Charges Announced in Custody Rule Violation Case

On January 9, 2019, the SEC announced charges against Katz, Sapper & Miller, LLP (“KSM”), and Scott C. Price, CPA (“Price”) (collectively “Respondents”) pursuant to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), Section 4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. This matter involves improper professional conduct by Respondents in completing audits pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”). In January 2013, Mohlman Asset Management Fund, LLC (“MAMF”), a former SEC-registered investment adviser, engaged KSM to audit the financial statements of two pooled investment vehicles MAMF advised, Mohlman Asset Management Fund 2010, LLC (“Fund I”) and Mohlman Asset Management Fund II, LLC (“Fund II”) (collectively, “the Funds”). The first engagement in 2013 covered Fund I from its inception in 2010 and Fund II from its inception in 2011 to December 31, 2012, which is the Funds’ fiscal year-end. MAMF engaged KSM to audit the Funds in 2014, 2015, and 2016, covering the Funds’ fiscal years ending on December 31, 2013, 2014, and 2015. The first engagement in 2013 and the second in 2014 also included KSM drafting the Funds’ 2012 and 2013 year-end financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States. The audits were supposed to be conducted in accordance with generally accepted auditing standards (“GAAS”) in the United States established by the AICPA Auditing Standards Board. MAMF engaged KSM to conduct the audits in an effort to enable MAMF to comply with an exception to the Custody Rule because MAMF had custody of client assets invested in the Funds. Audits performed pursuant to the Custody Rule exception require SEC independence. Unbeknownst to MAMF, KSM and Price, the audit partner on all of the engagements, failed to meet the requirements of the Custody Rule in conducting their audits of the Funds. KSM was not independent because it prepared the Funds’ 2012 and 2013 year-end financial statements and then audited them. As a result, Respondents KSM and Price caused MAMF’s 2012 and 2013 violations of the Custody Rule. KSM and Price also engaged in improper professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by failing to: (a) have relevant knowledge, training and experience; (b) issue a modified opinion with respect to Fund II’s 2013 and 2014 year-end financial statements, even though they should have been aware of a related party transaction and a loan that had not been properly disclosed in the financial statements; and (c) exercise due professional care. In addition, KSM failed to establish sufficient quality control standards.