those pertaining to participant accounts, transfers of mortgage-backed securities, the MBSCC participant fund, and the MBSCC certificate withdrawal policy. The Commission published notice of the proposals in the Federal Register on May 11, 1988.2

The Commission preliminarily believes that the proposals are consistent with the Act and is approving the proposals on a temporary basis. The Commission believes that the proposals are designed appropriately to clarify MBSCC's rules and to strengthen MBSCC's procedures, thereby enhancing MBSCC's ability to safeguard securities and funds and promote prompt and accurate clearance and settlement. The Commission, however, intends to continue to analyze the proposals and to discuss with MBSCC the actual operation of the proposals and the need for any refinements or enhancements to the proposals. In that regard, MBSCC has indicated to the Commission that it will file an amendment to the proposals in the near future. For those reasons, the Commission is temporarily approving the proposals through December 31, 1988.

IT IS THEREFORE ORDERED, pursuant to Section 19(b) of the Act, that MBSCC's proposed rule changes (File Nos. SR-MBS-88-7, MBS-88-9, and MBS-88-11) be, and thereby are approved temporarily through December 31, 1988.

For the Commission, by the Division of Market Regulation pursuant to delegated authority.

Jonathan G. Katz Secretary

SECURITIES EXCHANGE ACT OF 1934
Release No. 34-26238/November 1, 1988
ACCOUNTING AND AUDITING
ENFORCEMENT

Release No. AE-209/November 1, 1988
Administrative Proceeding
File No. 3-7084

In the Matter of

JOHN L. VAN HORN

ORDER INSTITUTING PROCEEDINGS AND OPINION AND ORDER PURSUANT TO RULE 2(e) OF THE COMMISSION'S RULES OF PRACTICE

The Commission deems it appropriate and in the public interest to institute proceedings against John L. Van Horn ("Van Horn") pursuant to Rule 2(e)(1) of the Commission's Rules of Practice. Accordingly, IT IS HEREBY ORDERED that said proceedings be, and hereby are, instituted.

In anticipation of these proceedings, Van Horn has submitted an Offer of Settlement (“Offer"), which the Commission has determined to accept. Under the terms of the Offer, Van Horn has consented to the issuance of this Opinion and Order prior to hearing and the presentation of evidence. In this Offer, Van Horn admits the jurisdiction of the Commission with respect to the matters set forth in this Order, but does not otherwise admit or deny the facts or findings contained herein.

I. FINDINGS

A. JOHN L. VAN HORN

Van Horn, a certified public accountant, was originally licensed to practice in California in June of 1979. Because of his failure to pay the license renewal fee, his license to practice accounting expired on October 1, 1983. Van Horn remained unlicensed until 1986, when he paid the delinquent fees and met the continuing education requirements necessary to reinstate his license to practice.

From 1981 to 1983, Van Horn operated a oneman accounting business which failed, and, thereafter, he was briefly unemployed. In 1984, he worked as an in-house accountant on the financial statements of a real estate syndicator. During 1984, Van Horn issued audit reports for CoElco,

2 Securities Exchange Act Release Nos. 25660 (May 4, 1988) 53 FR 16812; 25662 (May 4, 1988) 53 FR 16808; 25656 (May 4, 1988) 53 FR 16818.

Rule 2(e)(1) [17 C.F.R. § 201.2(e)(1)] provides:

"The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commis

sion after notice of and opportunity for hearing in the matter... (ii) ... to have engaged in unethical or improper professional conduct, or (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the federal securities laws [15 U.S.C. §§ 77a-80b-20], or the rules and regulations thereunder."

Ltd. ("CoElco") (described below) which are the subjects of this order.2 In April 1985, he became CoElco's controller.

On December 8, 1986, the Commission filed a complaint seeking injunctions against CoElco, Sterns, and Van Horn in the United States District Court for the Central District of California.

SEC v. CoElco, Ltd., et al., 86-7982 RMT (C.D. Cal); Litigation Release No. 11315 (Dec. 22,

1986).3 Van Horn has consented, without admitting or denying the allegations in the complaint except as to jurisdiction, to the entry of an order permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from aiding and abetting violations of Section 12(g) of the Exchange Act and Rule 12b-20 thereunder.

