Securities and Exchange Commission v. Jones

Filing 106

MEMORANDUM OPINION AND ORDER re Bench Trial beginning on July 7, 2015 and continuing through July 10, 2015. ORDERS, pursuant to Section 21(e) of the Exchange Act, Jones to comply with the May 25, 2001 Jones Bar Order. The court RESERV ES on the question of disgorgement or remedy and directs the partiesto file the requested briefing on the authority, the method, and the amount of an appropriate remedy to be applied in this case. The SEC shall file within twenty days from the date of this opinion, and Defendant within twenty days thereafter. Signed by Judge Bruce S. Jenkins on 9/30/2015. (jds)

FILED
2015 SEP 30 PM 4:35
CLERK
U.S. DISTRICT
COURT
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

MEMORANDUM OPINION AND
ORDER

v.
R. GORDON JONES,

Case No. 1:13-CV-00163-BSJ
Defendant.

District Judge Bruce S. Jenkins

This matter came before the court for bench trial, beginning on July 7, 2015 and
continuing through July 10, 2015. Polly Atkinson and Mark Williams appeared on behalf ofthe
Securities and Exchange Commission ("SEC" or "Commission"). J. Michael Coombs and Elliott
N. Taylor appeared on behalf ofR. Gordon Jones ("Jones").
Having considered the parties' briefs, the evidence presented, the arguments of counsel,
and the relevant law, the court finds the SEC has sufficiently demonstrated that (i) under a valid
102( e) Bar Order, Jones was not allowed to practice before the SEC, and (ii) Jones did practice
before the SEC during the prohibited time period and thereby violated the Bar Order. As such,
the court GRANTS the SEC's request under Section 21(e) of the Exchange Act of 1934
("Exchange Act") for an order requiring Jones to comply with his 102( e) Bar Order.
While finding Jones violated his Bar Order, the court is in doubt as to the appropriate
remedy for such a violation. The court would appreciate further briefing and argument on the
authority, the method, and the amount of an appropriate remedy to be applied in this case.
Therefore, at this time, the court RESERVES on the SEC's request for disgorgement.

BACKGROUND
Jones has been licensed as a Certified Public Accountant ("CPA") by the State of Utah
since June 1980. In connection with Jones's work on the 1995 audit ofDynamic American
Corporation, the SEC issued on May 4, 2011 an order against Jones pursuant to Rule 102(e) of
the SEC's Rules ofPractice. 1 The order-the "Jones Bar Order"-precludes Jones from
appearing or practicing before the Commission. It states, in relevant part, as follows:
Based on the foregoing, the Commission finds it appropriate and
in the public interest to accept the Offer of Jones and impose the
sanctions consented to therein. Accordingly, IT IS HEREBY
ORDERED that, effective immediately,
1. Jones is denied the privilege of appearing or practicing before
the Commission as an accountant.

2. After 3 years from the effective date of this order, Jones may
request that the Commission consider his reinstatement by
submitting an application (attention: Office of the Chief
Accountant) to resume appearing or practicing before the
Commission as:
a) preparer or reviewer, or a person responsible for the
preparation or review, of any public company's financial
statements that are filed with the Commission. Such an
application must satisfy the Commission that Jones's work in his
practice before the Commission will be reviewed either by the
independent audit committee of the public company for which he
works or in some other acceptable manner, as bng as he
practices before the Commission in this capacity; and/or

-1------·

b) an independent accountant. Such an application must satisfy
the Commission that: (i) Jones, or the firm with which he is
associated, is a member of the SEC Practice Section of the
American Institute of Certified Public Accountants Division for CPA
Firms ("SEC Practice Section"); (ii) Jones, or the firm, has received
an unqualified report relating to his, or the firm's, most recent
peer review conducted in accordance with the guidelines adopted
by the SEC Practice Section; and (iii) As long as Jones appears or
practices before the Commission as an independent accountant
he will remain either a member of the SEC Practice Section or
-----ass-ociate·d-with-a-member-firm-of-the-SE<.:i-Practice-8-ection;-and
will comply with all applicable SEC Practice Section requirements,
including all requirements for periodic peer reviews, concurring
partner reviews, and continuing professional education.

1

See Ex. 136; see also Pretrial Order, filed Feb. 3, 2015 (CM/ECF No. 66), at 3.

2

Ex. 136.
Since 2001, Jones has been an employee of J&J Consultants LLC ("J&J"). 2 J&J's
business includes accounting and income tax services for clients. 3 A major J&J business area is
the preparation and generation of financial statements for public companies. 4 Jones was the
managing partner of J &J from 2001 through 2012. 5 After Jones switched from managing
member to employee on January 1, 2012, Jones's day-to-day duties remained basically the
6

same. In addition to his salary, Jones also received distributions from J&J. 7 Before 2013, no
other employee received distributions from J&J. 8 Prior to 2006, Jones owned at least 95 percent
of J&J. 9 In 2006, Keith Elison joined J&J and Jones's ownership decreased to 75 percent. 10
Between 2006 and 2012, Jones's ownership decreased over time, though it is unclear by how
much.

11

Jones, since the date of the May 4, 2001 Jones Bar Order, has not been readmitted to
practice before the SEC. Though Jones did apply to be re-admitted after initiation of this lawsuit,
such application was denied on account of this lawsuit.

12

2

Hr'g Tr., at 154:23-25.

3

See id. at 185:15-186:13.

4

See id. at 186:14-187:21, 189:4-190:22, 191:2-17.

5

See id. at 156:10-12.

6

See id. at 156:13-157:12.

7

See id. at 158:12-14.

8

See id. at 158:15-17.

9

See id. at 311:8-11.

10

11

See id. at 311:12-17.

See id. at 311:18-312:7.

12

See Pretrial Order, filed Feb. 3, 2015 (CM/ECF No. 66), at 3.

3

DISCUSSION
This case centers on three issues: (i) whether the SEC has the power to regulate those
who practice before it;. (ii) whether Jones impennissibly practiced before the SEC and thereby
violated the Jones Bar Order; and (iii) the proper remedy for addressing any such Bar Order
violation. The court will address each issue in tum.

I. Power to Regulate Practice Before the SEC
Under Section 23 of the Exchange Act, the SEC has the "power to make such rules and
regulations as may be necessary or appropriate to implement the provisions of this chapter for
which they are responsible or for the execution of the functions vested in them by this chapter." 13
Pursuant to such authority, the SEC promulgated Rule 102(e) of the Commission's Rules of
Practice. Rule 102( e) states that the SEC "may censure a person or deny, temporarily or
permanently, the privilege of appearing or practicing before it in any way." 14 Given this statutory
and regulatory footing, the court finds the SEC has authority to prohibit individuals from
practicing before it. 15

II. Jones's Practice Before the SEC
Having determined that the SEC has power to regulate practice before it, the court finds
that in 2001, consistent with that power, the SEC entered the Jones Bar Order prohibiting Jones

13

15 U.S.C. § 78w(a)(1).

14

17 C.F.R. § 201.102(e)(1).

15

As noted during the bench trial, the constit-utionality of Rule 102(e) is not a matter before the court. See
Hr'g Tr., at 375:9-12. For completeness, however, the court notes that four circuit courts have held that Rule 102(e)
is valid: (i) the Second Circuit in Touche Ross & Co. v. S.E.C., 609 F.2d 570, 582 (2d Cir. 1979); (ii) the Ninth
Circuit in Davy v. S.E.C., 792 F.2d 1418, 1421 (9th Cir. 1986); (iii) the Eleventh Circuit in Sheldon v. S.E.C., 45
F.3d 1515, 1518 (11th Cir. 1995); and (iv) the District of Columbia Circuit inMarrie v. S.E.C., 374 F.3d 1196,
1205-06 (D.C. Cir. 2004).

