U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19380 / September 15, 2005
Accounting and Auditing Enforcement Release No. 2314 / September 15, 2005
Securities and Exchange Commission v. Mark David Shapiro, Philip D. Murphy, Thomas Gerald Dahlen, Jr., Albert M. Abbood, and James H. Thatcher, Civil Action No. 4:05-CV-0364/Eastern District of Texas (Sherman Division)
On September 15, 2005, the Commission charged five former officers of now-bankrupt grocery wholesaler Fleming Companies, Inc. of Lewsville, Texas, with securities fraud and other violations arising from material earnings overstatements during late 2001 and the first half of 2002. According to the complaint, the defendants, among other things, obtained false and misleading side letters from certain Fleming vendors to support improper accounting entries that inflated Fleming's earnings. These transactions were the subject of settled enforcement actions the Commission brought against Fleming and several of its vendors and vendor employees on September 14, 2004. See In the Matter of Fleming Companies, Inc., Lit. Rel. No. 18884 (September 14, 2004).
- The individuals named in the Commission's suit are:
- Mark David Shapiro, Fleming's former chief accounting officer and senior vice president of finance and operations during the critical periods.
- Phil Murphy, Fleming's former vice president in charge of Fleming's wholesale procurement department, which was responsible for approximately 80% of Fleming's revenues.
- Thomas Gerald Dahlen, Jr., the former president of Fleming Retail Group, which comprised about 20% of Fleming's revenues.
- Albert M. Abbood, a former vice president in Fleming's wholesale procurement group who reported to Murphy.
- James H. Thatcher, a vice president of the Fleming Retail Group who reported to Dahlen.
The Commission alleges that defendants obtained misleading letters from Fleming vendors that were used to improperly accelerate recognition of the vendors' up-front payments, in violation of generally accepted accounting principles. The complaint also alleges that Shapiro and Murphy inflated earnings by executing large quarter-end inventory purchases solely to generate discounts that Fleming could immediately recognize as earnings, to help meet Wall Street analysts' earnings expectations. Fleming failed to disclose that these purchases were part of an intentional scheme to inflate earnings. In addition, Shapiro improperly inflated Fleming's 2001 earnings by directing the release of extensive accounting reserves, without proper justification or disclosure. Finally, Dahlen helped Fleming report misleading same store sales numbers by repeatedly changing the methodology behind the calculation, without disclosure to the public, and approving financing transactions that were disguised as sales.
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The Commission alleges in its complaint that defendants Shapiro, Murphy, Abbood, and Thatcher violated Section 17(a) of the Securities Act of 1933 and violated and aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(B), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder. Against these defendants, the Commission is seeking a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, an officer and director bar and a civil money penalty. Dahlen has agreed to settle the Commission's charges that he aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. Dahlen also has agreed to pay a civil penalty of $100,000.