B. COELCO, LTD.

CoElco is a Delaware corporation, located in Fountain Valley, California during the times Van Horn issued audit reports for the company. CoElco's predecessor was incorporated in Nevada in 1978 (it changed its state of incorporation to Delaware in 1984). Initially, it operated a travel agency, but from at least 1981 through March, 1984, it was essentially a dormant shell. In May, 1984, CoElco began acquiring various small businesses, including an automobile parts company, a chemical business, and a manufacturer of recreational vehicle equipment. On or about July 16, 1984, CoElco's stock became registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). CoElco's stock was listed in the National Daily Quotation Service "pink sheets" beginning in May, 1984 and was listed on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) from October, 1984 to January, 1986 (when it was delisted).

2 Van Horn's work for CoElco during 1984 was not related to his full-time work as an in-house accountant for the real estate syndicator, and he used his home address in correspondence related to his CoElco engagement.

3 The complaint alleged that CoElco and Sterns violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"); CoElco and Sterns violated the antifraud provisions of Section 17(a) of the Securities Act; CoElco, Sterns, and Van Horn violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; CoElco, aided and abetted by Sterns, violated the issuer reporting provisions of Sections 12(g) and 13(a) of the Exchange Act and Rules 12b-20, 12b-25, 13a-1, 13a-11, 13a-13, and 13a-17 thereunder; Van Horn aided and abetted CoElco in violating Section 12(g) of the Exchange Act and Rule 12b-20 thereunder; CoElco and Sterns violated the proxy solicitation provisions of Section

From at least early 1984, CoElco's functional chief executive officer and controlling shareholder was David D. Sterns ("Sterns"). Sterns assumed the titles of CoElco's president, chief executive officer, and chairman of the board in approximately February, 1984. In August, 1984, Sterns resigned as chairman of the board while retaining the other titles. In May, 1985, Sterns resigned as president and chief executive officer of CoElco; he, however, continued to function as the company's chief executive officer and remained its controlling shareholder.

C. VIOLATIONS OF GENERALLY ACCEPTED AUDITING STANDARDS AND REGULATION S-X REQUIREMENTS FOR QUALIFICATIONS OF ACCOUNTANTS Van Horn was engaged to perform the first audit of CoElco's financial statements in the spring of 1984 and another audit in the early summer of 1984. At the time Van Horn was first engaged by CoElco, he had performed only one audit of a public company.4 Since Van Horn was not licensed to practice public accounting at the time he issued his audit reports, he did not comply with Rule 2-01(a) of Regulation S-X for purposes of acting as a certified public accountant with respect to reports filed with the Commission.5 Van Horn signed and issued audit reports expressing unqualified opinions on CoElco's financial statements included in its Form 10 and 1984 annual report. CoElco's Form 10, filed with the Commission on May 17, 1984, contained audit reports by Van Horn dated March 10 and May 8, 1984. The March audit report concerned CoElco's 1982 and 1983 financial statements which reflected virtually no economic activity. The May audit report concerned the financial statements for 1983 and the ten months ending March 31, 1984. In addition, an audit report by Van Horn, dated July 31, 1984, was included in CoElco's

14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder; CoElco violated the securities ownership reporting provisions of Sections 13(d) and 16(a) of the Exchange Act and Rules 13d-1 and 16a-1 thereunder; Sterns aided and abetted CoElco in violating Section 13(d) of the Exchange Act and Rule 13d-1; and Sterns violated the securities ownership reporting provisions of Sections 13(g) and 16(a) of the Exchange Act and Rules 13d-1 and 16a-1 thereunder.

4 This was Resources International, Ltd., described in Part III below.

5Rule 2-01(a) of Regulation S-X provides that, "The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office."

1984 annual report filed with the Commission on September 21, 1984.6 The July audit report pertained to CoElco's financial statements for the fiscal years ended May 31, 1983 and 1984. Each of Van Horn's audit reports stated that his examinations were conducted in accordance with Generally Accepted Auditing Standards ("GAAS") and that the financial statements fairly presented CoElco's financial position in conformity with Generally Accepted Accounting Principles ("GAAP"). Contrary to these representations, none of the audit reports were based on audits conducted in accordance with GAAS

and, as described in Part III, the financial statements did not comply with GAAP.

