U.S. Securities and Exchange Commission
Litigation Release No. 18534 / January 7, 2004
Accounting and Auditing Enforcement Release No. 1938 / January 7, 2004
Securities and Exchange Commission v. Robert Quattrone, et al., Civil Action No. 04-33(SRC) (D.N.J.)
SEC Sues 10 Defendants for Securities Fraud Arising from $700 Million Round-Tripping Scheme at Suprema Specialties
Defendants Include Former Suprema Executives and Several Suprema Customers and Vendors Who Participated in the Multi-Year Scheme
On January 7, 2004, the Securities and Exchange Commission filed a civil complaint in the United States District Court for the District of New Jersey charging ten defendants with violating the antifraud and other provisions of the federal securities laws in connection with a multi-year financial fraud at Suprema Specialties, Inc. (Suprema), a now defunct manufacturer and distributor of cheese products based in Paterson, New Jersey. The defendants include Arthur Christensen, the former controller of Suprema; John Van Sickell, the former operations manager of Suprema's Paterson, New Jersey plant; five entities that purported to buy from or sell products to Suprema in the round-tripping scheme, Battaglia & Company, Inc. (Battaglia), California Milk Market (CMM), LNN Enterprises, Inc. (LNN), Packing Products, Inc. (Packing Products), and West Coast Commodities, Inc. (WCC); and three persons who owned or operated these entities, Lawrence Fransen, Robert Quattrone, and George Vieira. Vieira was also sued in connection with his conduct as the former chief operating officer of Suprema's Manteca, California plant. Without admitting or denying the SEC's charges, all of the defendants have consented to the entry of judgments providing for full injunctive and other relief (described below), while deferring for determination at a later date the amount of any disgorgement, prejudgment interest and civil penalties to be awarded.
In its complaint, the SEC charged that, from at least 1998 through February 2002, when Suprema filed for bankruptcy, the defendants were engaged in a financial fraud that consisted of three components. First, Suprema and certain of its customers and vendors, including the five entities named as defendants, engaged in "round-tripping" transactions that generated approximately $700 million in fictitious sales revenue, or approximately 60% of Suprema's total reported revenue of approximately $1.13 billion over the relevant time period. Second, imitation cheese and non-cheese products were falsely re-labeled as premium cheeses to fraudulently inflate Suprema's reported inventory. Third, certain of Suprema's cheese products were adulterated with imitation cheese and non-cheese ingredients in order to reduce Suprema's costs illegally, contrary to statements in its filings with the SEC that Suprema sold "natural" or "all natural" cheeses that met applicable federal standards. According to the SEC's complaint, all three components of the fraudulent scheme resulted in material misstatements in Suprema's periodic reports filed with the SEC during its fiscal years 1998 through 2001 and the first quarter of 2002, as well as in the registration statements Suprema filed with the SEC for its secondary public offerings in 2000 and 2001.
The complaint alleges that the round-tripping transactions were effectuated through "circles" of entities, each of which included Suprema, a third-party "customer," and a related "vendor." In most instances, the customer and vendor in each circle shared a common owner. False paperwork, including purchase orders, invoices, and bills of lading, was created purporting to represent sales of various cheese products from Suprema to the customer, then from the customer to the vendor, and finally from the vendor back to Suprema. On each leg of the circle Suprema to the customer, customer to the vendor, and vendor back to Suprema checks were circulated in purported payment for the transactions. Typically, the checks from Suprema to each vendor involved in the fraud were greater than the corresponding checks from the related customer back to Suprema. This difference in the checks represented a kick-back or "commission" paid to the common owners for their participation in the fraudulent scheme. Funds for the checks, including commissions, were drawn on Suprema's line of credit, which increased as Suprema's accounts receivable grew. With rare exception, no goods were actually sold, purchased, or exchanged in these transactions.
Specifically, in its complaint the SEC alleged that the defendants participated in the fraudulent scheme as follows:
Based on these allegations, the SEC charged Christensen, Fransen, Quattrone, Van Sickell, Vieira, Battaglia, CMM, LNN, Packing Products, and WCC with: (i) securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5; (ii) aiding and abetting Suprema's violations of the periodic reporting, books and records, and internal accounting controls provisions of Exchange Act Sections 13(a) and 13(b)(2)(A) and (B) and Exchange Act Rules 12b-20, 13a-1, and 13a-13; and (iii) aiding and abetting misrepresentations by Suprema's officers and directors to the company's accountants in violation of Exchange Act Rule 13b2-2. Christensen and Van Sickell were also charged with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and, along with Vieira, knowingly circumventing internal accounting controls and falsifying corporate books and records in violation of Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1.
Without admitting or denying the allegations of the SEC's complaint, all of the defendants have agreed to settle the SEC's charges. Subject to the Court's approval, these settlements would result in judgments ordering permanent injunctive relief against future violations of the federal securities laws, permanent officer and director bars against the individual defendants (with the exception of Christensen, who would be subject to a ten-year bar in recognition of his level of cooperation), and deferment of any disgorgement, interest, or civil penalties until decided by the court upon motion by the SEC at a later date.
In a related proceeding, the United States Attorney for the District of New Jersey filed criminal charges against Fransen, Quattrone, Van Sickell, and Vieira. At a plea hearing in the U.S. District Court for the District of New Jersey held earlier today, Fransen, Quattrone, and Vieira each plead guilty to one count of securities fraud and one count of conspiracy to commit securities fraud, bank fraud, and mail fraud and to make false statements to auditors. In the same proceeding, Van Sickell plead guilty to one count of food adulteration and misbranding with intent to defraud and one count of conspiracy to commit securities fraud, bank fraud, and mail fraud, to make false statements to auditors, and to introduce adulterated and misbranded food into interstate commerce. (U.S. v. Lawrence Fransen, CR04-10 (D.N.J.); U.S. v. George Vieira, CR04-11 (D.N.J.); U.S. v. John Van Sickell, CR04-12 (D.N.J.); and U.S. v. Robert Quattrone, CR04-13 (D.N.J.)).
The SEC acknowledges the assistance of the United States Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the U.S. Food and Drug Administration in its investigation, which is continuing.