Plastic2Oil Inc (PTOI)

[dreaminbig]

Dead wrong. Here is the complaint. GAAP accounting rules.

http://www.sec.gov/litigation/complaints/2012/comp22220.pdf

Accounting for the Media Credits
18. In its third quarter financial statements filed in the Form 10-Q on November 16, 2009 (for the third quarter ended September 30, 2009) and its end of year financial statements filed in the Form 10-K on March 31, 2010 (for year ended December 31, 2009), JBI reported the media credits purchased from Domark as an asset of the company at their purported face value of $9,997,134. This valuation was contrary to applicable Generally Accepted Accounting Principles (“GAAP”). The $9,997,134 valuation can be traced to a purported arms length transaction between Domark and a company called Media4Equity LLC on August 13, 2008. In fact, the original valuation of the media credits by Domark and Media4Equity was severely flawed. In addition, the pricing and projection of probable future economic benefit used for the valuation was not reliable. Finally, the $1,000,000 in consideration paid by JBI for the media credits in its August 24, 2009 transaction with Domark was both a reliable basis for valuing the media credits and a correct reflection of the perceived value of the media credits at the time of the transaction. Because JBI used the purported face value of the media credits, rather than the actual cost, the company overstated the total value of its assets by a minimum of $8,997,134 (the $9,997,134 value reported less the actual $1,000,000 paid) as of both September 30, 2009 and December 31, 2009. That the media credits had no value, and certainly not the grossly overstated value contained in JBI’s financial statements, also is reflected in restatements later filed by the company.
19. In fact, the media credits should not have had any valuation as of the close of the reporting periods on September 30, 2009 and December 31, 2009. The 1,000,000 shares of 310 Holdings common stock (valued at $1.00 per share; $1,000,000 total) constituted an equity based payment. The consideration received in exchange for these equity instruments were the media Case 1:12-cv-10012 Document 1 Filed 01/04/12 Page 7 of 28
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credits. Because of the unreliability of the probable future economic benefit attributable to the media credits, GAAP required that the media credits initially be recorded in JBI’s books at the $1,000,000 consideration paid by 310 Holdings on August 24, 2009 and subsequently remeasured at September 30 and December 31, 2009. Because there was no probable economic benefit to JBI from the media credits as the ads had limited distribution and would be unlikely to increase sales and profits, GAAP required that the media credits should be written off in their entirety as of September 30, 2009. Therefore, the media credits, listed by JBI on its financial statements with a $9,997,134 valuation, in fact should have been valued initially at the $1,000,000 purchase price, but then written off entirely. For the reporting periods that ended on September 30, 2009 and December 31, 2009, JBI did neither.
Bordynuik Knew the Valuation of the Media Credits Was Improper
20. Up to and through the September 30, 2009 filing, JBI did not employ an in house accountant to assist with accounting and financial reporting. Instead, the company hired an outside accounting consultant (“the consultant”) to assist with accounting, financial statement preparation, and public filings with the SEC. The consultant hired by JBI was not a certified public accountant (“CPA”) nor did she have a formal degree in accounting. In total, the consultant had six credit hours at a community college in two introductory accounting courses. The consultant had begun doing accounting related work for 310 Holdings in the 2002-2003 timeframe. Her relationship with 310 Holdings continued when JBI was merged into it.
21. At the time JBI (through its predecessor, 310 Holdings) acquired the media credits Bordynuik discussed with the consultant valuing the media credits at $10 million despite the fact that JBI obtained them at a cost of $1 million (i.e., the $1,000,000 equity payment made via the transfer of 1,000,000 shares of 310 Holdings common stock). At the time Bordynuik
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knew that the consultant was not a CPA. Bordynuik also knew that she would be responsible for preparing JBI’s financial statements. Bordynuik then instructed the consultant via internet instant messaging (a “Skype” message) to “please get the pro formas as juicy as you can so I can acquire a chemical company for less.” The reference to a chemical company related to Bordynuik’s intent to use JBI and its valuation as a vehicle for acquisitions. The reference to “pro formas” related to financial statements of JBI that would not necessarily conform with GAAP and that the company could use to communicate information about JBI to prospective investors, as opposed to being filed with the SEC. In response to Bordynuik’s instructions the consultant produced pro formas to Bordynuik that contained the media credits valued at nearly $10 million.
