McConville, Rita J. v. SEC , 465 F.3d 780 ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3510
RITA J. MCCONVILLE,
Petitioner,
v.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Respondent.
____________
Petition for Review of an Order of the
Securities and Exchange Commission.
No. 3-11330
____________
ARGUED FEBRUARY 14, 2006—DECIDED OCTOBER 11, 2006
____________
Before BAUER, RIPPLE, and WILLIAMS, Circuit Judges.
WILLIAMS, Circuit Judge. “ ‘There cannot be honest
markets without honest publicity. Manipulation and
dishonest practices of the market place thrive upon mystery
and secrecy.’ ” Basic Inc. v. Levinson, 485 U.S. 224, 230
(1988) (quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess., 11
(1934)). This case involves mismanagement of a corpora-
tion’s financial department that eventually caused it to
report its financial health inaccurately. The United States
Securities and Exchange Commission (“SEC” or “Commis-
sion”) determined that, during her tenure as chief financial
officer for Akorn Incorporated (“Akorn”), Rita McConville
caused Akorn to make misleading financial statements to
2 No. 05-3510
investors. The Commission concluded McConville’s conduct
violated, among other things, Sections 10(b), 13(b)(2) and
13(b)(5) of the Securities Exchange Act of 1934, 15 U.S.C.
§§ 78j(b) and 78m(b)(5), and ordered her to cease and desist
from committing or causing any further violations of federal
securities laws. McConville now petitions us to review the
Commission’s cease-and-desist order. For the reasons that
follow, we deny the petition for review.
I. BACKGROUND
A. Akorn’s Financial Reports and SEC Filings
Akorn is a corporation that manufactures and sells
diagnostic and therapeutic pharmaceuticals. During the
time relevant to this proceeding, Akorn’s customers in-
cluded both pharmaceutical wholesalers and direct or end-
use customers. However, the company’s profits were
primarily from five major wholesale customers, which
amounted to approximately 43% of its total sales and 60%
of its gross accounts receivable as of December 31, 2000.
Akorn’s customers would generally order products and be
invoiced according to varying rates, corporate credits, and
payment schedules. Invoices were typically twenty to thirty
pages long. Payment schedules varied between thirty and
ninety days, with larger wholesalers generally enjoying
longer payment terms than direct customers. Akorn
classified its payment schedules as current, thirty to sixty
days past due, sixty to ninety days past due, and over
ninety days past due. Akorn, however, did not charge
interest on overdue bills, thus minimizing the incentive for
customers to remit payments in a timely manner. A cus-
tomer payment to Akorn was accompanied by a remittance
advice of up to 400 lines in length. A remittance advice
explained the payment and, in some instances, asserted
claims for a variety of credits that could apply to the order.
In the late 1990’s, Akorn’s invoicing system was a laby-
rinth in which the company billed customers and processed
No. 05-3510 3
cash remittances and credit claims against invoices at three
different finance offices that used different computer
programs and record-keeping mechanisms. In 1999, in an
effort to centralize its finance, billing, and accounts receiv-
able records, Akorn began using a software program called
Macola. Akorn’s use of Macola was short-lived, as the
software proved incapable of tracking the age of Akorn’s
outstanding invoices, monitoring debits and credits applied
to a particular customer account, and handling high-volume
data management. In 2000, Akorn began using a J.D.
Edwards software package. Rather than migrating its
billing files from the Macola software to the J.D. Edwards
software, Akorn recorded new receivables on the J.D.
Edwards software, but the company did not transfer the
existing Macola-tracked accounts. The result was a parallel
system of bill tracking that used two different software
modules.
Petitioner Rita McConville served as chief financial officer
(“CFO”) for Akorn from February 28, 1997 to March 20,
2001. As CFO, McConville reported to Akorn’s president
and chief executive officer (“CEO”), Floyd Benjamin.
McConville supervised Akorn’s corporate controller and its
finance departments, and she worked with Akorn’s auditor,
Deloitte & Touche LLP (“Deloitte”). As CFO, McConville
was also, along with Akorn’s corporate controller, responsi-
ble for filing Akorn’s financial documents with the SEC.
