«In the Matter of ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASEHalpern & Associates LLC AND-DESIST PROCEEDINGS and Barbara Halpern, CPA, PURSUANT ...»
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 74350 / February 23, 2015
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 3639 / February 23, 2015
File No. 3-16399
In the Matter of ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASEHalpern & Associates LLC AND-DESIST PROCEEDINGS and Barbara Halpern, CPA, PURSUANT TO SECTIONS 4C AND 21C
OF THE SECURITIES EXCHANGE ACTRespondents. OF 1934 AND RULE 102(e) OF THE
COMMISSION’S RULES OF PRACTICEI.
The Securities and Exchange Commission (“Commission”) deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Halpern & Associates LLC and Barbara Halpern (collectively, “Respondents”) pursuant to Sections 4C 1 and
Section 4C provides, in relevant part:
The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person is found... (1) not to possess the requisite qualifications to represent others... (2) to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder.
21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. 2 II.
The Commission’s public official files disclose that, at all relevant times, Lighthouse Financial Group, LLC (“Lighthouse” or “the firm”) was registered with the Commission as a broker-dealer.
After an investigation, the Division of Enforcement and the Office of the Chief Accountant
1. These proceedings arise out of Respondents’ improper professional conduct in their audit of Lighthouse’s financial statements for the year ended December 31, 2009. Those financial statements were materially inaccurate in that they overstated the firm’s assets, because its securities inventory as recorded in its financial statements was based on erroneous, and inflated, figures for the size of its positions in certain securities, and understated the firm’s liabilities by omitting its liabilities to one of the broker-dealers through which it engaged in proprietary trading. Those errors caused the firm’s reported net capital to be overstated by nearly $5 million, or over 350%.
Respondents egregiously failed in several ways to adhere to Generally Accepted Auditing Standards (“GAAS”) and did not detect those errors in their audit of the financial statements.
2. Halpern & Associates LLC (“H&A”) is an accounting and auditing firm based in Wilton, Connecticut. H&A was founded in 1982, has been registered with the PCAOB since 2004 and has twelve employees. Barbara Halpern is currently the sole owner and president of H&A. In 2014, H&A was the independent auditor to twenty-eight broker-dealers. In addition to serving as an independent auditor to broker-dealers and other entities, H&A provides tax advice and, on a consulting basis, provides broker-dealers with the services of individuals licensed to act
Rule 102(e)(1)(ii) provides, in pertinent part:
as a broker-dealer’s financial and operations principal. H&A acted as the independent auditor for Lighthouse from 2002 until Lighthouse withdrew its registration as a broker-dealer in August 2010.
3. Barbara Halpern, age 61, of Weston, Connecticut, was the engagement partner on Lighthouse’s 2009 audit. She is currently the sole owner and president of H&A; during the relevant period she was the 95% owner. During the relevant period, Barbara Halpern was a certified public accountant licensed to practice in New York and Connecticut. She is currently licensed in Connecticut. She has held a Series 27 license since 1998 and a Series 54 license since 1980.
OTHER RELEVANT ENTITY
4. Lighthouse was registered with the Commission as a broker-dealer from August 2, 2000 until October 23, 2010. In December 2010, Lighthouse filed a petition for liquidation under the U.S. Bankruptcy Code. At all relevant times, Lighthouse’s principal place of business was New York, New York. During the relevant period, Lighthouse acted as an introducing broker for retail and institutional customers, engaged in proprietary trading and market-making, and acted as an underwriter or placement agent for equity and bond issuances. Lighthouse had clearing arrangements with several clearing brokers, including Penson Financial Services, Inc. (“Penson”), which at all relevant times was a registered broker-dealer with its principal place of business in Dallas, Texas.
5. Section 15(c)(3) of the Exchange Act [15 U.S.C. § 78o(c)(3)] and Rule 15c3-1 thereunder [17 CFR 240.15c3-1] require that broker-dealers generally effecting transactions in securities “at all times have and maintain net capital.” The rule is designed to require a brokerdealer to maintain sufficient liquid assets to meet all obligations to customers and counterparties and have adequate additional resources to wind down its business in an orderly manner without the need for a formal proceeding if the firm fails financially. The net capital rule requires different minimum amounts of net capital based on the nature of a firm’s business and the method a firm uses in computing its net capital.
6. To compute its net capital for purposes of Rule 15c3-1, a broker-dealer first calculates its net worth, computed in accordance with generally accepted accounting principles (“GAAP”), deducts the value of certain illiquid assets, and then adds back certain qualifying subordinated loans. The final step is to deduct certain specified percentages, or haircuts, from the market value of the securities or other inventory it holds in its proprietary accounts. Rule 15c3-1 prescribes differing haircut amounts for a variety of classes of securities and other allowable assets.