4

from practicing before it. 16 It is undisputed that Jones consented to entry of the Jones Bar
Order. 17 To analyze whether Jones practiced before the SEC and thereby violated the Bar Order,
the court will first examine generally what qualifies as practicing before the SEC. Second, the
court will look at Jones's specific actions-namely, his involvement in preparing public
company filings-and assess whether they fit within the general framework of practicing before
the SEC. Third, the court will examine Jones's consent to his preparation work being
incorporated into public filings. And fourth, the court will assess Jones's advice of counsel
defense and its availability.
A. Work Generally Quali6;ing as Practicing Before the SEC
The SEC's Rules of Practice indicate that practicing before the SEC is a broad concept.

18

Under Rule 102( e), the Commission has broad power to deny a person "the privilege of
appearing or practicing before it in any way. " 19 This breadth is reinforced by Rule 102( f), which
provides an expansive definition of practicing before the SEC:
(f) Practice defined. For the purposes of these Rules of Practice,
practicing before the Commission shall include, but shall not be
limited to:
(1) Transacting any business with the Commission;
and

(2) The preparation of any statement,
other paper by any attorney, accountant,
other professional or expert, filed
Commission m any registration
16

See Hr'g Tr., at 154:3-5; Ex. 136.

17

opmwn or
engineer or
with the
statement,

See Hr'g Tr., at 154:6-14.

18

During litigation, the SEC described the concept of practicing before it as intentionally broad in order to
address the myriad offorms of improper accountant conduct. See Pl.'s Mot. for Summ. J., filed Sept. 19,2014
(CM/ECF No. 47), at 11. Indeed, the SEC's expert witness, Lynn Turner, testified at trial as to the importance of
breadth in protecting the efficacy of Rules 102(e) and 102(f). See Hr'g Tr., at 42:15-43:21, 136:16-139:16.
19

17 C.F.R. § 201.102(e)(1) (emphasis added).

5

notification, application, report or other document
with the consent of such attorney, accountant,
engineer or other professional or expert.
17 C.F.R. § 201.102 (emphasis added).
Two cases-In the Matter ofRobert W. Armstrong, III and S.E. C. v. Prince-provide
additional insight into the behavior that generally qualifies as practice before the SEC. Given the
importance of these two cases, the court will provide a more detailed analysis of their underlying
facts.
In the 2005 SEC administrative proceeding In the Matter ofRobert W. Armstrong, III, 20
Robert Armstrong was a vice president and controller ofNational Medical Care, Inc. ("NMC"), a
subsidiary of the public company W.R. Grace & Co. ("Grace")? 1 Previously, a SEC
administrative law judge ("ALJ") had detennined that Annstrong improperly prepared NMC
financial data, and that he submitted it to Grace in furtherance of a scheme to manipulate Grace's
reported earnings?2 But the ALJ had dismissed the Rule 102(e) claims against Armstrong,
finding that Armstrong did not appear or practice before the SEC "because he was not an officer
of a public company and did not prepare any of the reports that Grace filed with the Commission
because he did not actually draft them." 23 On appeal, the Commission in Armstrong disagreed
with the ALJ's dismissal ofthe Rule 102(e) claims, finding as follows:
The text of the Rule does not specify that a person must sign a
document filed with the Commission. Moreover, the tenn
"preparation" of a document is, we believe, sufficiently broad to
encompass the preparation of data to be included in a document
filed with the Commission, at least where, as here, the data was
-[--·-=================~---------20

2005 WL 1498425 (June 24, 2005).

21 /d. at *1-2.
22/d. at *1.
23

/d. at *11.

6

prepared for the express purpose of being included in such a
document.
The law judge's holding would allow accountants to escape
discipline under Rule 102( e) simply by instructing someone else to
draft, sign, and file fraudulent documents. The Rule, however,
recognizes that financial statements often incorporate information
created, compiled, or edited by accountants who are not
responsible for signing or filing the financial statements. Thus,
practicing before the Commission includes computing the figures
and supplying the data incorporated into Commission filings and
consenting to their incorporation. As a result, Armstrong appeared
and practiced before the Commission because he computed the
amounts of income needed to be held in reserve to achieve Grace's
targeted growth rates, prepared the materially false financial
reports based on these figures, and submitted this information to
Grace knowing that Grace would incorporate it into its
Commission filings. Armstrong consented to the inclusion of these
figures because he reviewed Grace's draft financial statements
containing these figures, confirmed that the figures reconciled with
the numbers that he had submitted, and suggested no changes to
the numbers.
We conclude that Armstrong in fact appeared or practiced before
the Commission (assuming that Rule 102( e) imposes such a
requirement) because he computed the figures and provided the
data included in Grace's financial statements filed with the
Commission and consented to the inclusion of this infonnation.
We further conclude that the Commission may discipline
individuals pursuant to Rule 102( e) even if those individuals did
not appear or practice before the Commission while committing
willful violations ofthe securities laws.
Armstrong, 2005 WL 1498425, at *11-12. Thus, the Commission in Armstrong determined that

practicing before the SEC included preparing data incorporated into SEC filings, regardless of
whether the preparer physically signed the document filed with the SEC. 24

-!-------

----------------

24

And as the U.S. District Court for the District of Columbia noted in S.E. C. v. Brown-a case related to the
S.E.C. v. Prince case discussed hereafter-"[t]he Commission's interpretation in Armstrong of 'practicing before the
Commission' is consistent with the language of Rule 102(t). Prince points to no past practices or pronouncements
that are inconsistent with this interpretation. Consequently, it is reasonable, especially in view of the purpose of Rule
102(e), to accord deference to the Commission's interpretation of it." 878 F.Supp.2d 109, 125-26 (D.D.C. 2012)
(footnotes omitted) (citing Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700
(1945)).

7

While the Commission in Armstrong determined that the SEC had the authority to deny
Armstrong the privilege of appearing or practicing before it pursuant to Rule 102( e), 25 the
Commission ultimately chose not to do so. Instead, it limited itself to ordering Annstrong to
cease and desist from committing or causing any violations or future violations of the federal
securities laws and rules? 6 Though, the Commission noted, the same factors that provided a
basis for issuing the cease-and-desist order could provide a basis for disciplining Annstrong
under Rule 102(e), "in light of the unique circumstances" of the case, it decided not to suspend
Armstrong under Rule 102( e) "as an exercise of [the Commission's] equitable discretion." 27
The more recent case, S.E.C. v. Prince, 28 out of the U.S. District Court for the District of
Columbia, adopts the reasoning of Armstrong and provides additional insight into what generally
qualifies as practicing before the SEC. In Prince, Gary Prince worked for Integral Systems, Inc.
("Integral")? 9 In 1992, Prince became Vice President and Chief Financial Officer ("CFO") of
Integral and acted with "final call" on accounting matters. 30 In 1993, the SEC filed suit against
Prince for securities laws violations related to Prince's work as CPO of a different company, and
in 1994 a judgment was entered prohibiting Prince from violating the securities laws in the
future. 31 In 1995, Prince resigned as Director and CFO but continued to act as a consultant to

25

Armstrong, 2005 WL 1498425, at *13.

26

Id. at *14-15.

21

Id. at 15.