Van Horn performed virtually no audit procedures in connection with his reports on CoElco's financial statements. There were no written audit programs, and no substantive audit testing of information and schedules provided to him by CoElco. His examinations consisted of his reviewing certain documents provided by CoElco and questioning CoElco personnel. With regard to CoElco's major asset, stock in the related companies described in Part III below, Van Horn accepted Sterns' valuation of the stock as reflected on CoElco's balance sheet without any testing. In fact, Sterns prepared the schedules justifying the valuations that were included in Van Horn's workpapers. Van Horn documented virtually none of his audit procedures.

Van Horn's audits failed to comply with GAAS in the following respects: (1) he failed to possess adequate technical training and proficiency as an auditor (Section 210 of the Codification of State ments on Auditing Standards, hereinafter referred to as "AU Section"); (2) he failed to exercise due professional care in the performance of his examinations and the preparation of his reports (AU Section 230); (3) the work was not adequately planned (AU Section 311); (4) he failed to study properly and evaluate the system of internal controls (AU Section 320); (5) he failed to identify adequately and examine related party transactions (AU Section 334); (6) he failed to obtain sufficient competent evidential matter (AU Section 326); and (7) he failed to prepare and maintain working papers designed to meet the circumstances of the engagement, and to docu

ment the work done and the conclusions reached (AU Section 339).

D. VIOLATIONS OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CoElco's March 31, 1984 balance sheet (on which Van Horn opined in his May, 1984 audit report) and May 31, 1984 balance reflected assets that were valued at amounts materially greater than allowed by GAAP. The overvalued assets consisted of stock, most of which was restricted, of two inactive shell corporations, Resources International, Ltd. ("Resources") and ARK Energy Company, Inc. (“ARK”).

Resources was a Delaware corporation purportedly engaged in syndicating oil and gas limited partnerships. Resources had lost its corporate charter on March 1, 1984. ARK was a Nevada corporation which was originally incorporated for the purpose of operating a hotel and casino. On April 7, 1983, ARK filed a Form 10-Q revealing that the company had generated no revenue and since then has not filed any reports with the Commission.

On March 31, 1984, Sterns transferred to CoElco 2,869,600 shares of restricted Resources stock, 450,000 shares of supposedly unrestricted Resources stock and 1,376,250 shares of restricted ARK stock; in return he received 4.5 million shares of CoElco stock. The ARK and Resources stock, Sterns' entire holdings in the two companies, constituted approximately 16 percent of Resources' outstanding shares and approximately 23 percent of ARK's outstanding shares. At the time of the transfer, Sterns was CoElco's of the board, and owned or controlled a majority president, chief executive officer, and chairman of CoElco's outstanding shares; he was also Resources' president, and ARK's chairman of the

board.

On CoElco's March 31, 1984 balance sheet, the Resources and ARK stock was valued at $1,831,832 (86 percent of the total assets shown on the balance sheet); the notes to the financial statements represented that these securities were valued at cost which approximated the market value of the securities as of March 31, 1984.7 On the May 31, 1984 balance sheet, these same securities were valued at $238,100 (19 percent of the total assets shown on the balance sheet); the

7In fact, the schedules prepared by Sterns, which were contained in Van Horn's audit files, calculating the value at

notes to the financial statements represented that the stock had originally been recorded at "an estimated value" which had been "adjusted to reflect its actual market value."

Under GAAP, marketable securities, held as assets, are valued at the lower of their aggregated cost or market value determined at the balance sheet date. The 4.5 million CoElco shares issued to Sterns had no ascertainable market value and, accordingly, could not be used to establish CoElco's cost basis. The use of any purported market value of the stock acquired as a measure of its cost was also improper in this instance because neither the ARK nor the Resources shares were marketable securities or had objectively ascertainable market values.9

In the absence of an ascertainable market value of the asset being given up or of the asset being acquired, Sterns' historical cost should have been used to value the stock. Staff Accounting Bulletin No. 48 provides that when nonmonetary assets are transferred to a newly formed or closely held company by promoters or shareholders in exchange for stock, 10 they should be recorded at the transferor's historical cost basis determined under GAAP.11 Sterns, however, was unable to establish that he paid anything for the ARK or Resources shares. Sterns testified in the staff's investigation that he originally acquired the ARK and Resources stock in transactions in which he had exchanged his interests in private companies for ARK and Resources stock. Sterns testified that he did not recall what he had paid for interests in the private companies. Absent evidence that Sterns had a cost basis in the ARK and

Resources stock given to CoElco, no value, or only a nominal value, should have been assigned to these assets.