On February 25, 2000, Akorn’s auditor, Deloitte, sent a
letter to its board of directors, alerting the board to antici-
pated problems in Akorn’s financial statements for the
fiscal year ending on December 31, 1999. The report
identified as particularly problematic Akorn management’s
failure to review the accounts receivable in detail, misappli-
cation of credits and payments to customer accounts, and
failure to collect outstanding balances effectively and
efficiently. The report also included a section entitled
“Management Response,” which was drafted in part by
4 No. 05-3510
McConville, stating that management had begun an effort
to reconcile all customer accounts, with a goal of “significant
collection resolution by June 30, 2000 and complete cleanup
by August 31, 2000.”
Later in 2000, the disarray in Akorn’s financial depart-
ment boiled over when a billing discrepancy arose between
Akorn and its largest customer, Cardinal Health Incorpo-
rated, which represented 12% of Akorn’s net sales and
22% of its gross accounts receivable. Akorn’s records (based
on invoices going back to 1999 when the Macola software
was used) showed that Cardinal owed Akorn approximately
$4 million. Cardinal’s records showed that it had a credit
balance with Akorn of approximately $800,000, meaning
the variance in the companies’ books differed by nearly $5
million. The chairman of Akorn’s board of directors and a
major stockholder, John Kapoor, instructed McConville and
the corporation’s CEO to meet with Cardinal and resolve
the billing dispute. McConville took copies of the largest
outstanding invoices to the meeting with Cardinal, leaving
behind the invoices with smaller balances.1 During the
meeting, McConville presented only the larger outstanding
invoices to Cardinal for payment. After the meeting,
Cardinal sent Akorn $ 913,000, which it viewed as full
payment to settle any debt it owed and creating a credit
balance with Akorn. Akorn, on the other hand, believed that
many outstanding Cardinal invoices remained unpaid, and
a March 15, 2001 letter from CEO Benjamin to Cardinal
stated that there was still a discrepancy of more than $5
million to be reconciled between the Akorn records and the
Cardinal records. (It is unclear from the record how the
1
McConville testified that she believed she took only invoices
for more than $10,000 to the meeting with Cardinal. The Com-
mission, however, noted other evidence in the record suggesting
that the invoices McConville presented at the meeting were
only those with balances of more than $ 50,000.
No. 05-3510 5
discrepancy of just under $5 million before the meeting
jumped to over $5 million after the meeting).
Notwithstanding the lingering dispute between Cardinal
and Akorn over the amount of Cardinal’s outstanding
balance, if any, McConville reassured Akorn’s auditor
Deloitte that the customer accounts were successfully being
reconciled and that there was little past due money owing
from wholesalers because most of the aging balances were
offset by more recent credits.2 McConville also wrote a press
release, dated February 20, 2001, announcing an approxi-
mate $ 2 million profit in Akorn’s fourth-quarter results.
During February and early March, McConville also re-
viewed drafts of the 2000 financial statements.
Still not satisfied with Akorn’s financial condition, Kapoor
assigned McConville to work with a consultant hired by
Kapoor to conduct a thorough analysis of Akorn’s accounts
receivable and to submit a report discussing any potential
write-offs of the receivables. On March 15, 2001, the
consultant submitted a report to Kapoor, stating, in rele-
vant part:
The wholesaler accounts have never been
worked. We are talking about an accumulation of
problems over a 3 or 4 year period. This provides us
with a legacy of pages and pages of A/R3 reports on
each of those five accounts, consisting of a maze of
transactions including: open invoices, partially paid
invoices, billbacks, credits for return goods, credits
for damaged goods, credits for shipments not
received, credits for billing errors, rebate credits,
2
Joint Appendix at 413, McConville v. SEC, No. 05-3510 (7th Cir.
Nov. 17, 2005).
3
“A/R” in the consultant’s report is shorthand for “accounts
receivable.”
