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U.S. Securities and Exchange Commission

LITIGATION RELEASE NO. 18797 / July 27, 2004

Securities and Exchange Commission v. Michael Resnick, Mark P. Kaiser, Timothy J. Lee, and William Carter, No. 04 CV 5824 (HOLWELL) (S.D.N.Y. filed July 27, 2004).


The Securities and Exchange Commission ("Commission") today filed a complaint in the United States District Court for the Southern District of New York alleging that Michael Resnick, Mark P. Kaiser, Timothy J. Lee and William Carter engaged in or substantially participated in a scheme to overstate the income of Royal Ahold (Koninklijke Ahold N.V.) ("Ahold") by $700 million or more 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 ("USF"), a major subsidiary of Ahold. The complaint alleges that they grossly inflated reported profits and induced numerous suppliers to submit false confirmations to the company's auditors in order to conceal their fraud. The Commission alleges that Resnick, Kaiser, Lee and Carter violated the antifraud provisions; aided and abetted violations of the reporting provisions; and violated and aided and abetted violations of the books and records provisions of the Securities Exchange Act of 1934 ("Exchange Act").

The Commission also alleges that Lee engaged in repeated instances of tipping material, nonpublic information regarding Ahold's April 2000 tender offer acquisition of U.S. Foodservice. As a result of the tipping, an associate of Lee realized profits of at least $363,000 from trading in the stock of U.S. Foodservice. The Commission alleges that Lee, through his insider tipping, violated the antifraud provisions of the Exchange Act.

The Commission seeks a final judgment ordering the defendants to disgorge all ill-gotten gains, including performance based-bonuses; imposing civil money penalties; barring each of them from serving as an officer or director of a public company; and enjoining each of them from future violations, or aiding and abetting violations, of Exchange Act Sections 10(b), 13(b)(5), 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13b2-1. The Commission also seeks a final judgment enjoining Lee from future violations of Section 14(e) of the Exchange Act and Exchange Act Rule14e 3, and ordering Lee to disgorge jointly and severally the trading profits of his tippees.

The Commission's complaint alleges that compensation for Resnick, Kaiser, Lee and Carter was based, in part, on USF's ability to meet or exceed budgeted earnings targets. They each received a substantial bonus in early 2002 because USF purportedly satisfied earnings goals for fiscal year 2001. They were each eligible for a substantial bonus if USF met earnings targets for fiscal year 2002. They engaged in or substantially participated in a scheme whereby USF "booked to budget" -- reporting earnings equal to or greater than the targets, regardless of the company's true performance.

The primary method used to carry out the fraudulent scheme to "book to budget" was to improperly inflate USF's "promotional allowance" income. A significant portion of USF's operating income was based on payments by its suppliers, usually referred to as promotional allowances. In a typical promotional allowance arrangement, USF would pay the full wholesale price for a product, then receive rebates of a portion of that price from the supplier if certain purchase volume and other conditions were met. They "booked to budget" by, among other things, causing USF to record completely unsupported promotional allowances sufficient to cover any shortfall to budgeted earnings. When questioned by Ahold's independent auditors about the promotional allowances recorded, Resnick, Kaiser and Lee are alleged to have provided false and misleading justifications.

The Commission's complaint alleges that the defendants covered-up the false earnings by making it appear that the inflated promotional allowance income had been earned by, among other things, (a) inducing suppliers to confirm false promotional allowance income, payments, and receivable balances; (b) manipulating the promotional allowance receivable and manipulating and misapplying cash receipts; and (c) making false and misleading statements, and material omissions, to the company's independent auditors, other company personnel, and/or Ahold personnel.

The Commission's complaint describes how Kaiser, Lee, and Carter, in order to keep the fraud from being discovered, participated in a systematic effort to corrupt the audit process. Ahold's auditors attempted at the end of each fiscal year to confirm with the vendors that they actually had paid, or still owed, the promotional allowances recorded by USF. The suppliers were convinced by Kaiser, Lee, and Carter to sign audit confirmation letters even though they knew that the letters were false.

Resnick, Kaiser, and Lee, in order to prevent the discovery of the fraudulent scheme, took various additional steps to make it appear that USF's promotional allowance receivable balance was being paid by the suppliers. Among other things, they made, or caused to be made, accounting entries that unilaterally deducted material amounts from the balances that USF owed to the suppliers for the products USF had purchased, and simultaneously credited the promotional allowance receivable balance for the amount of such deductions. These "deductions" were made at year-end and had the net effect of making it appear that USF had made material progress in collecting promotional allowance payments allegedly due. Resnick, Kaiser, and Lee concealed the fact that the deductions were not authorized, were not legitimate, and that a substantial percentage of the deductions were reversed in the early part of the following fiscal year


The Commission further alleges that Resnick, Kaiser, Lee and Carter also knew, or were reckless in not knowing, that the amounts paid by some suppliers included prepayments on multi-year contracts. But they falsely represented to USF personnel, Ahold personnel, and/or the company's independent auditors that none of the promotional allowance agreements included such prepayments. As a result, USF treated the prepayments by suppliers as if they were payments for currently owed promotional allowances. This made it falsely appear that USF was making material progress in collecting the inflated promotional allowance income it had recorded.

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, the New York Office of the Federal Bureau of Investigation, and the U.S Department of Labor, Employee Benefits Security Administration.

See related Litigation Release No. 18796 / July 27, 2004

SEC Complaint in this matter



Modified: 07/27/2004