UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7573 / September 9, 1998 SECURITIES EXCHANGE ACT OF 1934 Release No. 40414 / September 9, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1073 / September 9, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9695 ______________________________ : In the Matter of : :ORDER INSTITUTING PROCEEDINGS, CHARLES N. LIPTON, CPA, :MAKING FINDINGS, AND IMPOSING :REMEDIAL SANCTIONS PURSUANT TO Respondent. :SECTION 8A OF THE SECURITIES ACT :OF 1933, SECTION 21C OF THE :SECURITIES EXCHANGE ACT OF 1934, :AND RULE 102(e) OF THE COMMISSION'S :RULES OF PRACTICE ______________________________: The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted against Charles N. Lipton ("Lipton") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 102(e)[1] of the Commission's Rules of Practice. In anticipation of the institution of these administrative proceedings, Lipton has submitted an Offer of Settlement of Charles N. Lipton ("Offer of Settlement") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Lipton, without admitting or denying the findings set forth herein, except that he admits to the jurisdiction of the Commission over him and over the subject matter of these proceedings, consents to the entry of the findings and to the imposition of the remedial sanctions set forth below. I. FINDINGS On the basis of this Order Instituting Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the Commission's Rules of Practice ("Order") and the Offer of Settlement, the Commission makes the findings set forth below.[2] A.Respondent and Related Entities 1. Respondent Charles N. Lipton, 45, a certified public accountant ("CPA") licensed in the State of New York, at all material times was a partner in Scarano & Lipton, P.C. ("S&L"). S&L was retained by Visual Cybernetics Corp. ("Visual Cybernetics" or "the Company") to conduct an audit of its financial statements for the fiscal year ended December 31, 1993. Lipton primarily provided tax services to Visual Cybernetics and other clients. 2. Related Entities Scarano & Lipton, P.C. was an accounting firm located in Garden City, New York. S&L had only two partners at all material times. S&L issued an audit report containing an unqualified opinion dated, April 11, 1994, on Visual Cybernetics' financial statements for the fiscal year ended December 31, 1993. The firm resigned as auditor on November 28, 1994. The firm disbanded on July 4, 1997. Visual Cybernetics Corp., a New York corporation formed in 1990, maintained its principal offices in New York City. Visual Cybernetics was engaged in the acquisition, manufacturing, and marketing of computer products until it filed for bankruptcy on November 13, 1995. The common stock of Visual Cybernetics is registered with the Commission pursuant to Section 12(b) of the Exchange Act, and traded at all relevant times on the NASDAQ Bulletin Board. Its securities began to be publicly traded in 1992. Visual Cybernetics is required to file periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. B.Facts and Legal Conclusions Lipton offered and sold Visual Cybernetics common stock for which there was no valid registration statement in effect. Neither he nor S&L was registered as a broker with the Commission. At the time of his sales, S&L was conducting an audit of Visual Cybernetics' financial statements for the fiscal year ended December 31, 1993. As a result, Lipton engaged in conduct that directly or indirectly violated the federal securities laws and rules and regulations thereunder as more fully described below. 1.While Serving as an Unregistered Broker, Lipton Offered and Sold Unregistered Securities In late 1993 and early 1994, Lipton solicited S&L clients to purchase (1) Visual Cybernetics common stock that was improperly registered on a Form S-8 registration statement, and (2) a Visual Cybernetics private placement of units. Each private placement unit cost $15,000 and consisted of a promissory note and 5,000 shares of restricted common stock. With each private placement unit that an S&L client purchased, the client also simultaneously purchased an additional 5,000 shares of purportedly unrestricted Visual Cybernetics stock, which could be resold immediately ("the purported Form S-8 shares"), for an additional $5,000, or one dollar per share, a discount to the market price of the common stock. S&L, with the assistance of Lipton and the other S&L partner, sold a total of thirty-three private placement units and 165,000 purported Form S-8 shares to thirteen S&L clients ("the investors"). The Company issued the purported Form S-8 shares to the investors to evade the more extensive registration requirements of the federal securities laws and regulations thereunder. Company officials filed a Form S-8 registration statement creating the misleading appearance that the shares would be issued to a Company employee pursuant to a stock option.