6 No. 05-3510
chargeback credits, deductions taken arbitrarily by
the wholesaler, situations where the wholesaler
used credits multiple times, and unapplied cash.
These transactions go back as far as 1996.
(Emphasis in original). The consultant further concluded
that “there [we]re no quick fixes available” because “[n]o
management reports exist that trend sales, cash, A/R aging,
reserves, unbilled, or [days sales outstanding]. Therefore,
the A/R could not have been properly monitored.” At the
end of the day, the consultant concluded that “a determina-
tion on the collectibility will require a substantial amount
of time (months) and work.” Although Kapoor instructed
McConville to work with the consultant, McConville
maintains that she never viewed the report or discussed its
contents before it was submitted to the board of directors.
On March 20, 2001, Akorn’s board of directors removed
McConville from her position as CFO, and demoted her
to corporate controller.4 As part of her new duties,
McConville reported to incoming CFO Kevin Harris, and
she was tasked with resolving the billing dispute with
Cardinal. McConville also continued her work, the degree
to which is disputed by the parties, compiling the figures for
Akorn’s 2000 fiscal year audit for the financial statements
that would be filed with the SEC. What is apparent from
the record is that McConville’s input in the fiscal year 2000
financial statements began while she was CFO of Akorn.5
4
Also on March 20, 2001, the board of directors demoted
Akorn’s CEO Floyd Benjamin to vice president, and Kapoor
became the interim CEO.
5
McConville concedes that she had some input in drafting the
financial statements while she was CFO, but she contends that
the preparation of Akorn’s Form 10-K did not begin in earnest
until after she was removed as CFO. McConville contends that her
(continued...)
No. 05-3510 7
As stated, during her tenure as CFO, McConville frequently
reassured Akorn’s auditor, Deloitte, that the books would
eventually balance out. She also regularly met with
Deloitte representatives and reviewed preliminary draft
figures for the financial statements. According to the
Commission’s findings, by McConville’s last day as CFO on
March 20, the financial statements were largely completed,
and a draft of the 2000 Form 10-K, a document reporting a
corporation’s financial health to the SEC, had already been
prepared. The Commission also found that, as CFO,
McConville reviewed a draft of the 2000 Form 10-K, the
filing of which was delayed due to the consultant’s investi-
gation.6
McConville, among others, signed two management
representation letters in connection with Deloitte’s
annual audit of the financial statements filed with the 2000
Form 10-K. The first letter, dated February 23, 2001, stated
that, to the best of McConville’s knowledge: (1) other than
those disclosed, no events had occurred subsequent to
December 31, 2000 that required consideration as adjust-
ments to or disclosures in the consolidated fin-
ancial statements; (2) management believed the credit
allowances were adequate to absorb currently estimated
uncollectible receivables in the account balances; and (3)
management had reviewed the financial statements for
5
(...continued)
involvement in drafting the Form 10-K was limited to preparing
a single footnote pertaining to the corporation’s stock options.
6
McConville contends that she did not see a draft of the 2000
Form 10-K during her tenure as CFO. However, the Commission
deferred to the administrative law judge’s finding that
McConville’s testimony to that effect was incredible, and that
she did in fact review a draft of the Form 10-K while she was
CFO. And, as we explain below, our review of the Commission’s
finding is highly deferential.
8 No. 05-3510
impairments of Akorn’s assets, and no adjustment to the
statements was required.7 Notably, McConville admits that
the task of resolving the Cardinal billing dispute was “far
from complete on April 17, 2001.”8 However, the second
letter she signed, dated April 17, 2001, stated that “there
are no events which have occurred subsequent to February
23, 2001 that have a material effect on the financial
statements that are in the filing or that should be disclosed
in order to keep those statements from being misleading.”9
That same day, Akorn filed the 2000 Form 10-K with the
SEC, reporting a net income of $2,187,000, current assets
of $42,123,000 (as of December 31, 2000), and accounts
receivable of $24,144,000, which amounted to approxi-
mately 57% of Akorn’s then-current assets. McConville did
not sign the Form 10-K.