-·----------------------

28942 F. Supp. 2d 108 (D.D.C. 2013).
29

See id. at 113.

30Id.
31

Id. at 113-14.

8

Integral. 32 In 1997, the SEC issued an order under Rule 102( e) permanently bam1ing Prince from
appearing or practicing before the Commission as an accountant. 33
In 1998, Integral hired Prince as a full-time employee with the title "Director of Mergers
and Acquisitions." Over the next few years, Prince's work with Integral included the following:
(i) assessing the financial health of newly-acquired subsidiaries by investigating the subsidiary's
financial statements and making suggestions on how they should record certain transactions/ 4
(ii) writing a draft Management Discussion and Analysis ("MD&A") section oflntegral's Fonn
10-Q and 10-K filings-these drafts were edited and Integral's CEO approved the final, filed
version; 35 (iii) reviewing and commenting on drafts of public filings; 36 (iv) drafting financial
press releases, particularly pre-earnings press releases; 37 and (v) occasionally interacting with the
accounting department, including investigating how capital losses had been booked, creating a
software development amortization plan, and assessing how the company should adopt new
financial accounting standards. 38 In this work, Prince's suggestions or comments were not
always followed, and other Integral employees had the final say. 39
Although lengthy, the court finds the following Prince analysis useful:
The Commission issued a Rule 102( e) Order against Prince in
1997. This Order permanently prohibits Prince from exercising
"the privilege of appearing or practicing before the Commission as
32

Jd. at 114.

34

Jd. at 116.

35

Jd. at 118.

36

Jd. at 118-19.

37

Jd. at 119.

38

Jd. at 120.

39

Jd. at 115, 118-20.

9

an accountant." For purposes of analysis, violation of this
prohibition requires two elements. First, an individual must
"appear[ ] or practice[ ] ... as an accountant." Second, such action
must have occurred "before the Commission."

The evidence was undisputed that Prince reviewed and commented
on drafts of Integral's public filings, including Fonn 10-Ks and
Form 10-Qs. Prince also wrote the first draft of the MD & A
section included in those filings. In addition, Prince engaged in
discussions with members of the Integral accounting staff and the
accounting staff at Integral subsidiaries regarding the financial
statements. These activities clearly meet the second prong, in that
they involve work done on various types of statements and
documents "filed with the Commission." Thus, the question is
whether these activities constitute "practicing accounting" before
the Commission.
Rule 102(±) defines "practicing before the Commission" to include
"[t]he preparation of any statement, opinion, or other paper by any
... accountant" if that document is filed with the Commission. The
crux of this dispute turns on what the word "preparation"
encompasses.

This Court has already observed that Armstrong "established that
an individual may ... be found to have practiced before the
Commission ifhe or she participated in the preparation of financial
statements filed with the Commission by, for example, creating,
compiling or editing infonnation or data incorporated into [filings
with the Commission] and consenting to their incorporation."
The language in Armstrong rejects the theory put forth by Prince's
expert witness, Jonathan Macey, that only accounting department
personnel and the executives who have final authority for financial
disclosures are "practicing accounting."

This cramped definition ignores the language and spirit of
-----------Armstrong-,-which-rejected-the-premise-that--only-those-who-were,------"responsible for signing or filing the financial statements" were
practicing accounting. Armstrong himself did not make the
ultimate determination as to whether the information that he
contributed would be included in the filings. In fact, he "voiced
concerns" regarding the substance of the subsidiary's statements,
but they were submitted despite his disagreement. Thus, the fact
10

that Prince did not have final authority over what information was
included in Integral's filings with the SEC . . . is not dispositive.
Macey's definition ignores the fact that accounting is not a
mechanistic, quantitative endeavor, but instead requires many nonquantitative decisions on which people can reasonably disagree.
Because these non-quantitative decisions may greatly affect what
final numbers are included in the financial statements, those who
participate in making those decisions are "creating" and
"compiling" the relevant information, even if they do not have
final authority over the exact numbers that are included.
The record contains evidence showing that Prince engaged in such
decisionmaking. For example, Prince sent an email to Brown and
Pat Carey, Integral's controller, regarding the accmal of bonuses
given to employees at SAT, one of Integral's subsidiaries. He
wrote, "I have instmcted Paul [SAT's controller] to accme the
bonuses in FYOO and to reverse the FYOl entries. Please make sure
the consolidated numbers reflect this change also." Clearly, Prince
was making an accounting determination for SAT, and then
directing the Integral accounting staff to make sure that this
number was reflected in the consolidated financial statements.
Those financial statements were then filed with the SEC.

Similarly, Prince wrote to the controller of another Integral
subsidiary, RT Logic, and opined on how the subsidiary should
book certain journal entries in its closing financial statements. He
made specific recommendations as to how certain items should be
recorded. For example, he stated that a particular credit should be
booked to additional paid-in capital rather than retained earnings
and noted that a debit should flow through a particular expense.
The closing financial statements were then included in a Form 8-K.
that Integral filed with the SEC.

-1----- · - - - - - -

In general, the implementation of Generally Accepted Accounting
Principles ("GAAP") and the mles of the Financial Accounting
Standards Board ("F ASB") require complex decisions involving
the_exercis_e_of_a_c_co_unting_ju__dgmenLihus, __p_art of functioning,--'a""'s'------- _ __
an accountant, and "creating, compiling, or editing" the
infonnation or data incorporated in a financial statement, is making
such decisions.

11

The emails demonstrate Prince "practicing accounting" by
determining how particular data should be treated in the financial
statements of Integral and its subsidiaries. Those statements were
then incorporated in filings before the Conunission ... Thus, since
Prince was practicing accounting by preparing financial data that
was filed with the Commission, he violated the tenns of his
Accounting Bar.
942 F. Supp. 2d 108, 145-51 (D.D.C. 2013) (footnotes and citations omitted).
Rules 102(e) and 102(f) and the Armstrong and Prince cases illustrate the breadth of what
qualifies as practicing before the Commission, including creating, compiling, or editing
infonnation or data incorporated into filings with the SEC; participating in non-quantitative
accounting decisions; and implementing GAAP and FASB standards. And such work qualifies,
regardless of whether an individual actually signs the documents filed with the SEC or has final
decision making authority over them.
B. Jones's Specific Preparation Work

Having dealt with what generally qualifies as practicing before the Commission, the court
now turns to Jones's specific behavior to analyze whether Jones violated the Bar Order. After
considering the record, the court finds that Jones's involvement in preparing financial statements
and related disclosures qualifies as practicing before the SEC and violates the Bar Order. 40
The court will not undertake an exhaustive recital of every form of Jones's prohibited
preparation work, every instance of such work, or every company for which Jones engaged in
such work. Instead the court focuses on examples sufficient to demonstrate that Jones did in fact
engage in conduct prohibited and thereby violative of the Jones Bar Order, including (i) creating,
compi1ing;-or-editing-infonnation-incorporated-into-ftlings-with-the-eommission,-(ii}making---40

The court notes that during his investigative testimony, Jones was asked, "Do you believe that the work
that you have done at J&J over the past several years does not fall under the rubric of being a preparer or reviewer?"
After some clarification that the question was directed at what Jones thought as of that day, Jones responded in his
investigative testimony, "As of today, my understanding and my belief is that it is a violation." See Hr' g Tr., at
184:3-185:14.