[3] In fact, these shares were issued directly to the investors. The Company employee to whom the shares were purportedly issued was, in fact, a mere nominee who had no beneficial interest in the shares. Although the investors wrote checks payable to the employee-nominee, he immediately endorsed the checks over to Visual Cybernetics. Visual Cybernetics offered the purported Form S-8 shares at a discount to induce the investors to purchase the restricted private placement securities. Each investor prepared two checks, one payable to the employee-nominee for the purported Form S-8 shares, and a second, payable to the Company for the private placement unit(s). In most instances, the investors delivered both checks to S&L. S&L then delivered the checks to Visual Cybernetics. Lipton and his partner had no contact with the employee-nominee during this process. S&L billed Visual Cybernetics for the time Lipton and his partner spent offering and selling the securities, in the same manner as, and concurrently with, its billings for audit services. Visual Cybernetics paid S&L $116,000 for the time that the firm spent on audit services and the selling efforts. After receiving the investors' funds, the president of the Company instructed the transfer agent to issue 165,000 purported Form S-8 shares directly to the investors. Several months later, Visual Cybernetics defaulted on its obligation to pay interest on the debt securities issued as part of the private placement units. Following the default, at least some of the investors, through the assistance of S&L, were permitted by Visual Cybernetics to exchange the notes for more shares purportedly issued pursuant to a Form S-8 registration statement. 2.Lipton Violated Sections 5(a) and 5(c) of the Securities Act andSection 15(a) of the Exchange Act Form S-8 permits an issuer to issue stock to company "employees," which is defined to include consultants and advisors, who provide bona fide services not in connection with the offer or sale of securities in a capital-raising transaction. In this case, the purported Form S-8 shares were intended for, and were sold to, the investors to raise capital for the Company. A Company employee was used simply as a conduit to the investors. The Form S-8 registration statement did not disclose the actual transactions between Visual Cybernetics and the investors, and there was no valid registration statement in effect. Section 5(a) of the Securities Act provides that, unless a registration statement is in effect as to the security, it is unlawful for any person, directly or indirectly, to sell such a security through any means or instruments of transportation or communication in interstate commerce or of the mails. Section 5(c) similarly provides that, unless a registration statement is in effect, such means or instruments may not be used to offer to sell a security. There was no exemption applicable to the sales transactions in the purported Form S-8 shares. As a result, Visual Cybernetics offered and sold the purported Form S-8 shares without having a valid registration statement in effect in violation of Sections 5(a) and 5(c) of the Securities Act. As a result of his role in offering and selling the purported Form S-8 shares, Lipton violated Sections 5(a) and 5(c) of the Securities Act. Lipton induced or attempted to induce the purchase or sale of securities, and as such, he acted as a broker within the meaning of Section 3(a)(4) of the Exchange Act because he "engaged in the business of effecting transactions in securities for the accounts of others." By virtue of Section 15(a) of the Exchange Act, he was prohibited from inducing or attempting to induce the purchase or sale of securities (other than exempted securities or commercial paper, bankers' acceptances or commercial bills) without being registered as a broker with the Commission in accordance with Section 15(b) of the Exchange Act.[4] Neither he nor S&L was registered as a broker.[5] As a result, Lipton violated Section 15(a) of the Exchange Act. Based upon the conduct described above, the Commission concludes that Lipton willfully violated Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act within the meaning of Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 3.Lipton Solicited S&L's Clients to Purchase Visual Cybernetics Securities While S&L Served as the Company's Auditor S&L was retained in January 1994 to perform an audit of Visual Cybernetics' financial statements for the fiscal year ended December 31, 1993. S&L began planning for the audit in January and commenced the audit at least as early as February 1994. S&L issued an audit report dated April 11, 1994, containing an unqualified opinion on the financial statements. While the audit was being conducted, Lipton and his partner solicited S&L's clients to purchase Visual Cybernetics' securities. Lipton provided a private placement memorandum to S&L's clients and responded to their questions about the matters in the memorandum. 4.Lipton Aided and Abetted and was a Cause of S&L's Violation of Section 210.2-02(b) of Regulation S-X Section 13(a)(2) of the Exchange Act and Exchange Act Rule 13a-1 require public companies to file such annual reports, "certified if required by the rules and regulations of the Commission by independent accountants," as the Commission may prescribe. Sections 210.1-02(d), 210.3-01, and 210.3-02 of Regulation S-X require that the annual reports that public companies file include financial statements audited by independent accountants in accordance with generally accepted auditing standards ("GAAS"). GAAS requires that, "[i]n all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors." AU Section 220.01.[6] "To be independent, the auditor must be intellectually honest; to be recognized as independent, he must be free from any obligation to or interest in the client, its management, or its owners." AU Section 220.03. As a result of offering and selling Visual Cybernetics securities, while S&L audited Visual Cybernetics' 1993 financial statements, Lipton willfully aided and abetted and was a cause of S&L's violation of the Commission's independence requirements in connection with that audit.