U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23431 / December 16, 2015
Accounting and Auditing Enforcement Release No. 3728 / December 16, 2015
Securities and Exchange Commission v. Lee Cole, et al., Civil Action No. 12-CV-8167 (RJS)
Court Imposes Injunction and $100,000 Civil Penalty Against Auditor Timothy Quintanilla
The United States Securities and Exchange Commission announced that, on December 4, 2015, Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York issued a final judgment, on consent of defendant Timothy Quintanilla, which permanently enjoined him from violating the antifraud provisions of the federal securities laws and ordered him to pay a $100,000 civil penalty. Quintanilla was the former outside auditor of Electronic Game Card Inc. (EGMI). This final judgment fully resolves the enforcement action before Judge Sullivan, in which final judgments were previously entered against three other defendants, former CEO Kevin Donovan, Lee Cole (Donovan’s predecessor as CEO), and Linden Boyne (EGMI’s former CFO), who the Commission charged with violations of the securities laws’ antifraud provisions and other violations.
The Complaint, filed in November 2012, alleged that Quintanilla, as the engagement partner for EGMI, violated the securities laws by authorizing the issuance of unqualified opinions for the years 2006 through 2008 by the accounting firm Mendoza Berger & Co. LLP (“Mendoza Berger”). The Complaint alleged that in Mendoza Berger’s audit reports, Quintanilla knowingly misrepresented that it had conducted audits of EGMI’s financial statements “in accordance with the standards of the Public Company Accounting Oversight Board (United States)” (“PCAOB”) and that those statements “present[ed] fairly, in all material respects, the financial position” of EGMI. In the course of its audit work, Quintanilla and the audit team he supervised failed to properly investigate a series of red flags, any number of which, if appropriately pursued, would have quickly uncovered large-scale fraud in EGMI’s financial statements. Other evidence indicated that Mendoza Berger simply failed to audit significant portions of EGMI’s balance sheet. To conceal those failures, Mendoza Berger employees, under Quintanilla’s supervision, created and backdated documents for the EGMI audit file shortly before an inspection by the PCAOB in September and October 2009.
Without admitting or denying the allegations of the Complaint, Quintanilla consented to the final judgment which: (a) permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Securities and Exchange Act of 1934, and Rule 10b-5 thereunder; and (b) orders him to pay a $100,000 civil penalty.
For further information see Litigation Release 22529 (November 9, 2012), 23099 (September 30, 2014).