E. CONCLUSION

Based on the foregoing, the Commission finds that Van Horn:

2. willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and willfully aided and abetted violations of Section 12(g) of the Exchange Act and Rule 12b-20 thereunder.

II. OFFER OF SETTLEMENT AND ORDER Van Horn has submitted an Offer to the Commission in which he neither admits nor denies any of the factual assertions, findings, or conclusions set forth herein, except that he admits the jurisdiction of the Commission with respect to the matters set forth in this Order. Van Horn submitted his Offer, and this Order is entered, solely for the purposes of the instant proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without adversarial evidentiary hearing, trial, or argument of any issue of law or fact. The Commission has determined that it is in the public interest to accept the Offer.

Accordingly, IT IS HEREBY ORDERED that: (1) Van Horn be and hereby is permanently denied the privilege of appearing or practicing oefore the Commission;

(2) After five years from the date of this Order, Van Horn may apply to resume appearing and practicing before the Commission upon a showing that:

(a) Van Horn or any firm with which Van Horn is associated in any capacity is a member of the SEC Practice Section of the American Institute of Certified Public Accountants division for CPA firms ("SEC Practice Section") and has received an unqualified report relating to a peer review in accordance with the guidelines adopted by the SEC Practice Section; and

(b) Van Horn has, during each year of the five year period immediately preceding such application, enrolled in and attended a total of 40 hours or more of professional seminars or college courses not unacceptable to the Commission

8 See Statement of Financial Accounting Standards No. 12 18.

"Financial Accounting Standards Board ("FASB") Statement No. 12 and FASB Interpretation No. 16, ¶4 provide that restricted stock is not considered marketable. Further, securities are not marketable unless bid and ask prices are currently available on a national securities exchange or in the over-the-counter market. Moreover, in the over-thecounter market, a security is not considered marketable unless it is listed on NASDAQ or at least three dealers are providing quotes. At the balance sheet dates, neither ARK

and generally accepted accounting principles.

nor Resources stock was traded on a national exchange, listed on NASDAQ, or being quoted by three dealers, and most of this stock was restricted.

10 Although CoElco's predecessor was formed in 1978, the company was essentially a dormant shell from 1981 through March, 1984.

11 "Although staff accounting bulletins may not in themselves establish GAAP, SAB No. 48 articulates a long established practice which has become GAAP." In re Harrington, Exchange Act Release No. 23062 (March 25, 1986) [Vol. 6] Feb. Sec. L. Rep. ¶73,492 at 63,326 n.2.

Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission may be a party, and without admitting or denying the allegations or findings contained herein, except as to the jurisdiction of the Commission over the Respondent and the matters contained in this order, which is admitted, and the findings contained in paragraph III 4, below, which are also admitted, Respondent Ptak, by his Offer of Settlement, consents to the findings and the imposition of the remedial sanction set forth below.

II

Accordingly, IT IS ORDERED that such proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and hereby are, instituted.

III

and the Offer of Settlement submitted by Respondent Ptak, the Commission finds that: 1. During the period from on or about October 7, 1985 through on or about May 4, 1987, Ptak was a registered representative of a broker-dealer regis

tered with the Commission.

2. During the period from in or about November 1986 through on or about May 4, 1987, Ptak willfully violated Section 19(b) of the Exchange Act and Rule 10b-5 thereunder in that, in connection with the purchase and sale of securities, namely shares in mutual funds, by use of the means and instrumentalities of interstate commerce, and by use of the mails, Ptak, directly and indirectly, employed devices, schemes and artifices to defraud, made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaged in acts, practices and courses of business which would and did operate as a fraud and deceit, including, among other things:

(a) falsely stating to investors that the investors' funds would be used to purchase shares in various mutual funds, when, in fact, Ptak was not purchasing the mutual fund shares for the investors, but was continually misappropriating the funds; and

(b) providing the investors with fictitious confirmations indicating that the mutual fund shares had been purchased.

3. During the period from in or about November 1986 through on or about May 4, 1987, Ptak willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), in that, in the offer and sale of various securities, by use of the means and instruments of transportation and communication in interstate commerce, and by use of the mails, Ptak, directly and indirectly, employed a device, scheme or artifice to defraud, obtained money or property by means of untrue statements of material fact and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaged in transactions, practices and a course of business which operated as a fraud or deceit upon the purchasers. As part of the aforesaid conduct, Ptak, among other things, would and did engage in the acts and practices described in paragraph 2, above.