On May 22, 2001, a month after filing the Form 10-K,
Akorn filed its quarterly report, Form 10-Q, for the quarter
that ended on March 31, 2001. In its Form 10-Q, Akorn
increased by $7.5 million its allowance for doubtful ac-
counts, that is accounts with balances unlikely to be
recovered. McConville’s employment with Akorn terminated
in July 2001. Over a year later, on October 7, 2002, Akorn
restated its financial statements for 2000 and 2001 by filing
a Form 10-K/A. The Form 10-K/A stated that Akorn “had
not adequately considered all of the information available
with respect to certain disputed receivables in establishing
its allowance for uncollectible accounts as of December 31,
2000,” and the $7.5 million increase in its allowance for
7
Joint Appendix at 388-392, McConville v. SEC, No. 05-3510 (7th
Cir. Nov. 17, 2005).
8
Brief of Petitioner-Appellant at 19, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
9
Joint Appendix at 396, McConville v. SEC, No. 05-3510 (7th Cir.
Nov. 17, 2005).
No. 05-3510 9
doubtful accounts should have been recorded at the end of
2000, rather than in the 2001 Form 10-Q. At the end of the
day, once the financial statements were corrected, Akorn
sustained a net loss of $2.4 million in 2000, rather than a
gain of $2 million as it had originally reported in its Form
10-K.
B. SEC Proceedings
On November 12, 2003, the SEC instituted proceedings
against McConville and Akorn CFO Harris. The SEC
alleged that, as CFO, and later as corporate controller,
McConville’s mismanagement of Akorn’s financial depart-
ment caused the corporation to file inaccurate financial
statements with the Commission in violation of federal
securities laws. An administrative law judge (“ALJ”)
determined that McConville and Harris were liable, and the
ALJ ordered McConville to cease and desist and to disgorge
nine months of her Akorn salary. On review, the Commis-
sion largely agreed with the ALJ’s decision, finding the
footnotes to the Form 10-K should have reported an un-
quantifiable impairment in Akorn’s accounts receivable and
that McConville lied to Deloitte about the financial health
of the company, which she failed to monitor properly. The
SEC concluded that McConville’s conduct violated Sections
10(b), 13(b)(2) and 13(b)(5) of the Securities Exchange Act
of 1934, 15 U.S.C. §§ 78j(b) and 78m(b)(5), as well as SEC
Rules 13b2-1 and 13b2-2. And, although the Commission
believed disgorgement was unwarranted, it ordered
McConville to cease and desist from further securities
violations. This petition for review followed.
II. ANALYSIS
The Securities Exchange Act of 1934, 15 U.S.C. § 78y
(2000), requires us to give highly deferential, conclusive
10 No. 05-3510
effect to the Commission’s factual findings, so long as they
are supported by substantial evidence in the record.
Monetta Fin. Servs., Inc. v. SEC, 390 F.3d 952, 955 (7th Cir.
2004). As a congressionally authorized administrative
agency, the Commission’s interpretation of the Securities
Exchange Act will be upheld, unless the interpretation is
contrary to clear congressional intent. United States v.
Mead Corp., 533 U.S. 218, 227 (2001); see also Chevron,
U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 843-45 (1984). In
addition, the Commission’s interpretation of its own
regulations promulgated pursuant to the Act will be upheld,
unless the regulations are arbitrary, capricious, or mani-
festly contrary to the statute. Chevron, 467 U.S. at 844.
A. There is Substantial Evidence that McConville
Violated SEC Rule 10b-5.
Under Section 10(b) of the Securities Exchange Act, 15
U.S.C. § 77j(b), promulgated as Securities and Exchange
Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, the Commis-
sion must show that McConville (1) made a false state-
ment or omission (2) of material fact (3) with scienter (4) in
connection with the purchase or sale of securities. SEC v.
Maio, 51 F.3d 623, 630 (7th Cir. 1995).
