fired from Aryana.13 16. Mr. Aryana testified regarding Respondent’s responsibilities in one company, a theme amusement and waterpark (with various concessions) in Redlands, California. Respondent was its Chief Financial Officer supervising three accountants for that business. Respondent had full control of the cash room at this business which had daily cash deposits approximately $100,000 to $200,000 ($3.5 million every 6 months) and, based on Mr. Aryana’s reviews, there was never any issue with Respondent and there was never a penny missing.

Mr. Aryana met Respondent in 2003; Respondent was hired as a forensic auditor for a business that Mr. Aryana was acquiring. There were approximately 37 Aryana companies, with 750 employees and in excess of $500 million in construction and business. At hearing, Respondent indicated both that he moved to Arizona in 2011, after the real estate bust, but wasn’t finding any work (except seasonal for H&R Block in 2012) and that he moved to Arizona in mid- 17. Mr. Aryana specified the interaction between various Aryana companies, one of which was a company, LifeCo, which was formed in 2009 specifically to market the insurance business of Rhonda Sands.14 LifeCo is not an insurance

company. Mr. Aryana had no knowledge of any prior issues or disciplinary

action as to Ms. Sands’ insurance operations or practices.

18. An Aryana company called MyLife supplied the staffing services for LifeCo and

staffing services for Aryana Management operations.

19. Aryana Management provided management services for LifeCo.15 Working as

an employee of Aryana Management, Respondent provided accounting services

for LifeCo, including bookkeeping, making deposits, and preparing and filing

taxes.

20. Two accounts were set up for LifeCo; one for deposit of broker’s fees and one

for deposit of insurance premium payments. An insurance customer would write

two checks, one to LifeCo for the broker fee and one to Ms. Sands for the

insurance policy premium payments that Ms. Sands was supposed to send to

the insurer. Expenses for LifeCo would be paid out of the LifeCo account.

21. Not long after LifeCo was formed, Ms. Sands began depositing the broker fees into her insurance premium account. Additionally, she was not paying the premiums to the/an insurer, and she was creating bogus insurance certificates. Mr. Aryana gave several example of which he had personal knowledge. 22. Mr. Aryana had business partners in developing multiple restaurants in Las Vegas.16 Mr. Aryana provided the capital and all the design work, while the partners did the physical operations. Mr. Wynn came to Mr. Aryana with an insurance certificate created by Ms. Sands for coverage with CNA insurance,

2013. The lack of certainty as to dates is attributed to the setting and discomfort of the administrative hearing for this respondent as opposed to any untruthfulness. Mr. Aryana met Ms. Sands through IndyMac bank and she subsequently provided the insurance on 16 or so of Aryana property development projects. LifeCo was funded by Mr. Aryana and was 100% owned by Mr. Ayana’s father. Aryana Management owned My Life. Arayana Management was owned by Mr. Aryana. 16 Aryana developed the La Cave restaurant at the Wynn and all the restaurants at the Palms Casino. indicating that he had paid the premiums on a policy but discovered there was no policy. 23. One of Mr. Aryana’s business partners discovered that Ms. Sands had collected

$40,000 a month in fees for 6 months and had not paid the insurance premiums

for a particular steakhouse restaurant.

24. Another example of Ms. Sands not paying designated premium monies was as to

a life insurance policy that was purchased for one of Mr. Arayana’s partners,

who later got cancer and died, and the family found out that the policy had not

been written.17 Mr. Aryana stated that Ms. Sands made up a false story and told

the family that Aryana had taken the money; Mr. Aryana again indicated that Ms.

Sands was the person who was responsible to any insurers.

25. In discussions with Ms. Sands, Mr. Aryana sensed that Ms. Sands was “not all

there” and, a few times when he met up with her, she smelled of marijuana. Mr.

