A major food and beverage manufacturing company, its former chief operating officer ("COO") and its former chief procurement officer ("CPO") settled SEC charges for an alleged expense management scheme. The scheme involved premature and improper recognition of cost savings in financial statements resulting from misleading supplier contracts generated by procurement employees.
According to the Order, the misstated accounting entries led the company to restate in its Forms 10-K and 10-Q approximately 300 corrected transactions and their adjusted interest, taxes, depreciation and amortization (or "EBITDA"). The restatement came about as a result of a lacking internal accounting controls system and the former COO's actions, which included pressuring the procurement division "to deliver unrealistic savings targets" and approve materially false company financial statements.
In its findings, the SEC determined that:
- the company and the former COO violated Sections 17(a)(2) and 17(a)(3) of the Securities Act;
- the former COO caused the company to violate Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and SEA Rules 12b-20 ("Additional Information"), 13a-1 ("Requirements of Annual Reports"), 13a-11 ("Current Reports on Form 8-K") and 13a-13 ("Quarterly Reports on Form 10-Q"); and
- the former COO violated Section 13(b)(5) of the Exchange Act, and SEA Rules 13b2-1 ("Falsification of Accounting Records") and 13b2-2(a) ("Representations and Conduct in Connection with the Preparation of Required Reports and Documents").
To settle the charges, both the company and the former COO agreed to cease and desist from committing or causing further violations, the company agreed to pay a $62 million civil money penalty, and the former COO agreed to pay a $300,000 civil money penalty, disgorgement in the amount of $12,500 and prejudgment interest of $1,711.
In a related Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that the former CPO "negligently approved" supplier contracts that represented "artificial" cost savings targets and certified the procurement division's financial statements for accuracy and completeness. The company, in turn, based its financial statements on this sub-certification. The SEC charged the former CPO with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(b)(5) of the Exchange Act and SEA Rules 13b2-1 and 13b2-2. The CPO consented to a final judgment permanently enjoining him from future violations, imposing a civil penalty of $300,000 plus prejudgment interest, and barring him from serving as an officer or director of a public company for five years.
In a statement, SEC Commissioner Caroline A. Crenshaw said this enforcement action highlights how information bundling by corporate issuers (i.e., "strategically releasing bad news in ways that dampen or obscure the market's reaction") obfuscates the relationship between a stock drop and released negative information. Ms. Crenshaw explained that, in this instance, the company announced the SEC's investigation at the same time that it released a dividend cut and a write-down of goodwill. Later, the company preempted the filing of its restated financial results by announcing no misconduct by senior management, which Ms. Crenshaw noted "could also dampen the stock price reaction to negative news and affect a corporate benefit analysis."
Ms. Crenshaw reiterated her position that penalty amounts should not be limited by corporate benefits, which are "notoriously difficult to quantify" and potentially leave a corporation in a "better economic position for having committed the violation."
- SEC Press Release: SEC Charges The Kraft Heinz Company and Two Former Executives for Engaging in Years-Long Accounting Scheme
- SEC Order: The Kraft Heinz Co. and Eduardo Pelleissone
- SEC Complaint: Klaus Hofmann
- SEC Statement, Caroline A. Crenshaw: Statement regarding Information Bundling and Corporate Penalties
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