As an initial matter, we briefly address McConville’s
argument that she cannot be primarily liable for the
misstatements in Akorn’s 10-K because her significant
participation in creating the corporate misstatements
cannot form the basis for Rule 10b-5 liability.10 McCon-
ville’s argument is essentially that despite her substantial
involvement in drafting the financial statements, their
subsequent fraud on the market cannot be attributed to her
10
Brief of Petitioner-Appellant at 34, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
No. 05-3510 11
because she did not sign or physically file the Form 10-K.
This circuit long ago rejected McConville’s literal interpre-
tation of Rule 10b-5’s antifraud provision. See SEC v.
Holschuh, 694 F.2d 130, 142 (7th Cir. 1982). In Holschuh,
a corporate officer provided materially misleading informa-
tion that was ultimately incorporated into offering circulars
given to potential investors. The officer argued that Rule
10b-5 liability could not be imposed against him because he
had no direct contact with investors or editorial control over
the contents of the offering circulars. We disagreed, holding
that “actual or first-hand contact with offerees or buyers [is
not] a condition precedent to primary liability for antifraud
violations,” so long as the requisite intent was established.
Id. at 142.
As to the merits of the case against McConville, the SEC
concluded the following:
The violations here were significant. McConville
was responsible for misrepresentations and omis-
sions in Akorn’s Form 10-K, which was filed with
the Commission and thus made available to inves-
tors. As a result of the deficiencies in Akorn’s
recordkeeping and internal controls, Akorn’s receiv-
ables were overstated, no impairment of the receiv-
ables was disclosed, and no reserve was created for
customer accounts that represented 60% of the
receivables. McConville made misrepresentations to
Deloitte in the management representation letters
to Deloitte, knowing that Deloitte would be basing
assumptions on those letters in its work on the
2000 audit.11
We now consider whether there is substantial evidence to
support the Commission’s finding that, with the requisite
11
In re Rita v. McConville, Exchange Act Release No. 51950, 2005
WL1560276 at *15 (June 30, 2005).
12 No. 05-3510
scienter, McConville breached a duty to disclose an unquan-
tifiable impairment in Akorn’s accounts receivable. Given
that the loss to Akorn’s investors was inevitable when the
Form 10-K was filed, and only the magnitude of the loss
was uncertain, as discussed below, we conclude
McConville’s failure to disclose the impairment in Akorn’s
financial statements violated Rule 10b-5.
McConville argues that the Commission’s findings
regarding the first and third elements of Rule 10b-5 liability
are not supported by substantial evidence. Regarding the
first factor (whether she made or, more precisely, caused
Akorn to make material misstatements to investors),
McConville argues that the SEC’s findings are not sup-
ported by substantial evidence because she had no obliga-
tion to file or cause the Form 10-K to be filed.12 This
argument misses the point, however. As we have stated, the
issue is not whether McConville (quite literally) delivered
the misleading statements to the SEC, but whether she
caused Akorn to make material misstatements to the
investing public. Importantly, McConville does not dispute
three critical facts that are fatal to her argument: (1) she
drafted and reviewed the core financial statements that
overestimated Akorn’s profits; (2) in February 2001, she
reviewed and approved a draft of the Form 10-K that
consisted of the inaccurate core financial statements;13 and
(3) in a February 23, 2001 letter to Deloitte, McConville
represented that management had reviewed the financial
statements for impairments of Akorn’s assets, and that no
12
Brief of Petitioner-Appellant at 30, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
13
Notably, the Commission found that the Form 10-K that was
ultimately filed with the SEC was virtually identical to the draft
McConville reviewed while still CFO of Akorn. Brief of Petitioner-
Appellant, appendix at 14, McConville v. SEC, No. 05-3510 (7th
Cir. Dec. 6, 2005).
No. 05-3510 13
adjustment to the statements was required. McConville also
attempts to wash her hands of the misstatements, arguing
her involvement with Akorn’s financial statements ceased
after she prepared the February 20, 2001 press release
announcing Akorn’s 2000 earnings were approximately $2
million. Here again, the record belies McConville’s argu-
ment. In Akorn’s April 17, 2001 letter to Deloitte,
McConville represented that there were no events to occur
subsequent to February 23, 2001 that materially affected
the financial statements that were in the Form 10-K filing
or that should be disclosed in order to keep those state-
ments from being misleading. Thus, the same day the SEC
filing was disseminated to investors, McConville repre-
sented to Akorn’s auditor that the financial statements that
she compiled were accurate. Therefore, we conclude that
her substantial involvement in compiling the misleading
statements and her reassuring Akorn’s auditors as to their
accuracy is substantial evidence to establish that
McConville made a false statement or omission.
