The fall out from a failed investment firm continues to haunt McGladrey which inherited the mess involving the former Sentinel Management Group when it acquired the former Altschuler, Melvoin and Glasser in November 2006. This week, the SEC censured AMG and barred engagement partner George Victor (Vic) Johnson, who is now a partner with McGladrey, from SEC practice for his role in signing off on audits for Sentinel, which used millions of dollars in client investment funds as collateral for loans.
Sentinel collapsed, filing for Chapter 11 protection on Aug. 11, 2007, after it defaulted on a line of $321 million of credit issued by the Bank of New York. The SEC said Sentinel placed funds, which were supposed to go into three investment accounts, into the firm's general account and used $1.5 billion in client funds to obtain financing for three times that amount.
Johnson, now 69 years old, was engagement partner from 2002 through 2006 with the exception of 2004 when and the firm had agreed to an order for him to refrain from that role for any audit for six months. The SEC said Johnson should have known about the comingled funds and faulted his supervision of the office staff and in one year he billed only 1.5 hours for the account and apparently provided little guidance.
Moreover, instead of conducting annual surprise visits as required under the Advisers Act, under Johnson's supervision, Altschuler notified Sentinel of upcoming visits and in one case, let Sentinel set the date for an inspection. Such inspections are required for investment firms that mail their own quarterly statements to clients.
Johnson was also reportedly told during each of the surprise visits that Sentinel had transferred client funds to its own account and had also received bank records showing those transfers. During this period, the loan grew from $20 million in 2002 to about $120 in million in 2004 and about $230 million on Dec. 31, 2006. The SEC said he should not have issued unqualified audits based on his knowledge.
Altschuler, which is required to defend work performed while it was independent, was ordered to pay disgorgement of $18,700.00 in fees collected and prejudgment interest of $5,476. Johnson and the firm agreed to the order and its conditions, but did not admit any wrongdoing.
The SEC action paled compared to an action by Sentinel's Chapter 11 trustee which sued McGladrey and Johnson for $500 million alleging that Johnson and the firm "failed to satisfy the most basic standards of the accounting and auditing profession,"
