Prager Metis CPAs and its associated California professional services firm, have agreed to pay $1.95 million to resolve two SEC actions alleging misconduct in its audits of the now-defunct crypto asset trading platform, FTX, plus further auditor independence violations.
In one of the actions, the SEC alleged that Prager misrepresented its compliance with auditing standards regarding FTX. According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS).
The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit. Most significantly, by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research, a crypto hedge fund controlled by FTX’s CEO.
Negligence-based fraud
The SEC’s complaint charges Prager with negligence-based fraud. Without admitting or denying the SEC’s findings, Prager agreed to permanent injunctions, to pay a $745,000 civil penalty, and to undertake remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures and abiding by certain restrictions on accepting new audit clients. The settlement is subject to court approval.
“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors. To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
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Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed.
“The siren song of the crypto assets markets”
By limiting Prager’s ability to take on new business and by requiring it to retain an independent compliance consultant, these resolutions not only enhance investor protection, they also serve as a warning to audit professionals that are not appropriately meeting their gatekeeping obligations.
“Once more we see an entity, lured by the siren song of the crypto asset markets, cutting corners on its obligations to comply with the law. As we have seen time and time again, these shortcuts do not pay. They do not pay for the entities who take them or for the multitude of victims that this misconduct leaves in its wake,” said Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit. “Our dedicated staff will continue to pursue investigations of those who may have violated the law, even after other wrongdoers have been identified.”
The SEC also said that the Prager entities have agreed to the entry of final judgments to settle separate, previous charges for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws. The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams. As a result, they were not independent from their clients, as required under the federal securities laws.
The final judgments provide for permanent injunctions, combined civil penalties of $1 million, and combined disgorgement with prejudgment interest of $205,000. The Prager entities also agreed to be censured. The settlement is subject to court approval.
“Auditor independence is critical to investor protection and a fundamental cornerstone of the integrity of our financial markets,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “We are committed to this principle, and we will hold accountable auditors who violate their independence requirements.”