22. Prior to JBI’s filing of its Form 10-Q for the period ended September 30, 2009, Bordynuik traveled from Canada to Florida to consult with the consultant in person about, among other things, the valuation of the media credits, and what needed to be done in preparation for the quarterly filing. During the same trip Bordynuik also was scheduled to meet with an audit firm, Gately & Associates (“the Gately firm”), that served as JBI’s independent auditors. Leading up to and during this trip Bordynuik became aware of a severe drinking problem by the auditor (a principal of the firm) assigned to JBI at the Gately firm (“the auditor”) that incapacitated him for days and/or weeks at a time. One of those who told Bordynuik about the auditor’s drinking problem was the consultant, who did so in an effort to encourage Bordynuik to hire a different auditor. Despite knowing of the auditor’s drinking problem and, at times, having difficulty making contact with him, JBI and Bordynuik continued to utilize Gately & Associates (and the assigned auditor) as its independent auditor for the September 30, 2009 10-Q filing and through the March 31, 2010 filing of the Form 10-K for the year ended 2009. Case 1:12-cv-10012 Document 1 Filed 01/04/12 Page 9 of 28
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23. During this trip by Bordynuik to Florida, and prior to the filing of the Form 10-Q for the quarter ended September 30, 2009, the consultant expressed concerns to Bordynuik about what appropriate value, according to GAAP, to record the media credits on JBI’s balance sheet. The consultant told Bordynuik that she thought GAAP required that the media credits be recorded at their cost to JBI of $1 million, not at their face value of $9.997 million. During the same period, and also before the filing of the third quarter 10-Q, another consultant (“the business consultant”) affiliated with JBI raised questions about JBI’s pro formas containing the $9.997 million value of the media credits. The business consultant was the Assistant Secretary for JBI and a business consultant working on Plastic2Oil initiatives. He also was a CPA and a former staff auditor at Deloitte & Touche, one of the Big Four accounting firms.
24. The business consultant expressed concerns to Bordynuik that the media credits should be booked at cost prior to the third quarter Form 10-Q filing. The business consultant had specific discussions with Bordynuik about his concerns with JBI booking the media credits at a nearly $10 million value. The business consultant told Bordynuik that the $10 million valuation was odd and inconsistent with his experience as an auditor because he believed that such an asset should be booked at the lesser of cost or market value. The business consultant further explained his concern regarding the $10 million valuation of the media credits on JBI’s balance sheet by pointing out that the company one day prior to the transaction had no assets yet, on the very next day, appeared to have assets of nearly $10 million. The business consultant raised these concerns with Bordynuik after the media credits were first acquired. Bordynuik responded to the business consultant’s concerns by stating that the media credits were “audit proof.” The business consultant also cautioned Bordynuik that he needed to be careful about how he valued the media Case 1:12-cv-10012 Document 1 Filed 01/04/12 Page 10 of 28
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credits and advised that, in his view, to obtain good accounting and auditing advice, Bordynuik should hire a Big 4 accounting firm.
25. Bordynuik did not follow the advice of the business consultant about either the valuation of the media credits or the hiring of a new accountant and/or auditor. Instead, Bordynuik continued to use the consultant for accounting services, including the preparation of pro formas and financial statements and kept the auditor at the Gately firm as his independent auditor. In fact, notwithstanding the concerns raised both by the consultant and the business consultant, in Skype messaging to the consultant on September 2, 2009, Bordynuik stated to her:
[The business consultant’s] group is ultra conservative and are very very good at what they do. They were concerned about our pro forma because they said the [m]edia
should have been booked at cost and the big 4 accounting firms would
probably penalize us. I advised that the media credits could stand on
their own and the auditor said so (this was from [Domark’s CEO]). I hope so….
We need a chemc company bad…jezz (sic).
26. By mid-September 2009, and prior to the filing of the third quarter Form 10-Q, additional information came to Bordynuik that raised questions about the valuation, and even the validity at all, of the media credits. Bordynuik learned that misleading statements had been made by Domark’s CEO to induce JBI’s acquisition of Javaco, including whether Javaco even maintained operations in Mexico as previously claimed by the CEO. In addition, Bordynuik learned that the CEO of NewsUSA, the parent company of Media4Equity (the original source of the media credits in a purported arms length transaction with Domark), was previously on the Board of Directors of Domark. On September 21, 2009, the consultant informed Bordynuik of the suspect relationship via Skype message, “BTW, I just discovered that the CEO of NewsUSA is a prior director of Domark.” Bordynuik responded, also via Skype, “I saw that. Yuck.” Despite having renewed doubts about the source of the media credits, the credibility of Domark’s CEO, and being warned about the proper GAAP treatment of the media credits by JBI’s own
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consultant and business consultant, Bordynuik directed that the media credits on JBI’s financial statements contained in its Form 10-Q, filed on November 16, 2009, for the quarter ended September 30, 2009, be listed at the purported face value of $9.997 million.