SEC Charges Pasta Executives With Accounting Fraud

Washington, D.C., Sept. 15, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged Kansas City-based American Italian Pasta Company (AIPC) and its former senior executives for engaging in a fraudulent accounting scheme to artificially increase the company’s stock price and mislead investors about the company’s earnings. The SEC’s complaints allege that AIPC’s former chief executive officer Timothy S. Webster, former chief financial officer Warren B. Schmidgall, and former executive vice president of corporate development and strategy David E. Watson orchestrated the scheme. Webster agreed to pay more than $1 million to settle the SEC’s charges. In a related criminal action, the U.S. Attorney’s Office for the Western District of Missouri announced today that it resolved its investigation of AIPC and that Webster and Schmidgall both pled guilty to one count of conspiracy to commit wire fraud for their roles in concealing AIPC’s true financial condition and filing materially false reports with the SEC. In addition, AIPC agreed to resolve the criminal investigation of the company by paying a $7.5 million penalty. “This is another case where executives at the highest levels of a public company sought to meet Wall Street’s earnings expectations at all costs,” said George B. Curtis, Deputy Director of the SEC’s Division of Enforcement. “The Commission will hold those individuals accountable for breaching the public trust and putting shareholders at risk by falsely reporting the financial condition of their companies.” Donald M. Hoerl, Acting Director of the SEC’s Denver Regional Office, added, “This case demonstrates the severe civil and criminal consequences to companies and corporate officers who choose to engage in financial fraud. The Commission and the criminal authorities will combine efforts and take strong action, as we did in this case, to protect the integrity of corporate financial reporting, which is at the foundation of our capital markets.” The SEC’s complaints, filed in federal district court in the Western District of Missouri, allege that Webster, Schmidgall, and Watson engaged in a variety of fraudulent accounting from AIPC’s fiscal year 2002 through the second quarter of its fiscal year 2004 to inflate AIPC’s reported earnings. This caused period costs to be fraudulently capitalized in order to meet AIPC’s external targets. The SEC further alleges that AIPC and its former executives manipulated AIPC’s trade promotion accounting; failed to write off obsolete or missing spare parts; structured fraudulent round-tripping of cash transactions; and recorded false receivables. According to the SEC’s complaints, the fraudulent accounting and other errors arising from inadequate internal controls, resulted in the overstatement of AIPC’s pre-tax income for the relevant period by approximately $59 million, or 66 percent. The SEC additionally charged AIPC’s former controller Stephanie S. Ruskey in a civil action in federal court, and brought a settled administrative proceeding against AIPC’s former vice president of accounting and finance Mark A. Peterson. The SEC alleges that Ruskey knew or was reckless in not knowing that AIPC’s quarterly and annual financial statements were misleading, and alleges that she signed representation letters to AIPC’s auditor that falsely stated that the financial statements were prepared in accordance with generally accepted accounting principles (GAAP). The Commission found that Peterson knew or should have known that AIPC’s accounting was contrary to GAAP. AIPC and Webster agreed to settle the SEC’s charges without admitting or denying the allegations. Both will be permanently enjoined from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. Webster will be permanently barred from serving as an officer or director of a public company, and will pay $751,978 in disgorgement, $32,610 in prejudgment interest, and a $250,000 penalty. The terms of the SEC’s settlement with AIPC reflect the cooperation that the company provided during the course of the SEC investigation. Without admitting or denying the SEC’s allegations, Ruskey consented to a final judgment enjoining her from violations of the reporting, record-keeping, and internal controls provisions of the federal securities laws and imposing a $25,000 penalty. The Commission also entered an order today ordering Peterson to cease and desist from causing any violations and any future violations of the reporting, record-keeping, and internal controls provisions. Peterson consented to the issuance of the order without admitting or denying any of the Commission’s findings. The SEC’s case against Schmidgall and Watson is ongoing. The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Western District of Missouri and the Kansas City Field Office of the Federal Bureau of Investigation (FBI).

SEC Charges Pasta Executives With Accounting Fraud

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