Aryana indicated that one of his employees told him that Ms. Sands had a

business selling marijuana and that she was providing insurance to marijuana

dispensaries. Mr. Aryana testified that he did not want to be associated with

such activity and his business relationship with Ms. Sands got more and more contentious; she also owed Aryana $450,000 and was not making any payments on the debt. Eventually, Aryana asked Ms. Sands “to leave” and she did. 26. At hearing, Respondent credibly testified about his weekly meetings with Ms. Sands, for which he had prepared financial reports about the expenses and at which he had disclosed everything to her about all the LifeCo accounts and expenses. Respondent recalled that these conflicts arose in mid-2010 and in 2011, and that Ms. Sands threatened multiple times to “make his life miserable,” to “take [you] down,” and to file a complaint against him to the CABA, particularly so if he did not back her up in support of her “against” Mr. Aryana. Respondent estimated that these threats occurred maybe 10 to 15 times.

17 Arayana testimony. 27. Mr. Aryana indicated that, about 18 months after Mr. Aryana asked her to leave, Ms. Sands filed a lawsuit against Aryana.18 In the suit, she had contended that she was an owner of LifeCo, which was false.19 When she added Respondent to

that lawsuit, she also filed a complaint against Respondent with the CABA.20

28. After that lawsuit was filed, Aryana’s counsel discovered that Ms. Sands had

previously been placed on probation with the California insurance regulating

agency based on accusations of similar activity (i.e., the nonpayment of

premiums to any insurance company and creating bogus policy certificates).21

29. Mr. Aryana countered with a cross suit for malicious prosecution and fraud and,

later, Ms. Sands dismissed the case with prejudice. However, that dismissal, or

agreement to dismiss, apparently did not take care of the complaint against

Respondent at the CABA.

30. In mid-2013, Respondent had moved to Arizona; he indicated that his mail was

being forwarded from California.22 After he had moved to Arizona, he received a

copy of the complaint Ms. Sands had filed to CABA. In May 2013, Respondent

was in contact with one Dorothy Osgood from the CABA.23 Respondent filed a

response using the information he could find explaining the circumstances of Ms. Sands and the companies. Respondent later received notice about a CABA hearing, which was rescheduled for October 23, 2014.

The hearing record does not contain a copy of the lawsuit’s complaint/claims. Mr. Aryana testimony. However, Respondent was an employee of Aryana Management; the suit must have contained claims about Respondent. Respondent testified that he was added to the lawsuit after it was initially filed. The hearing record indicates that Ms. Sands filed a complaint with the CABA “[o]n or about January 23, 2013.” See Board Exhibit 3 at Bates 20 (paragraph #12). The hearing record does not contain a copy of Ms. Sands’ complaint to the CABA. See Respondent’s Exhibit 1, Attachment 3 (the 2007 Sands California Accusation document). At hearing, Respondent indicated that he had been advised by the CABA not to change his address because he was not sure if he would, or would not, be coming back to California; based on the hearing record, the Tribunal presumes that this was in 2020 or 2013. As the investigative hearing had been rescheduled and Respondent attended, the Tribunal must presume that the CABA was aware of Respondent’s Arizona location and address. At hearing, Respondent indicated that he would receive emails from Ms. Osgood. It is noted that the final CABA Default Decision was issued as the License at the California address, but was also mailed to that California address rather than to Respondent at an Arizona address. 31. During its investigative process, the CABA held an investigative hearing on October 23, 2014.24 By the time of the investigative hearing, Respondent had already relocated to Arizona and did not have detailed information from records

of his prior employment.

32. Although he did appear and answer questions at that CABA meeting,

Respondent did not have, at his access, business records from six years before

from his prior employment to be able to fully prepare for the hearing. His

recollection is that the CABA members had “paperwork” from which they were

asking him specific questions about specific transactions, but he indicated that

he had not seen the paperwork they were using (other than the information he

had provided to them in his response). He recalled that the CABA indicated that

LifeCo had been approved as an insurance company in Nevada, to which he

responded that LifeCo was not an insurance company in California and was only

a marketing company for Ms. Sands’ insurance company.