7. Section 17(e) of the Exchange Act and Rule 17a-5 thereunder require registered broker-dealers to file with the Commission annual audited reports containing, among other things, the broker-dealer’s financial statements for the fiscal year, a calculation of its net capital at fiscal year-end, and a report of an independent auditor on the financial statements.
8. On February 28, 2010, Lighthouse filed its annual audited report (“Annual Audited Report”), which contained Lighthouse’s financial statements for the year ended December 31, 2009 (“2009 financial statements”). The 2009 Annual Audited Report also contained H&A’s report on the financial statements.
9. The 2009 financial statements overstated the firm’s net capital by approximately $4.9 million, or over 350%. The overstatement was primarily attributable to the following errors: 3
Errors That Led to The Overstatement of Lighthouse’s Long Securities Positions and Understatement of its Liabilities to Penson
10. The overstatement of the total market value of Lighthouse’s long securities positions in its accounts at Penson was the result of the firm’s use of erroneous – and overstated – numbers of shares of fifteen securities held in five accounts. Lighthouse calculated the total market value of its inventory in those accounts to be $3,489,971, whereas based on the actual size of the positions as shown in Penson’s records, the total market value of Lighthouse’s inventory in its Penson accounts was only $1,437,714. The 2009 financial statements thus overstated the value of Lighthouse’s long securities positions by approximately $2,052,257.
The firm’s reported net capital was also overstated as result of the application of erroneous and insufficient haircuts to Lighthouse’s assets.
The $2,052,257 figure also takes into account a $251,317 understatement of the value of the firm’s long securities position that resulted from Lighthouse’s failure to include any of the inventory in one of the firm’s proprietary accounts.
In addition to the amounts due to Penson discussed at paragraph 11 below, this figure includes a $113,002 understatement of Lighthouse’s exposure on short positions in Penson accounts.
11. The 2009 financial statements also understated, by approximately $2,314,484, Lighthouse’s payables to brokers as a result of the firm’s failure to include negative balances in a Lighthouse account at Penson. The account, named “Lighthouse Financial Group F/X Account” (“F/X account”), was one of several Lighthouse administrative accounts at Penson that were used to hold deposits, resolve failed settlement transactions, and pay clearing balances. Positive balances in those accounts represented amounts due from Penson to Lighthouse while negative balances represented amounts due to Penson from Lighthouse.
The Audit of Lighthouse’s 2009 Financial Statements
12. In its Independent Auditors’ report, which was authorized for issuance by Barbara Halpern, H&A stated that it had audited Lighthouse’s 2009 financial statements in accordance with GAAS and expressed its opinion that the financial statements fairly presented, in all material respects, the financial position of Lighthouse as of December 31, 2009. As the engagement partner on the audit, Barbara Halpern was responsible for supervising the audit and she signed off on all the work papers.
13. In fact, the audit was not conducted in accordance with GAAS and the financial statements contained in the 2009 Annual Audited Report did not fairly present, in all material respects, the financial position of Lighthouse as of December 31, 2009 because they reflected the errors described above.
14. The audit was not conducted in accordance with GAAS because, among other things, Respondents failed to adhere to the most fundamental GAAS requirements: the requirement to exercise due professional care in planning and performing the audit, which includes the requirements to properly staff and supervise the audit, to obtain sufficient appropriate audit evidence to support the auditor’s opinion, and to exercise professional skepticism in evaluating the audit evidence obtained.
15. Respondents failed to exercise due care in planning the Lighthouse auditand performing the Lighthouse audit, as the auditing standards require. AU § 230.01. The requirement
to exercise due professional care includes the requirement to staff the audit appropriately:
“Auditors should be assigned to tasks and supervised commensurate with their level of knowledge, skill, and ability so that they can evaluate the audit evidence they are examining.” AU § 230.06. 6 The individual who was responsible for the testing of Lighthouse’s securities inventory and its balances with banks and brokers – the “senior auditor” – lacked the knowledge necessary to evaluate the audit evidence obtained concerning Lighthouse’s proprietary trading. At the time of the audit, he had only been with H&A for six months, had only six months of experience doing audit work of any kind, had never audited a broker-dealer, had no understanding of Lighthouse’s Citations to “AU” are citations to Statements on Auditing Standards in effect at the time of the audit. Those statements were issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (“AICPA”).
proprietary trading, and was not familiar with the professional literature concerning auditing broker-dealers. By assigning the senior auditor the critical responsibility of testing Lighthouse’s securities inventory and its balances with banks and brokers despite his lack of knowledge in these areas, and by failing to properly supervise him, Respondents failed to exercise due care in planning and performing the audit.