57. Despite having his doubts confirmed as to the value of the Media Credits and the credibility of Domark’s CEO’s claims regarding the value of Media Credits and the value of Javaco, and despite being warned that his treatment of the Media Credits was contrary to GAAP, Bordynuik directed that the Media Credits on JBI’s financial statements contained in its Form 10-Q, filed on November 16, 2009 be listed at a purported value of $9.997 million.
58. In a continuing attempt to move forward with his scheme, Bordynuik also engaged a sham auditing firm, Gately & Associates, LLC (“Gately, LLC”) to serve as JBI’s independent auditor. JBI’s previous auditor Moore and Associates Chartered, had their registration removed by the SEC for violations of auditing standards and regulations. Gately, LLC also would end up in serious trouble with the SEC and eventually the firm was barred from providing audits to public companies by the Public Company Accounting Oversight Board (“PCAOB”) for its failure to cooperate with an inspection by the Board’s Division of Registration and Inspections. Moreover, the firm’s principal, James P. Gately, was permanently barred from associating with any registered public accounting firm and the firm’s registration was permanently revoked by the PCAOB.
59. None of this could possibly have been a shock to Bordynuik given Gately, LLC had been inspected by the PCAOB previously and in a March 9, 2006 report was found to be deficient in the following areas:
1) the failure to perform and document, in two of the audits reviewed, audit procedures regarding the proper classification of certain debt instruments;
2) the failure to perform and document, in two of the audits reviewed, sufficient audit procedures with respect to revenue recognition;
3) the failure to perform and document, in two of the audits reviewed, audit procedures to determine whether it was necessary to recognize a beneficial conversion feature;
4) the failure to perform and document audit procedures to test the valuation of an intangible asset acquired in a transaction;
5) the failure to perform and document audit procedures to evaluate the issuer’s accounting for a consulting agreement; and
6) the failure to perform and document sufficient audit procedures related to the valuation of acquired in-process research and development.
60. In addition, James Gately was undergoing treatment for a severe alcohol dependency that allegedly incapacitated him for days or weeks at a time. Bordynuik was well aware of Gately’s drinking problem and had in fact been warned by his consultant that he should choose a new auditor. Nevertheless, JBI and Bordynuik continued to utilize Gately and his firm as its independent auditor for the September 30, 2009 10-Q filing through the March 31, 2010 filing of the Form 10-K.
61. Shortly after the filing of the Form 10-Q for the third quarter of 2009 on November 16, 2009, additional issues arose regarding JBI’s auditor at the Gately firm. On November 28, 2009, the auditor was arrested for Violation of Probation, Felony DUI and Possession of Marijuana. The auditor remained in jail in Florida until February 18, 2010. The consultant informed Bordynuik of the auditor’s incarceration but Bordynuik insisted on continuing to use Gately, LLC for JBI’s 10-K audit for the fiscal year ending December 31, 2009. Indeed, Bordynuik even agreed to assist the incarcerated auditor by paying for his criminal representation, an alcohol treatment program and offering him a job as an internal auditor for JBI’s operations in Canada. During a telephone call to the auditor in jail, Bordynuik offered him legal and financial assistance while he was still retained as the principal of JBI’s supposedly independent audit firm, Gately, LLC.
62. Despite these issues, and the dissolving of any notion of “independence” between the auditor and Bordynuik, between the period in which JBI’s 10-Q for the third quarter of 2009 was filed and the 10-K for the year end was filed on March 31, 2010, Bordynuik and JBI persisted in using Gately, LLC as its “independent” audit firm. Bordynuik later claimed that one of the auditor’s colleagues at the Gately firm stepped in to assist with the audit responsibilities while the auditor was incarcerated or otherwise was unavailable due to his drinking problem. However, there is no indication that anyone from the Gately firm (or otherwise) undertook any review of the final set of consolidated financial statements included in JBI’s Form 10-K filed on March 31, 2010. In fact, the PCAOB’s 2006 Report and 2009 Final Decision both listed James P. Gately as the only employee of Gately, LLC.
63. In truth, the independent auditing “performed” by Gately was a sham. No one associated with JBI ever had any significant contact with Gately prior to the filing of the financial statements. In fact, Bordynuik, Baldwin, and the Board never consulted with James Gately about the Media Credits’ valuation in advance of the two reporting periods in question.
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