12

non-quantitative accounting decisions, (iii) drafting responses to SEC comment letters, and (iv)
managing others involved in the preparation of materials filed with the SEC. 41

ill

Creating, Compiling, or Editing Information Incorporated into Filings

There is no dispute that Jones personally participated in the preparation of financial
statements for public companies. Jones's counsel stated during trial that "we have admitted from
day one, Mr. Jones has never, ever denied that he was preparing financial statements for public
companies. So we do admit that." 42 In addition, Jones specifically admitted to working on 10-K.'s
for public companies. 43 He admitted to working on 10-Q' s for public companies. 44 He admitted
to working on 10-KSB's for public companies. 45 He admitted to working on the pro fonna
financials for an 8-K filing. 46 He admitted to writing the MD&A47 for public companies on

41

The court notes Jones's point that it is unclear what amount of contribution is necessary before an
individual is involved in "preparing" a financial statement. See Def.'s Mot. for Summ. J. of Dismissal and
Supporting Mem., filed Aug. 12,2014 (CM/ECF No. 41) at 10 n.7. However, like the District Court for the District
of Columbia in Prince, the court finds that it need not delve into the challenging question of how expansively
"prepare" can be interpreted, because there is substantial evidence in the record of Jones practicing before the SEC
under the standards set forth in Armstrong and Prince. See Prince, 942 F. Supp. 2d 108, 148 n.25 (D.D.C. 2013).
See also Hr'g Tr., at 134:7-135:12.
42

Hr'g Tr., at 574:25-575:5. The court notes that instead of contesting that he prepared financial statements
for public companies, Jones makes two other arguments under Rule 102(±): (i) that the SEC has not shown that
Jones transacted business with the Commission, and (ii) that the SEC has not shown that Jones consented to the
financial statements he prepared being filed with the SEC. See Hr'g Tr., at 575:3-20. The court finds that Jones's
first argument is based on a misreading of Rule 102(±) and the Armstrong and Prince cases. Rule 102(±) does not
require that an accountant both transact business with the Commission and prepare financial statements for that
accountant to be practicing before the Commission. Such an interpretation ignores the important language in Rule
102(±) that practicing before the Commission includes "but shall not be limited to" the examples provided. Jones's
first argument also ignores Armstrong and Prince, both of which find that the preparation of financial statements, in
and of itself, qualifies as practicing before the Commission. Regarding Jones's second argument, the court finds that
Jones both prepared financial statements and consented to their filing with the Commission. Jones's consent will be
further discussed later in this opinion.
43

See id. at 195:21-23; see also Ex. 97; Ex. 166.

44

See Hr'g Tr., at 194:17-22, 212:6-213:2, 317:19-319:1; see also Ex. 119; Ex. 127; Ex. 178; Ex. 185.

45

See Hr'g Tr., at 205:22-206:9,208:20-209:8, 218:8-219:11; see also Ex. 167; Ex. 173; Ex. 215.

46

See Hr'g Tr., at 210:3-18; see also Ex. 97.

13

multiple occasions,48 and he specifically admitted to writing the MD&A for Anoteros, Inc.
("Anoteros") that was included in Anto eros's 10-K for the period ending December 31, 2007. 49
Jones admitted to working on statements of cash flows, which are part of a company's financial
statement. 5° And Jones admitted to personally drafting footnotes for financial statements. 51
Jones's personal participation in the preparation of public company financial statements
and related disclosures filed with the SEC squarely qualifies as practicing before the
Commission. The Armstrong and Prince cases are clear: an individual practices before the SEC
ifhe or she participates in the preparation of financial statements filed with the SEC by creating,
compiling, or editing information incorporated into filings with the Commission. 52 Jones has
admitted to such personal participation several times over, having admitted generally to
preparing financial statements for public companies and having admitted specifically to
preparing 10-K's, 10-Q's, 10-KSB's, an 8-K, MD&A's, statements of cash flows, and footnotes
for public companies. 53
Having practiced before the SEC, the court finds Jones violated the Jones Bar Order.

47

A Management Discussion and Analysis ("MD&A") is a document written for inclusion in public filings
and is derived from the financial statements. See Hr'g Tr., at 227:5-14. MD&A's are not audited. See id. at 227:1517,549:20-21.
48

See Hr'g Tr. at 233:14-17.

49

See id. at 227:18-229:9, 322:3-324:18; see also Ex. 129; Ex. 266.

50

51

See Hr'g Tr., at 216:3-217:9; see also Ex. 212.

See Hr'g Tr., at 221:8-13, see also Hr'g Tr., at 223:2-224:4, 225:1-226:21; Ex. 59, Ex. 183, Ex. 199, Ex.

207.
-I

I

52

See Armstrong, 2005 WL 1498425, at *11; Prince, 942 F. Supp. 2d 108, 147 (D.D.C. 2013).

53

See also, e.g., Ex. 177 (This exhibit contains an engagement letter from J &J to Zaldiva, Inc. The letter is
signed by Gordon Jones and states that "[t]his letter is to outline our proposal for assisting your company in
completing its 2009 SEC filings." The letter offers several services, including to "[d]raft the above reference
financial statements and footnotes in accordance with [GAAPJ," and to "[c]ommunicate with the Company's
auditors during the course of the reviews and audit.").

14

.(ill

Non-Quantitative Accounting Decisions

The court finds Jones engaged in making non-quantitative accounting decisions and
thereby practiced before the SEC. As previously noted, Prince stated that "accounting is not a
mechanistic, quantitative endeavor, but instead requires many non-quantitative decisions on
which people can reasonably disagree," and that "those who participate in making those
decisions are 'creating' and 'compiling' the relevant information, even if they do not have final
authority over the exact numbers that are included." 54 The U.S. District Court for the District of
Columbia found that Prince engaged in such decision-making by advising how certain journal
entries and accounting items should be treated. 55 Jones, in the present case, engaged in similar
conduct. For example, in Exhibit 172, Jones provides Studio One Media, Inc. ("Studio One")
advice about the appropriate time to amortize software. Jones acknowledged that Exhibit 172 is
an example of him providing advice to a client about what kind of accounting to use. 56 And
Jones acknowledged that his advice is going to affect multiple filings and multiple time
periods. 57
Exhibit 182 provides a similar example of Jones making non-quantitative accounting
decisions and advising public companies accordingly. In Exhibit 182, Studio One seeks Jones's
advice on the appropriate accounting treatment for a recent transaction where the amount Studio
One paid a manufacturer differed from the amount Studio One had been carrying on its books.
Jones advised that "the difference needs to be recorded under other income as a gain on

54

Prince, 942 F. Supp. 2d 108, 148 (D.D.C. 2013).

55

See id. at 148-50.

56

Hr'g Tr., at 239:11-24.

57

Id. at 239:25-240:6.

15

settlement of debt. It would not be appropriate to recognize it in a prior period. Is the result [sic]
of actions taken in the current period. " 58 Jones testified at trial about Exhibit 182:
Q. (By Ms. Atkinson) And again, Mr. Jones, this is a company
reaching out to you and asking for advice on how to account for
specific transactions; isn't that right?
A. That's correct.
Q. This is one of those sophisticated issues that they're looking for
your accounting expertise and your accounting guidance; isn't that
right?
A. Yes.
Q. And you provide that accounting guidance; isn't that right?
A. I did.

Q. Right. So this was a decision about whether they needed to file
a restatement or whether they didn't need to file a restatement,
whether they could just record it in the current period?
A. Correct.

Q. And this decision affected the public companies financial
statements?
A. It did.
Q. And it affected the public companies filings?
A. Yes.
Hr'g Tr., at 247:9-19, 248:13-22.
Jones's non-quantitative decision-making was not limited to issues raised by clients. In
addition to clients, Jones acknowledged that the auditors of clients also reached out to him from

58

Ex. 182.

