Washington, D.C., Sept. 14, 2004 LAWFUEL – Best for law news, SEC, attorneys, legal research, criminal law – The Securities and Exchange Commission today announced settlement of enforcement proceedings against grocery wholesaler Fleming Companies, Inc., of Lewisville, Texas, for securities fraud and other violations arising from material earnings overstatements during late 2001 and the first half of 2002. The Commission also announced settled enforcement proceedings against three Fleming suppliers and their employees, and against former employees of two other Fleming suppliers, for causing certain of Fleming’s violations.
To settle these charges, Fleming, the suppliers and the supplier employees each consented to Commission orders to cease and desist from such violations. The suppliers and supplier employees also agreed to pay civil penalties – ranging from $100,000 to $400,000 for the suppliers and from $25,000 to $75,000 for the supplier employees – that the Commission will obtain through related civil actions it filed today in U.S. District Court in Sherman, Texas. The Commission is not seeking civil penalties against Fleming, which recently emerged from bankruptcy protection. All parties settled without admitting or denying the Commission’s non-jurisdictional findings.
Commenting on the enforcement actions, Harold F. Degenhardt, Administrator of the Commission’s Fort Worth office, said, “Fleming’s repeated wrongdoing masked the reality of an increasingly earnings-challenged company and prevented investors from discovering just how poorly the business actually was performing. Today’s action represents an important step in holding those who contributed to Fleming’s misstatements responsible for their actions. As our investigation continues, we will focus on others who may have culpability for Fleming’s misconduct.”
The Commission’s administrative orders find that over several quarters in late 2001 and into 2002, Fleming improperly accounted for a number of transactions – described internally as “initiatives” – to sustain an illusion of growth and financial strength when, in fact, its earnings were under tremendous pressure from a series of business reversals, including the failure of Kmart Corporation, its largest customer. Over this span, Fleming became increasingly reliant on these initiatives to “bridge the gap” between Wall Street expectations and disappointing actual operating results.
As the Commission’s orders outline, Fleming employed a variety of improper initiatives during this period. For example, Fleming obtained misleading side letters from suppliers to justify improperly accelerating accounting recognition of up-front payments the suppliers made to secure forward-looking contracts. The Commission’s orders implicate the following suppliers and their employees in these types of improper transactions (the numbers in parentheses are the penalties each agreed to pay in the related civil actions):
· Dean Foods Company ($400,000), a publicly traded dairy product supplier based in Dallas, and John D. Robinson ($50,000), a senior executive in its dairy division;
· Kemps LLC, f/k/a Marigold Foods LLC ($150,000), a privately held dairy product supplier headquartered in Minneapolis, and its CEO, James Green ($50,000), and vice president of financial services, Christopher Thorpe ($50,000);
· Digital Exchange Systems, Inc. ($100,000), a privately held company based in Tampa, and its president, Steven Schmidt ($75,000), and principal owner, Rosario Coniglio ($75,000);
· Bruce Keith Jensen ($25,000), a director of national accounts for Frito Lay, Inc. in Plano, Texas, during the relevant periods; and
· John K. Adams ($25,000), a region manager for Kraft Foods, Inc. in Dallas during the relevant periods.
Spencer C. Barasch, Associate Administrator of the Fort Worth office, added, “Put simply, Fleming manufactured earnings to meet Wall Street expectations. But it takes two to tango. Without suppliers providing or agreeing to false transaction documents, Fleming could not have misled investors as it did. Our actions today reinforce the Commission’s commitment to impose liability on those third parties who help others mislead investors.”
Fleming also improperly inflated earnings by buying excessive inventory quantities – including perishable and outdated products – near quarter ends solely to generate cash and volume discounts, which Fleming recorded immediately. Fleming also released sizable accounting reserves, without justification or disclosure, to increase reported earnings. Moreover, Fleming failed to establish reserves against known losses, including likely repayment of supplier deductions, even as Fleming’s disputed deduction balance ballooned. These improper transactions materially overstated Fleming’s earnings for these periods. For example, had Fleming properly accounted for these transactions, its pre-tax earnings for 2001 would have declined almost 40%.
The Commission’s orders also find that Fleming’s retail group reported false same-store sales, an important metric in the grocery industry. Fleming repeatedly changed how it calculated same-store sales, without disclosing to investors that it was making these changes. Fleming compounded these undisclosed changes by including in its calculations several financing transactions disguised as sales. As a result of this misconduct, Fleming was able to report apparent same-store sales growth in its retail division when, in fact, same-store sales were declining.
In determining to accept Fleming’s offer, the Commission took into account the remedial acts Fleming promptly undertook and its cooperation with the Commission’s staff.
The Commission’s investigation continues.