33. Respondent openly testified that he became very flustered at the CABA meeting

because he felt the CABA members were discounting, or attacking, everything

he was saying or explaining about the money being paid out for LifeCo expenses. Respondent testified that he told the CABA that they were caught up in the disputes that had arisen between Mr. Aryana and Ms. Sands. In his opinion, the questions became increasingly accusatory and the CABA did not want to listen to his explanations. To the best of his recollection, CABA called a recess and then simply indicated that they had the information they needed.25 34. Respondent heard nothing else from CABA until July of 2016 when he learned of The Default. 35. At hearing, Respondent testified that he had been working as a bookkeeper for a small firm and has been hired by a firm as a CPA with the possibility of becoming

The alleged actions being investigated were apparently reiterated in the CABA document entitled Accusations, dated May 13, 2016. See Board Exhibit 3. Counsel had asked Respondent whether he had become so flustered (inferring, with the rising tension) that he really could not remember the last portion of his interactions with the CABA, and this was his response. a partner. Respondent noted that he had not effectively communicated with CABA at the investigative hearing, but he argued that he had little detailed information available to him at the time and that the accusations were false and

fraudulent by Ms. Sands. Respondent argued that the CABA revocation is not

an indication that Respondent is unregulatable. Respondent argued that these

overall circumstances merit a lesser discipline and requested consideration for a

period of probation.

36. At hearing, the Board argued that it has the statutory authority to revoke

Respondent’s certificate due to the CABA having revoked Respondent’s CA

License. The Board argued that because California believed moving forward to

a hearing on the serious accusations was appropriate and, because Respondent

failed to take part after the Accusation was mailed, that with the documentation

available to CABA for revocation, Respondent is likely unregulatable and his

Arizona certification as a CPA should be revoked. The Board argued that, here,

Respondent has simply tried to re-litigate the CABA determination, and smear

Ms. Sands, through this administrative hearing. The Board argued that it cannot

regulate a person who will not take part in the regulatory process and, relying primarily on the California revocation, asked that the revocation action be recommended.26 CONCLUSIONS OF LAW 1. The Board has jurisdiction over Respondent and the subject matter in this case. 2. Pursuant to A.R.S. § 41-1092.07(G) (2) and A.A.C. R2-19-119(B), 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). 3. Pursuant to A.A.C. R4-1-102(A), Respondent is deemed to have knowledge of the Board’s rules. 4. The CABA discipline of revocation of Respondent’s CA License constitutes cause, under A.R.S. § 32-741(A)(5), for the Board, in its discretion, to revoke or A revocation action would not deprive Respondent of the ability to practice accountancy; he simply would not be allowed to do so as a CPA. suspend and take disciplinary action against Respondent’s Arizona CPA certification. 5. The Board’s allegation of cause to revoke pursuant to A.R.S. § 32-741(A)(9)

through A.A.C. R4-1-455.03(A)(3) fails, as the Board failed to present any

evidence of Respondent having violated any decision, order or rule issued or

adopted by the Arizona Board in the way of any “discreditable act.” Based on

the Board’s argument at hearing, this Board allegation is based on the Board’s

determination that the allegations in the CABA Accusation, by default were,

therefore, proven “discreditable acts.” In the instant case, the Board did not

demonstrate, with any evidence, that Respondent had committed any

“discreditable acts.” As footnoted previously, the CABA “Default Decision

Evidence Packet” on which the CABA relied was not available in this hearing

record. Additionally, Respondent presented credible testimony specifically

related to, and in denial of, the CABA Accusation’s alleged violations.

6. The Administrative Law Judge concludes that a disciplinary action of revocation

is not warranted and that a lesser form of discipline, if any, should be

considered. RECOMMENDED ORDER Respondent’s Certified Public Accountant Certificate No. 17969-R shall be disciplined with suspension for a period of not more than 2 months from the effective date of the Board’s Order entered in File No. 2017.026. 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 (5) days from the date of that certification. Done this day, November 19, 2018. /s/ Kay Abramsohn Administrative Law Judge

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