16

time to time with accounting questions. 59 For example, in Exhibit 186, auditor Chad Sadler asks
Jones about Omnitek Engineering Corp.'s research and development carry forward and whether
it mistakenly stayed the same from 2009. In response, Jones writes to Sadler as follows:
The tax accounting and the book accounting for R&D is the same.
R&D is expensed when incurred. This is not really a reconciling
item between book and taxes. I don't know why HJ broke the
number out from the total but I don't want to upset the apple cart
with them. We should just leave it as it was shown for 2009 so that
they can see that we didn't change their numbers then when we do
the 2011 audit we can fix the presentation.
Ex. 186. 60
Exhibit 193, a similar example, involves the company client BLVD Holdings, Inc.
("BLVD") and the auditors of Sadler, Gibb & Associates. Jones testified about Exhibit 193 at
trial:
Q. (By Ms. Atkinson) And the bottom e-mail from you, Mr.
Jones, to Sadler Gibb, re: Proposed changes to financials, you tell
the auditors we don't need to put this 6/30/12 balance sheet with the
9/30/12 balance sheet because that is not BLVD's year end. Do
you see where I'm talking about?
A. I do.

Q. So this is you giving the auditors your opinion about the proper
accounting here; isn't that right?
A. That's correct.
Q. Up above that, Mr. Neves from Sadler Gibbs says, has the
company moved out of the development stage at this point? This
is your slash management's call. And you say, at the very top of
the page in your response to Mr. Neves, good question, let's leave it
there for now. Do you see where I'm talking about?

A. Yes.

59

See Hr'g Tr., at 250:12-252:9.

60

See also id. at 252:21-254:8.

17

Q. That is you giving your opinion to the auditors; isn't that right?
A. It is.

Q. In fact, in that last e-mail where you're giving your opinion to
the auditors, you don't copy that to the company; isn't that right?
A. I don't know. This looks like a whole e-mail chain all connected
together but 1 have no way of knowing if that is the case or not.
Q. Well, let's look at it. So the e-mail is from Gordon Jones, sent
Wednesday, December 5, 2012, to T. Neves at SadlerGibb.com,
subject re: Proposed change to financials. This particular e-mail is
not copied to the company; isn't that right?
A. I don't know. I'm not an expert on this.
Hr'g Tr., at 257:4-258:10.
These exhibits and testimony selections illustrate Jones's participation in non-quantitative
accounting decisions. 61 And as indicated in Prince, this is a fonn of creating and compiling
relevant information that qualifies as preparation of financial statements and practicing before
the Commission. As such, the court finds Jones practiced before the Commission and thereby
violated the Jones Bar Order.
(iii)

Response to SEC Comment Letters

As explained by the SEC expert witness Lynn Turner, the SEC is required by law to
periodically review the public filings of all public companies. 62 And if, after review, the SEC has
questions or comments or changes that need to be made to correct those filings, then the SEC

-!
61

Some other examples include Exhibits 164, 175, 176, 180, 181, and 189, which were discussed by the
SEC and Jones during trial at Hr'g Tr., 238:14-239:10; 240:7-241 :25; 243:15-245:2; 245:6-23; 245:24-247:1; and
254:9-255:1, respectively.
62

Hr'g Tr., at 77:12-13.

18

writes a letter to the company raising those issues. 63 That letter from the SEC is referred to as a
SEC comment letter. 64
Jones admitted he was involved in the drafting of responses to SEC cmmnent letters, 65
and the record shows as much. For example, 66 in Exhibit 188, Ann Courtney ofBLVD writes to
Jones about a SEC comment letter BLVD recently received. She writes, "Hi Gordon, thank you
for the update regarding the auditors. I was also wondering if you had a chance to review the
comments as I was hoping to get your feedback/response to the SEC." 67 Jones responds, "I read
the comment letter. I am working on the answers to 44, 45 and 46 with the auditors. When would
you like to discuss the other comments left to you by your attorney? Is there a number I can
reach you at?" 68 Later, Jones writes to Courtney and her associate, "Attached are the responses to
the SEC comments. Please provide the auditors a complete version of the amended S-1 prior to
refiling." 69 Also included in Exhibit 188 are responses to comment letter questions 27, 28, and
39. 70 As indicated at trial, Jones testified during his investigative testimony that he believed he
drafted those responses. 71

63

See id. at 77:13-25.

64

See id. at 78:5-7.

65

See id. at 267:24-268:9.

66

At trial, the SEC also walked through Exhibits 60, 118, 120, 130, 179, 190, 195, 200, and 201 with Jones,
which provide additional evidence that Jones was involved in drafting responses to SEC comment letters. See Hr'g
Tr., at 268:10-270:25,273:6-280:2.
67
_ _ _ _ _ _ _ _--""'E""'x.,__,1'""8"'8,,__at

JON_ES-E0006458l~,-----

68Jd. at JONES-E00064580, JONES-E00064581.
69

Jd. at JONES-E00064579.

70

Jd. at JONES-E00064583, JONES-E00064585.

71

See Hr'g Tr., at 271:1-273:5.

19

Jones's involvement in preparing responses to SEC comment letters qualifies as
practicing before the SEC. Preparing comment letter responses is analogous to responding to
non-quantitative accounting quystions from public companies or their auditors-which the court
has already determined to be practicing before the SEC-except that the recipient of the
feedback is the SEC itself. SEC comment letters and responses can impact how public
companies draft filings in the future. 72 As noted in Armstrong, the SEC disciplines accountants
under Rule 102(e) to "protect the integrity of its own processes." 73 "The reliability of the
disclosure process is impaired if incompetent or unethical accountants are permitted to certify
financial statements. The reliability of the disclosure process is equally impaired if such
accountants are permitted to participate in the preparation of financial statements certified and
filed with the Commission." 74 The same rationale applies to the preparation of comment letter
responses-the reliability of the disclosure process is impaired if such accountants are permitted
to respond to SEC corrections, comments, or questions about financial statements filed with the
Commission.
The conclusion that Jones's involvement in preparing responses to SEC comment letters
qualifies as practicing before the Commission is supported by Jones's own testimony. Jones
testified that he did not participate in telephone conversations with SEC staff about SEC

72
To illustrate, in Exhibit 179-a comment letter to Studio One-the SEC states, "We have reviewed the
above referenced filings and have the following comments. We ask you to revise future filings in response to some of
these comments. lfy:ou disagree, we will consider y:our exQlanation as to why: a revision is unnecessary:." Ex. 179,__,a"'--t_ _
T&E00212128 (emphasis added). And the court notes that the Studio One response to the SEC comment letter is
one of the responses that Jones testified he believed he worked on. See Hr'g Tr., 270:18-25.

73

Armstrong, 2005 WL 1498425, at *11 (quoting Touche Ross & Co. v. SEC, 609 F.2d 570, 582 (2d Cir.

1979)).
74

Jd. (footnotes omitted).

