In a significant development, the United States Securities and Exchange Commission (SEC) has taken legal action against the global accounting firm, Prager Metis CPAs, LLC, and its California-based counterpart, Prager Metis CPAs LLP. The SEC has leveled charges against the firms for alleged violations of auditor independence rules and for their purported involvement in aiding and abetting their clients’ breaches of federal securities laws.
Prager Metis acted as the auditor for the now-defunct cryptocurrency exchange FTX Group in 2021. Current FTX CEO John Ray III had previously raised serious concerns regarding the accuracy of the audits conducted by Prager Metis.
It’s important to note that the alleged violations outlined in the filings are said to have occurred between December 2017 and October 2020. Notably, the SEC’s filing does not explicitly reference FTX in its allegations.
The SEC’s complaint alleges that between approximately December 2017 and October 2020, Prager Metis CPAs improperly included indemnification provisions in engagement letters for over 200 audits, reviews, and exams. These provisions allegedly compromised Prager’s independence from their clients, a requirement mandated by federal securities laws. Shockingly, despite senior partners at Prager being repeatedly informed that such indemnification provisions were in violation of auditor independence regulations, the firm continued to include them in their engagement letters and issued “accountant’s reports” in which they falsely claimed to be independent. Many of Prager’s clients subsequently incorporated these reports into their filings with the SEC.
Furthermore, the complaint alleges that Prager Metis CPAs failed to inform their clients about these violations, even after being notified by the Public Company Accounting Oversight Board (PCAOB) that these indemnification provisions were in breach of federal securities laws.
The significance of auditor independence cannot be overstated, as it plays a vital role in maintaining the integrity of financial reporting and fostering public trust. Eric I. Bustillo, the Director of the SEC’s Miami Regional Office, emphasized the importance of this issue, stating, “Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust. As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”
The SEC’s complaint has been filed in the U.S. District Court for the Southern District of Florida. The charges against Prager Metis CPAs include violations of auditor independence provisions of federal securities laws and aiding and abetting their clients’ violations of these laws. The SEC is seeking various remedies, including a permanent injunction, disgorgement of ill-gotten gains along with prejudgment interest, and a civil monetary penalty against Prager.
The SEC’s investigation into this matter is ongoing and is being led by a team of dedicated professionals, including Drew D. Panahi, Michelle Bosworth, and Carol Der Garry, under the supervision of Thierry Olivier Desmet, Fernando Torres, and Glenn S. Gordon in the Miami Regional Office. The litigation is being spearheaded by Christine Nestor and supervised by Teresa Verges, also in the Miami Regional Office.
This case underscores the SEC’s commitment to upholding the highest standards of auditor independence and ensuring the integrity of financial markets. The outcome of this legal action against Prager Metis CPAs will undoubtedly be closely watched by the financial industry and investors alike as it has far-reaching implications for the broader regulatory landscape.
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