As to the third element (whether McConville acted with
scienter), we also conclude that the Commission’s finding
was supported by substantial evidence. The requisite
scienter is “an extreme departure from the standards of
ordinary care, [ ] which presents a danger of misleading
buyers or sellers that is either known to the defendant or is
so obvious that the actor must have been aware of it.”
Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588,
600 (7th Cir. 2006) (quoting Sundstrand Corp. v. Sun
Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)).
McConville’s conduct was an extreme departure from the
requisite standard of ordinary care because she was well
aware that Akorn’s financial department was in critical
disarray, and she failed to disclose inevitable problems in
the financial statements. In light of Deloitte’s February 25,
2000 letter raising concerns about mismanagement of the
department, McConville responded that management had
begun an effort to reconcile all customer accounts, with a
14 No. 05-3510
goal of “significant collection resolution by June 30, 2000
and complete cleanup by August 31, 2000.” That goal was
never met. McConville was also aware that there was an
ongoing $5 million dispute between Akorn and its biggest
customer, Cardinal. Most importantly, McConville knew
that resolving the Cardinal billing dispute was “far from
complete on April 17, 2001.”14 Yet, the very day when the
Form 10-K was filed, she nonetheless represented to
Akorn’s auditors that “there are no events which have
occurred subsequent to February 23, 2001 that have a
material effect on the financial statements that are in the
filing or that should be disclosed in order to keep those
statements from being misleading.”15 Thus, there is sub-
stantial evidence in the record to support the Commission’s
finding that McConville’s conduct (at least) occurred with
recklessness. Makor, 437 F.3d at 600; Sundstrand, 553 F.2d
at 1045.16
B. There is Substantial Evidence that McConville
Violated SEC Rules 13b2-1 and 13b2-2.
McConville also challenges the Commission’s finding that
she violated SEC Rules 13b2-1 and 13b2-2. Both of these
findings are supported by substantial evidence, however.
Rule 13b2-1 provides: “No person shall directly or indi-
rectly, falsify or cause to be falsified, any book, record or
account subject to Section 13(b)(2)(A) of the Securities
14
Brief of Petitioner-Appellant at 19, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
15
Joint Appendix at 396, McConville v. SEC, No. 05-3510 (7th Cir.
Nov. 17, 2005).
16
For reasons similar to why we conclude there is substantial
evidence to support the Commission’s finding that McConville
violated Rule 10b-5, we conclude there is substantial evidence
to support its finding that she violated Section 13(a) of the Act
and SEC Rules 13a-1 and 12b-20.
No. 05-3510 15
Exchange Act.” 17 C.F.R. § 240.13b2-1 (2006). In its
opinion, the SEC found that “Akorn’s accounts receivable
did not accurately show what invoices had been paid or
what amounts were still owing on particular invoices and
therefore did not accurately and fairly reflect the transac-
tions and dispositions of Akorn’s assets.”
McConville argues that there is no evidence of her
scienter to violate Rule 13b2-1. However, the Commission
has previously stated that there is no scienter require-
ment in SEC Rule 13b2-1 because § 13(b) of the 1934
Securities Exchange Act “contains no words indicating that
Congress intended to impose a ‘scienter’ requirement.”
Promotion of the Reliability of Financial Information and
Prevention of the Concealment of Questionable or Illegal
Corporate Payments and Practices, Exchange Act Release
No. 34,15570, 16 SEC Docket 1143, 1151 (February 15,
1979). As we have stated, the Commission’s interpretations
of its own regulations are entitled to deference as long as,
as in this case, the interpretation is not arbitrary, capri-
cious, or manifestly contrary to the statute. See, e.g.,
Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 842-43
(1984) (courts must give deference to administering
agency’s reasonable statutory interpretations). Because
scienter is not required under the Rule, and because there
is otherwise substantial evidence of liability in the record,
we will not reverse the SEC’s finding that McConville
violated Rule 13b2-1.