20

comment letters because he felt that doing so would violate the Bar Order. 75 It seems clear that if
telephone conversations with the SEC regarding SEC comment letters would violate the Bar
Order, then written responses directed to the SEC regarding SEC comment letters would
similarly violate the Bar Order.
Thus, the court finds Jones practiced before the SEC by participating in the preparation of
SEC comment letter responses, and he thereby violated the Jones Bar Order. 76
(iv)

Management of Others

In addition to Jones's direct participation in the preparation of public company filings,
Jones also indirectly participated through his oversight of others. The record provides several
instances of such indirect involvement.
For example, several exhibits illustrate Jones's involvement through his management and
oversight ofKirk Gibb-a J&J employee. In Exhibit 215, Jones emails Kirk Gibb, "I have fixed
the financial statements for Studio One Media as attached. Please complete the notes now." In
his investigative testimony, Jones acknowledged that the email indicates that he reviewed Kirk
Gibb's initial draft of Studio One's financial statements and made some changes to it. 77 The
email also shows Jones instmcting Kirk Gibb to complete the notes for Studio One Media.
Likewise, in Exhibit 217, Kirk Gibb emails David Rector of Standard Drilling regarding the
company's 10-Q filing. Kirk Gibb writes, "I'm just finishing up the final touches on the financial

75

See Hr'g Tr., at 280:3-281:23.

Though not a response to a SEC comment letter, the court finds Exhibit 125 noteworthy. In Exhibit 125,
Jones emails auditor Mike Moore, with a copy to Keith Elison. The email has the subject "Re: PCAOB response for
FUSA" and states, "Here are my responses to the FUSA comments. Keith please send me the response you prepared
on Standard Drilling." Jones acknowledged at trial that ordinarily an auditor would be the one to respond to a
PCAOB inquiry about an audit of a public company. See Hr'g Tr., at 266:25-267:23. See also Ex. 124; Hr'g Tr., at
266:16-24.
77

See Hr'g Tr., at 218:8-219:11.

21

statements and then they'll go through Gordon's review." 78 Further, in Exhibit 219, Jones writes
to Kirk Gibb, "How are the work papers coming along? Will you be able to send them to me
soon?" Kirk Gibb responds to Jones-"My final draft. Please review."-and attaches Ethos
Enviromnental, Inc.'s audit work papers. 79
Other examples of Jones indirectly preparing public company filings include his
oversight of Bradley Gibb and Keith Elison-both employees of J&J. For instance, in Exhibit
59, Bradley Gibb writes, "Here are the most recent accounting pronouncements for the Q's and
K's going forward. Gordon went over it and its what should be what is included in all notes." 80
Similarly, in Exhibit 109, Jones directs Keith Elison, 81 stating, "I expect that you will have (at a
minimum) the Asia4sale and Curatech audits finished before you come back from Las Vegas. I
would also like the ARDCO and Franklin Mini~g audits completed ifpossible." 82 And later, in
Exhibit 120, after Jones receives an email from the auditors about an accounting adjustment for
the company Alpha Trade, 83 he instructs Keith Elison to "use this adjustment in responding to
the SEC." 84

78

Ex. 217; see also Hr'g Tr., at 220:2-221:7.

79

Ex. 220. Note: when asked about specific pages of Kirk Gibb's attached audit work papers (specifically,
Jones was asked about pages T&E0026654 and T&E0026656 of Exhibit 220), Jones admitted that he recognized the
pages as testing work papers that would normally be prepared by an auditor in the audit of a public company. See
Hr'g Tr., at 264:11-266:15. These emails show Jones overseeing and reviewing Kirk Gibb's work, which, in this
instance, appears to be work that would normally be performed by an auditor.
80
I

Jones admitted that he is the "Gordon" identified and that "all notes" refers to footnotes to financial

-:------statements.-SeeHr-'.g_Tr.,_at_22~6=:2~-=2=1._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
81

See Hr'g Tr., at 263:11-264:10.

82

Ex. 109.

83

At the time of Exhibit 120, Kirk Gibb is an audit partner for Sadler, Gibb & Associates.

84

See Ex. 120; Hr'g Tr., at 279:9-280:2.

22

Having analyzed the record, the court finds that Jones indirectly prepared materials filed
with the SEC by instmcting, reviewing, and/or overseeing the efforts of other individuals. By so
doing, Jones practiced before the Commission and thereby violated the Jones Bar Order.

C. Jones's Consent
As previously noted, Rule 102(:1) provides that "[t]he preparation of any statement,
opinion or other paper by any attorney, accountant, engineer or other professional or expert, filed
with the Commission in any registration statement, notification, application, report or other
document with the consent of such attorney, accountant, engineer or other professional or
expert," qualifies as practicing before the SEC. 85 Though Jones admits, and the court. so finds,
that he prepared financial statements for public companies, Jones argues that he did not violate
the Bar Order because he did not consent to those materials being filed with the Commission. 86
The court disagrees.
Jones suggests consent under Rule 102(:1) must be written consent, 87 where the preparer
signs off on an item being filed with the SEC or being incorporated into items filed with the
SEC. But such a constmction of Rule 102(:1) is directly contradicted by Armstrong. Armstrong
states that Rule 102(:1) "does not specify that a person must sign a document filed with the
Commission. Moreover, the term 'preparation' of a document is, we believe, sufficiently broad
to encompass the preparation of data to be included in a document filed with the Commission, at
least where, as here, the data was prepared for the express purpose of being included in such a
document."

85

88

17 C.F.R. § 201.102(£)(2) (emphasis added).

86

See Hr'g Tr., at 574:25-575:5.

87

See id. at 16:23-17:15.

88

Armstrong, 2005 WL 1498425, at *11.

23

The court likewise finds that written consent is not required under Rule 102(f). The court
finds persuasive the reasoning of Armstrong that a more restrictive interpretation of Rule 102( f)
"would allow accountants to escape discipline under Rule 102(e) simply by instmcting someone
else to draft, sign, and file fraudulent documents." 89 Instead, Rule 102(f) "recognizes that
financial statements often incorporate information created, compiled, or edited by accountants
who are not responsible for signing or filing the financial statements." 90
Jones consented under Rule 102(f) because he prepared materials for public companies
with the understanding and expectation that such information would be included in SEC filings.
In Prince, the court found that "[t]he subject lines and substance ofthe emails show that Prince
was fully aware that these calculations were going to be used in SEC filings." 91 The record
amply demonstrates that the same can be said in the present case, as illustrated by the following
four examples. First, in Exhibit 118, Jones receives an email from Keith Elison with the subject
line "Standard Drilling SEC Comment Letter Response." The email attaches a proposed SEC
comment letter response and asks for comments. Jones replies to the email, "Looks good to me
too. Let's get this filed." 92
Second, in Exhibit 193, auditor Tyler Neves sends an email to Jones with the subject line
"RE: Proposed Changes to Financials." Neves asks Jones, "Has the Company has [sic] moved
out of the development stage at this point, given the initial revenues earned (planned principle
[sic] operations, etc). This is yours/managements call, but we thought it maybe on the border of

-~---~====~~--------------------­
~

91

942 F. Supp. 2d 108, 149 (D.D.C. 2013).

92

Ex. 118.