[7] In addition, Section 210.2- 02(b) of Regulation S-X requires that the auditor's report state whether the audit was made in accordance with GAAS. By issuing an audit report containing an unqualified opinion on Visual Cybernetics' 1993 financial statements which stated falsely that the audit was performed in accordance with GAAS, S&L violated Section 210.2-02(b) of Regulation S-X, and Lipton was a cause of that violation. Lipton also willfully aided and abetted that violation within the meaning of Rule 102(e)(1)(iii) of the Commission's Rules of Practice. II. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement and accordingly, IT IS HEREBY ORDERED, effective immediately, that 1.Pursuant to Section 8A of the Securities Act, Lipton permanently cease and desist from committing or causing any violation, and any future violation, of Section 5(a) of the Securities Act, by, directly or indirectly, a.selling a security through any means or instruments of transportation or communication in interstate commerce or of the mails through the use or medium of any prospectus or otherwise, unless a registration statement is in effect as to the security and b.carrying or causing to be carried through use of any means or instruments of transportation or communication in interstate commerce or of the mails, any security for the purpose of sale or delivery after sale, unless a registration statement is in effect as to the security; 2.Pursuant to Section 8A of the Securities Act, Lipton permanently cease and desist from committing or causing any violation, and any future violation, of Section 5(c) of the Securities Act, by, directly or indirectly, offering to sell a security through any means or instruments of transportation or communication in interstate commerce or of the mails through the use or medium of any prospectus or otherwise, unless a registration statement is in effect as to the security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding of examination under Section 8 of the Securities Act; 3.Pursuant to Section 21C of the Exchange Act, Lipton permanently cease and desist from committing or causing any violation, and any future violation, of Section 15(a) of the Exchange Act by, directly or indirectly, using the mails or the means or instrumentalities of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, securities (other than exempted securities or commercial paper, bankers' acceptances of commercial bills) without filing with the Commission an application for registration as a broker in accordance with Section 15(b) of the Exchange Act; 4.Pursuant to Section 21C of the Exchange Act, Lipton permanently cease and desist from committing or causing any violation, and any future violation, of Section 210.2-02(b) of Regulation S-X by, directly or indirectly, issuing an accountant's report which falsely states that the audit was made in accordance with GAAS; 5.Lipton is denied the privilege of appearing or practicing before the Commission as an accountant from the date of the Order. 6.After two years from the date of the Order, Lipton may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: a.A preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Lipton undertakes that, in his practice before the Commission, 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; b. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that (i)Lipton, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he appears or practices before the Commission as an independent accountant, (ii)Lipton 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)Lipton will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant, and c.The Commission's review of any request or application by Lipton to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Lipton's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]:Rule 102(e) of the Commission's Rules of Practice, 17 C.F.R.  201.102(e), in pertinent part, provides as follows: The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. [2]:The findings herein are made pursuant to the Offer of Settlement that Lipton submitted and are not binding on any other person or entity in this or any other proceeding. [3]:Form S-8 registration statements are intended for use in registering securities offered to employees, officers, directors, and consultants who perform bona fide services for a company under employee benefit plans. Management may distribute Form S-8 registered securities at its discretion to the company's employees, officers, directors, and consultants, who then are free to sell the securities to the public (assuming they meet an exemption to the registration requirements). However, management may not use employees, officers, directors, or consultants as conduits to effect sales of company securities to the public for purposes of raising capital. [4]:The Visual Cybernetics securities that Lipton sold were not exempted. [5]:S&L's other partner also was not registered as a broker. [6]:GAAS citations are to the American Institute of Certified Public Accountants, Codification of Statements on Auditing Standards (1993). [7]:Section 210.2-01(b) of Regulation S-X provides that the Commission "will not recognize any certified public accountant or public accountant as independent who is not in fact independent." In that regard, Section 602.02e.iii. of the Commission's Codification of Financial Reporting Policies states that performing broker-dealer functions is "incompatible with the practice of public accounting. The functions customarily performed in such employment include the recommendation of securities, the solicitation of customers and the execution of orders, any one of which could involve securities transactions of clients either as issuer or investor and provide third parties with sufficient reason to question the accountant's ability to be impartial and objective."