U.S. Securities and Exchange Commission
Litigation Release No. 18884 / September 14, 2004
Securities and Exchange Commission v. Dean Foods Company and John D. Robinson, Civil Action No. 4:04 CV-321/Eastern District of Texas (Sherman Division)
Securities and Exchange Commission v. Kemps LLC, f/k/a Marigold Foods LLC, James Green and Christopher Thorpe, Civil Action No. 4:04 CV-323/Eastern District of Texas (Sherman Division)
Securities and Exchange Commission v. Digital Exchange Systems, Inc., Rosario Coniglio and Steven Schmidt, Civil Action No. 4:04 CV-324/Eastern District of Texas (Sherman Division)
Securities and Exchange Commission v. John K. Adams, Civil Action No. 4:04 CV-322/Eastern District of Texas (Sherman Division)
Securities and Exchange Commission v. Bruce Keith Jensen, Civil Action No. 4:04 CV-320/Eastern District of Texas (Sherman Division)
On September 14, 2004, the Commission announced the settlement of enforcement proceedings against grocery wholesaler Fleming Companies, Inc., of Lewisville, Tex., 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, five of these suppliers' 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 administrative 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 complaints it filed today in U.S. District Court in Sherman, Texas. All parties settled without admitting or denying the Commission's non-jurisdictional findings.
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.
The Commission's complaints in the civil actions allege that Fleming obtained misleading side letters from the suppliers to justify improperly accelerating accounting recognition of up-front payments the suppliers made to secure forward-looking contracts. The Commission alleges the following suppliers and employees engaged in these types of improper transactions (the numbers in parentheses are the civil penalties each agreed to pay in the civil actions):
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The civil complaints allege that the supplier defendants aided and abetted Fleming's violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.