24

moving out of the development stage." 93 Jones responds, "Good question. Let's leave it there for
now in case they don't have any more sales before the end of the year." 94
Third~ in Exhibit 171, auditor April McEniry of Moore & Associates sends an email to

Kenneth Pinckard of Studio One with the subject line "RE: Studio One QE 12-31-07." The
emails states, "I sent all these to Gordon and we are just waiting to make sure he concurs before
we give permission to file." 95 In his investigative testimony, Jones testified that this email is an
example of auditors giving him and J&J the final review of SEC filings prior to filing. 96 He also
testified that he believed this was the usual practice of Moore & Associates. 97
Fourth, in Exhibit 178, Jones sends David Rector of Standard Drilling and auditor Mike
Moore an email with the subject "Re: FW: Standard Drilling 10Q." Jones states, "Hi David, I
removed the editorial comments made by the attorneys. I am forwarding this to Mike Moore. It
looks good to go." 98
The record, as exemplified by these four examples, demonstrates that Jones prepared
materials with the understanding and expectation that such materials would be used in filings
with the SEC. This understanding and expectation is consistent with the consent described in
Rule 102(£)(2). As such, the court finds that Jones consented to his preparation work being used
in public company filings with the Commission. By so doing, Jones practiced before the SEC
and violated the Jones Bar Order.
93

Ex. 193, at JONES-E00056671.

f----·------

95

96

Ex._1JJ

,_atT&E0_02252.i2~

See Hr'g Tr., at 260:7-261:13.

97

See id. at 261:14-21.

98

Ex. 178. Notably, Jones sent the email on Saturday, May 2, 2009 at about two o'clock in the afternoon.
On Monday, May 4, 2009 at about seven o'clock in the morning, Mike Moore emails an associate what purports to
be the Standard Drilling 10-Q final document. See Hr'g Tr., at 261:22-262:16.

25

D. Advice a( Counsel Defense
Having established that Jones practiced before the SEC in violation of the Jones Bar
Order, the court addresses Jones's asserted defense that his actions were taken in good faith
reliance upon the advice of counse1. 99 Specifically, Jones argues that he relied on the advice of
three attorneys-Jacob Stein, Paul Moxley, and Wallace Boyack-that his work preparing
financial statements did not violate the Bar Order. 100
The court finds this advice of counsel defense fails for two reasons. First, Jones's reliance
on counsel, reasonable or otherwise, is irrelevant to the matter at hand. Advice of counsel is
simply not a defense to violations of Rule 102(e) Bar Orders. The court finds nothing in Rule
102( e) that indicates scienter is relevant in establishing violations, and Jones has not identified
any case law indicating otherwise. 101 Indeed, instead of relying on case law, Jones argues that to
not require the SEC to demonstrate scienter "only makes sense if the Commission had bothered
to be fair and define the words 'prepare' or 'preparer' in Rule 102(£)." 102 This argument,
however, is misplaced for an important reason: Jones consented to the Bar Order. 103 His own
signature allowed the Bar Order to be entered against him. 104 If Jones felt the terms "prepare" or

99

See Hr'g Tr., at 167:19-23,578:21-580:3.

100

See id. at 167:24-168:1,172:20-173:11,282:24-286:23, 287:24-289:20; Def. Jones's TrialMem. for
Trial Commencing on July 7, 2015 at 9:30a.m., filed June 26, 2015 (CM/ECF No. 83), at 2-5 [hereinafter Def.'s
Trial Mem.].
101

-1----

See Prince, 942 F. Supp. 2d 108, 151 (D.D.C. 2013) ("Prince notes in his Post-Trial Brief that if he did
_ _ _Qractice accounting before the Commission, he 'did so in good faith reliance u_Ron the advice of counsel.' However, _ __
Prince did not identify any caselaw requiring scienter to establish a violation of a Rule 102( e) Order.").
102

See Def.'s Trial Mem., supra note 100, at 10.

103

See Hr'g Tr., at 154:6-11.

104

See id. at 154:12-14.

26

"preparer" in the Bar Order were unclear or overly broad, he could have walked away-he was
not obligated to consent. But having so chosen, Jones is so bound.
Second, even if an advice of counsel defense were available to Jones, the court finds the
defense fails because Jones has not carried his burden on the defense's elements. As the parties
note, 105 Jones must demonstrate four elements to establish an advice of counsel defense: "(1) a
request for advice of counsel on the legality of a proposed action, (2) full disclosure of the
relevant facts to counsel, (3) receipt of advice from counsel that the action to be taken will be
legal, and (4) reliance in good faith on counsel's advice." 106
Jones's failure to demonstrate an advice of counsel defense is most readily seen with
Wallace Boyack. Not only did Jones never call Boyack as a witness, Jones himself never
identified at trial the advice Boyack purportedly gave him. 107 Exhibit 310, the only exhibit
proffered and admitted into evidence that was actually drafted by Boyack, is a letter to the
SEC-not to Jones. And, as noted as trial, 108 a letter directed to the SEC is not advice to Jones.
Thus, without sufficient evidence of Boyack advising Jones that his preparation work was legal,
and without sufficient evidence that Jones relied in good faith on such advice, the court finds
Jones has not met the burden of an advice of counsel defense.
Jones's purported reliance on Jacob Stein's advice is also problematic. According to
Jones, he told Stein he intended to prepare financial statements that were signed offby a CPA, 109

105

See Def.'s Trial Mem., supra note 100, at 9; Pl.'s Trial Br., filed July 1, 2015 (CM/ECF No. 88) at 16.

106

U_nited_States_1!._Jifenger,A27_E.3_cl84_0,_85_3_(l_D_th_Cir.2Q05)_(_qunting_C.E._Carlsan,Jn_c._E_SEC,_8.5_2_ _ __

F.2d 1429 (lOth Cir.1988)).
107

See, e.g., Hr'g Tr., at 344:21-348:11.

108

See id. at 348:6-7.

109

See id. at 172:20-24. At trial, Jones also suggested that his letter to Stein in Exhibit 303 contains the gist
of what he told Stein about the work he intended to do after entry of the Bar Order. See id. at 283:12-19. In Exhibit

27

and Stein advised him that those services were not in violation of the Bar Order. 110 Importantly,
Stein did not testify at trial, and there is no documentation in the record of any advice from him
to J ones. 111 But assuming such advice occurred, there are still two major problems. First, there is
inadequate evidence that Jones fully disclosed to Stein all relevant facts regarding Jones's
significant role in the preparation of public company filings. In fact, Exhibit 304-Jones's
exhibit-suggests otherwise. Jones had directed Stein to contact Amy Norwood of the SEC
about Jones's work for Environment Oil Processing Technology, Inc. ("EOPT"),

112

and Exhibit

304 contains Stein's October 19, 2001letter to Norwood. This letter does not indicate that Stein
understood the scope of preparation work Jones intended to participate in following the Jones
Bar Order. The letter refers to work Jones "performed" for EOPT-past tense. It does not
indicate that Jones's work for EOPT is ongoing. The letter indicates that Jones's consulting
responsibilities with EOPT "included"-again, past tense-gathering EOPT's accounting data to
have its financial statements audited or reviewed by other CPA's. The letter only mentions
EOPT and does not indicate Jones intended to work for any other company. 113 This letter does
not seem to anticipate Jones's extensive involvement in the preparation of financial statements
for public companies, both in quantity and quality of work done. 114

303, Jones writes to Stein, "My understanding is that you spoke to Bob Fusfeld the attorney representing the SEC
prior to my entering into the settlement with the SEC and that you told him of my concerns. Also I believe that the
settlement that you worked out with him prohibited me from auditing, reviewing or signing financial statements of
public companies for three years but not from preparing financial statements as long as they were signed off by a
CPA."
110

See Hr'g Tr., at 173:7-11.

111

See id. at 173:4-6, 177:8-12.

112

See id. at 173:19-174:3; Ex. 303.

113

See Hr'g Tr., at 176:16-18.

114

The record contains no response to Exhibit 304's letter from Stein to Norwood, and Jones testified that
he did not know if Stein ever received a response. See Hr'g Tr., at 341:22-342:1.