The Commission’s finding that McConville violated Rule
13b2-2 is also supported by substantial evidence. Rule 13b2-
2 provides: “No director or officer of an issuer shall, directly
or indirectly: (1) make or cause to be made a materially
false or misleading statement to an accountant in connec-
tion with . . . (i) [a]ny audit, review or examination of the
financial statements of the issuer. . . .” 17 C.F.R.
§ 240.13b2-2. For the reasons already explained in our
discussion of her Rule 10b-5 argument, we reject
McConville’s argument that there is not substantial
16 No. 05-3510
evidence supporting the Commission’s conclusion that
she lied to Deloitte in the two management representa-
tion letters she signed. Particularly, McConville knew the
Cardinal dispute over $5 million was unresolved when she
signed the representation letters, reassuring Deloitte that
the financial statements were accurate.
C. There is Substantial Evidence that McConville
Violated Sections 13(b)(2)(A), 13(b)(2)(B), and
13(b)(5) of the 1934 Securities Exchange Act.
Section 13(b)(2)(A) of the Securities Exchange Act re-
quires an issuer of registered securities to “make and keep
books, records, and accounts, which, in reasonable detail,
accurately and fairly reflect the transactions and disposi-
tions of the assets of the issuer. . . .” The Commission
concluded that as CFO, McConville caused Akorn to violate
Section 13(b)(2)(A) of the Act. McConville now argues that
she cannot be liable for causing the Section 13(b)(2)(A)
violation “because the Commission cannot identify any
evidence suggesting she was responsible for the mainte-
nance and upkeep of Akorn’s book’s and records.”17 This
argument is without merit. As chief financial officer,
McConville’s very job at Akorn was to manage its financial
department and ensure its records and accounts were
accurately and fairly maintained, and there is substantial
evidence that she failed to do so. The record indicates that
Akorn’s financial records were in an ongoing state of
disarray. By spring 2001, the wholesaler accounts (which
were the bulk of Akorn’s sales) had never been reconciled;
and there was an accumulation of problems over a three or
four year period. Even McConville admits that the reconcili-
ation process in Akorn’s financial department was continu-
17
Brief of Petitioner-Appellant at 45, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
No. 05-3510 17
ing when her employment terminated in July 2001.18 We
affirm the SEC’s conclusion that she caused Akorn to
violate Section 13(b)(2)(A) of the Act.
McConville also challenges the Commission’s conclu-
sions that she violated Sections 13(b)(5) and 13(b)(2)(B) of
the Act, which require corporations to implement and
maintain internal accounting controls. Examples of internal
controls include manual or automated review of records to
check for completeness, accuracy and authenticity; a
method to record transactions completely and accurately;
and reconciliation of accounting entries to detect errors.19
For reasons similar to why we affirm the Commission’s
Section 13(b)(2)(A) finding, we likewise conclude there is
substantial evidence that McConville failed to implement
and maintain internal accounting controls at Akorn in
violation of Section 13(b)(5).
III. CONCLUSION
Accordingly, for the reasons set forth in this opinion, the
petition for review is DENIED.
18
Brief of Petitioner-Appellant at 19, McConville v. SEC, No. 05-
3510 (7th Cir. Dec. 6, 2005).
19
See In re Albert Glenn Yesner, CPA, Initial Decision, Exchange
Act Release No. 184, 2001 WL587789 at *33 (May 22, 2001) (citing
STATEMENT ON AUDITING STANDARDS No. 55 ¶ 32, CONSIDERATION
OF INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT (1998).
VINCENT M. O’REILLY ET AL., MONTGOMERY’S AUDITING 9-7
through 9-10, 9-13 through 9-14 (12th ed. 1988)).
18 No. 05-3510
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-11-06