U.S. Securities and Exchange Commission
Litigation Release No. 21819 / January 20, 2011
Accounting and Auditing Release No. 3234 / January 20, 2011
Securities and Exchange Commission v. NutraCea, et al., United States District Court, District of Arizona, Civil Action No. CV 11-0092-PHX-DGC
SEC CHARGES ARIZONA-BASED HEALTH FOOD COMPANY AND FORMER EXECUTIVES WITH ACCOUNTING FRAUD
On January 13, 2011, the Securities and Exchange Commission charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate NutraCea's product sales revenues.
The SEC alleges that NutraCea overstated its sales revenues for the second and third quarters of its fiscal year 2007 and fiscal year 2007 by booking false sales and engaging in improper revenue recognition practices. Through misstated financial statements, NutraCea disguised its true operating results in the second and third quarter of 2007 and fiscal year 2007.
The SEC charged NutraCea's former chief executive officer, Bradley D. Edson, former chief financial officer, Todd C. Crow, and former senior vice president and secretary, Margie Adelman, for their roles in the fraudulent accounting scheme. The SEC also charged former controller, Joanne D. Kline, and former director of financial services, Scott Wilkinson, for their roles in the improper accounting.
NutraCea, an Arizona-based company that manufactures and sells health food products, agreed to settle the SEC's charges. Edson agreed to pay a $100,000 penalty, reimburse NutraCea $350,000 in bonuses he received in 2008, and agreed to a permanent officer and director bar to settle the SEC's charges against him. Adelman, Kline, and Wilkinson also agreed to settle the SEC's charges.
The SEC's complaint, filed in federal district court in Arizona, alleges that NutraCea, Edson, Crow, and Adelman falsified NutraCea's sales revenues in 2007, and Kline and Wilkinson engaged in improper accounting by recording these false revenues. NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp. in the second quarter of 2007, resulting in overstated product sales revenue of as much as 35% in the second quarter of 2007.
According to the SEC's complaint, Edson instructed Bi-Coastal's president to falsify his family's financial statements to reflect a higher net worth in order to support the false sales to Bi-Coastal. In reality, Bi-Coastal's "down payment" for the $2.6 million sale came from NutraCea's former COO. When Kline tried to discuss with Crow in 2007 her discovery that the $1 million deposit for the Bi-Coastal sale came from a loan from the former COO to Bi-Coastal in order to justify NutraCea's recognition of revenue from this sale, she says that Crow "covered his ears and said, 'No, no, no, no, no, no, no, no, no. I don't want to hear it.'"
The complaint also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007. As a result of the Bi-Coastal and ITV Global transactions alone, NutraCea overstated its product sales revenue by 36.8% for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by over 89% in the second quarter 2007, over 17.6% in the third quarter 2007, and nearly 7% in fiscal year 2007.
Without admitting or denying the SEC's allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settle this matter on the following terms:
These settlements are subject to the approval of the U.S. District Court of Arizona.
The complaint against Crow alleges that he violated and aided and abetted violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws. The complaint also alleges that Crow violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. The SEC's complaint against Crow seeks a permanent injunction, a civil penalty, and an officer and director bar. The case against Crow is ongoing.