28

The second problem is that there is inadequate evidence of Jones's good faith reliance on
Steins's purported advice. Jones admits he read the Bar Order, 115 and the Bar Order states that
after three years Jones could apply to resume practicing before the Commission as a "preparer or
reviewer, or a person responsible for the preparation or review, of any public company's
financial statements that are filed with the Commission." 116 But despite the inconsistency
between this Bar Order language and Stein's alleged advice that Jones could prepare financial
statements if they were signed offby a CPA, Jones never received-nor even sought-Stein's
advice in a written legal opinion. 117 Under such circumstances, it is difficult to see how Jones
could rely on Stein's advice in good faith. 118
Similar issues make Paul Moxley's advice a problematic footing for an advice of counsel
defense. Moxley is the only counsel that testified at trial. 119 He testified that in 2001, while
negotiating the Bar Order, Jones told him that he wanted to continue functioning as a
paraprofessional doing accounting work 120 Moxley stated that he communicated Jones's desires
to the SEC attorneys, and they said they would not express any opinions on it, but they did not

115

See Hr'g Tr., at 159:4-10.

116

Ex. 136.

117

See Hr'g Tr., at 286:21-23, 300:16-301:1. Indeed, Jones did not seek a written legal opinion that his
preparation work was proper, even after receiving word that an SEC attorney had stated that the SEC takes a "broad
view" of what constitutes practice before the SEC. See Ex. 303; see also Hr'g Tr., at 352:1-353:11.
118

-!
I

Furthermore, the court notes Jones's testimony that he is "not aware of any case where a financial
statement would be filed with the Commission that wasn't audited or reviewed by an auditor." Hr'g Tr., at 314:1-3.
As noted by the SEC, the advice that Jones could prepare financial statements if they were signed off by a CPA-an
-independent-auditor does-not~makeaJoLofsense_ifallJinanciaLstatements_filed_with_the_SEC_are_audittJ_d_or_ _ __
reviewed by an auditor. See id. at 565:5-20. The exception would swallow the rule, and the Jones Bar Order
language regarding Jones applying to resume practicing before the SEC as a preparer of financial statements would
be superfluous.
119

Jones also testified about his discussions with Moxley. See Hr'g Tr., at 182:10-183:13, 287:24-291:13,
301:2-302:21,342:7-344:20.
120

See Hr'g Tr., at 433:5-13.

29

see any problems with it. 121 Moxley also testified about discussions he had with Jones in 2004
about Jones reapplying to practice before the SEC. 122 Moxley believed that he acquiesced at that
time that Jones could still practice as a paraprofessional. 123
The evidence does not sufficiently demonstrate that Jones fully disclosed all relevant
facts to Moxley or that Jones relied on Moxley's advice in good faith. As an initial matter, even
assuming the SEC attorneys did tell Moxley that Jones's preparation work would not violate the
Bar Order, 124 Jones could not rely in good faith on any advice that the SEC itself would see his
preparation work the same way. Jones knew those SEC attorneys were not issuing an opinion on
behalf of the SEC, and he knew their statements would not be put in writing.

125

And even more

important, Jones also knew that, in his Offer of Settlement, he represented that his Offer was
made voluntarily and that "no offers, promises, threats or inducements of any kind have been
made by the Commission, or any member, officer, employee, agent or representative of the
Commission in consideration of this Offer or otherwise to induce him to submit this Offer."

126

Additionally, Jones could not rely in good faith on advice from Moxley that Jones's preparation
work did not violate the Bar Order, because Jones never retained Moxley to give him a written
opinion that he could do such. 127 In fact, Moxley testified that in the cases he gets, there is not

121

See id. at 433:21-25.

122

See id. at 434:19-436:12.

123

See id. at436:13-16.

124

For purposes of this decision, the court need not determine whether these comments were made, or, if
made, whether they were made to Stein, Moxley, or both. But the court notes the testimony of Robert Fusfeld that he
would not have told Jones or his attorney that Jones could engage in certain conduct after the Bar Order. See Hr'g
Tr., at 541:21-542:2.
125

See Hr'g Tr., at 286:3-20,442:13-23.

126

Ex. 136-A, at 4.

127

See Hr'g Tr., at 301:6-11, 302:17-21, 445:10-22.

30

usually a lot of mystery that his clients violated the securities laws, but that if there were close
questions he would bring in a transactionallawyer. 128 When asked, "Is your habit and practice,
then, if an individual comes and seeks a specific legal opinion on rules and regulations that you
would then bring in a transactional attorney?" Moxley responded, "Well, it would depend on
what it was. But I'd be very reluctant to write any opinions." 129 Thus, when the SEC responded
to the 2004 reapplication inquiry by reiterating that Jones could not currently practice before the
SEC as a preparer of public company financial statements, 130 Jones did not have and did not seek
a written opinion from Moxley to the contrary. Indeed, Moxley testified that he did not
remember discussing with Jones what it meant to be a preparer or a person responsible for the
preparation of a public company's financial statements.

131

Moreover, although it appears Moxley had a general sense that Jones would be preparing
financial statements for public companies, 132 it does not seem Moxley understood the extent of
Jones's involvement. After testifying that he did not recall Jones telling him that he would direct
auditors to present financial statements in development stage formats, that he would draft
unaudited MD&A' s, or that he would draft unaudited pro forma financial statements, Moxley
testified "Frankly, if he would have, it wouldn't have meant anything to me." 133

128

See id. at 447:6-14.

129

See id. at 447:15-20.

130

See Ex. 306 ("The terms of the suspension order provide that Jones' application to resume appearing or
practicing before the Commission as a preparer or reviewer, or a person responsible for the preparation or review,
·---~of.flnancial statements oi a public company_lo be .flled with the Commission must make a showing that his work will
be reviewed by the independent audit committee of the company for which he works or in some other manner
acceptable to the Commission.").
131

See Hr'g Tr., at 441:16-20.

132

See id. at448:8-451:4.

133

See id. at 454:13-455:4.

31

Thus, the court concludes that reliance on counsel is not a defense to violations of Rule
102( e) Bar Orders, but, even if it were, the defense is similarly unavailable to Jones because he
failed to show that the elements of the defense were met.

III. Proper Remedy for Jones's Bar Order Violation
The court now turns to the SEC's request that Jones's profits from his Bar Order
violation be disgorged. Though the court finds Jones practiced before the SEC and thereby
violated his Bar Order, the court is in doubt as to the appropriate remedy for such a violation.
The court would appreciate further briefing and argument on the authority, the method, and the
amount of an appropriate remedy to be applied in this case. At this time, the court will continue
to reserve on the disgorgement or remedy issue.

CONCLUSION
The court finds that (i) under a valid 102(e) Bar Order, Jones was not allowed to practice
before the SEC, and (ii) Jones did practice before the SEC during the prohibited time period and
thereby violated such Bar Order.
Having so found, the court hereby ORDERS, pursuant to Section 21(e) of the Exchange
Act, Jones to comply with the May 25, 2001 Jones Bar Order.
The court RESERVES on the question of disgorgement or remedy and directs the parties
to file the requested briefing on the authority, the method, and the amount of an appropriate
remedy to be applied in this case. The SEC shall file within twenty days from the date of this
opinion, and Defendant within twenty days thereafter.
-i
I

-----------------------,rh_------------------------------1-------------------

DATED this

'a 0

day of September, 2015.

~-':
-=·=--.J>."'---"--"--~----'=9'-'-'--f~----"--~--Bruce S. Jenkins ,
United States S ,for Dis rict Judge

32