The Securities and Exchange Commission (SEC) today announced that Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, agreed to pay $1.95 million to resolve two actions alleging misconduct in its audits of the now-defunct crypto asset trading platform, FTX, and auditor independence violations.
In one of the actions, the SEC alleges 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 LLC, a crypto hedge fund controlled by FTX’s CEO.
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.
The SEC today also announced that the Prager Entities 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 and, as a result, 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.
