In its first-ever whistle-blowing case, the SEC brought a civil suit against Glenn Ohlhauser, a chartered accountant with the Canadian firm of MacKay & Partners, alleging he failed to take appropriate action after uncovering possible illegal conduct at Solucorp Industries Ltd. in the course of a 1998 audit.

The SEC sued Solucorp and its senior officers last year, claiming they defrauded investors and engaged in insider trading. The agency amended the suit Tuesday to include Mr Ohlhauser, alleging he neglected to blow the whistle on licensing agreements that appeared to be backdated.

Required whistle-blowing is relatively recent. Concerned about increased accounting fraud, Congress amended US securities laws in 1995 to add Section 10A, which requires auditors to alert senior management and audit committees whenever they detect potentially illegal acts. If the company fails to respond, or the auditor resigns, auditors must inform the SEC immediately.

Although the rule took effect in 1996, the SEC hadn't brought a single 10A case until this week. Mr Ohlhauser isn't represented by an attorney and could not be reached for comment.

On Tuesday, in addition to suing Mr Ohlhauser, the SEC filed lesser administrative proceedings against two New York CPAs, Pat Rossetti and Jeffrey Yonkers, of Marcum & Kliegman LLC, alleging they neglected to speak up about possible accounting violations at Detour Magazine Inc.

According to the SEC, the auditors discovered that Detour's unaudited quarterly financial reports didn't reflect actual results in 1997-98, but relied on fractional results from existing financial statements. The auditors also didn't properly record options Detour issued to consultants in 1997, valuing them far below the stock's fair value at the time, the SEC said.

"Rossetti and Yonkers knew this was going on and they failed to notify senior management at Detour," as required under Section 10A, said Ken Israel, district administrator in the SEC's Salt Lake City office. The SEC is seeking a cease-and-desist order and civil penalties against both accountants, and an order barring them from practicing before the Commission. Mr Rossetti's attorney declined to comment and Mr Yonkers's attorney didn't immediately return a phone call seeking comment. Detour and its chief financial officer haven't been charged, but further action is expected this week.

(The Wall Street Journal)