Washington, D.C., Jan. 13, 2005 – LAWFUEL – The Law News Network – The Securities and Exchange Commission today filed enforcement actions against nine individuals alleging they aided and abetted a massive financial fraud by signing and returning materially false audit confirmations sent to them by the auditors of the U.S.
Foodservice, Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.). The
actions filed name as defendants Mark A. Bailin, Kenneth H. Bowman, Timothy
Neal Daly, Michael J. Hannigan, Peter O. Marion, John Nettle, Gordon
Redgate, Bruce Robinson and Michael Rogers. All of these individuals were
employees of or agents for vendors which supplied U.S. Foodservice.
The Commission’s complaints allege that U.S. Foodservice personnel contacted
vendors and urged them to sign and return the false confirmation letters.
In some cases U.S. Foodservice pressured the vendors; in other cases they
provided side letters to the vendors assuring the vendors that they did not
owe U.S. Foodservice the amounts reflected as outstanding in the
confirmation letters. The letters clearly stated that the confirmations
were being used in connection with the annual audit and the letters directed
the defendants to return the confirmations directly to the company’s
Each of the individuals aided and abetted the fraud by signing and sending
to the company’s independent auditors confirmation letters that they knew
materially overstated the amounts of promotional allowance income paid or
owed to U.S. Foodservice. The amounts overstated in the confirmations were
often inflated by millions of dollars and by more than 100 percent.
Bailin, Hannigan, Nettle, Redgate, and Rogers have each agreed to settle the
Commission’s action, without admitting or denying the allegations in the
complaint, by consenting to permanent injunctions and payment of a $25,000
penalty. Also today, the U.S. Attorney’s Office for the Southern District
of New York announced criminal charges in this matter.
“Financial frauds often depend on the assistance of outsiders to succeed and
remain undetected. The individuals and salespersons charged today, while
not employed by Ahold, helped the company commit a fraud and helped hide
that fraud from Ahold’s auditors. By verifying as true information they
knew to be false, the defendants corrupted the audit process and helped U.S.
Foodservice commit and hide a fraud,” said Linda Chatman Thomsen, Deputy
Director of the Commission’s Division of Enforcement.
“Third party confirmations are an integral part of the auditing process.
Confirmations are intended to provide an auditor with independent
corroboration of financial statement assertions made by management.
Undermining the confirmation process increases the risk that the public can
be misled by the reporting of inaccurate financial results,” said Susan
Markel, Chief Accountant of the Commission’s Division of Enforcement.
The complaints allege that U.S. Foodservice engaged in a scheme to report
earnings equal to or greater than its targets, regardless of the company’s
true performance. U.S. Foodservice inflated its promotional allowance
income by at least $700 million for fiscal years 2001 and 2002 and thereby
caused Ahold to report materially false operating and net income for these
periods. The annual audit confirmation process at U.S. Foodservice was
systematically corrupted to help keep the fraud from being discovered.
On July 27, 2004, the SEC filed a complaint in the United States District
Court for the Southern District of New York alleging that Michael Resnick,
Mark P. Kaiser, Lee and Carter engaged in or substantially participated in a
scheme to overstate Ahold’s income in SEC filings and other public
announcements for at least fiscal years 2001 and 2002. Resnick, Kaiser,
Lee, and Carter were top executives at Columbia, Maryland based wholesale
food distributor U.S. Foodservice, a major subsidiary of Ahold (Litigation
Release No. 18797). The Commission also filed actions against Royal Ahold
and others on Oct. 13, 2004 (Litigation Release No. 18929).
The Commission’s investigation is continuing. The Commission acknowledges
the assistance and cooperation of the Office of the United States Attorney
for the Southern District of New York, and the New York Office of the
Federal Bureau of Investigation.