UNITED STATES OF AMERICA
In the Matter of
TURE ROLAND FAHLIN,
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Ture Roland Fahlin ("Fahlin" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Koninklijke Ahold N.V. ("Ahold") is a publicly-held company organized in The Netherlands with securities registered with the Commission pursuant to Section 12(b) of the Exchange Act. Ahold's securities trade on the New York Stock Exchange and are evidenced by American Depositary Receipts. Ahold prepares its financial statements in accordance with Dutch generally accepted accounting principles ("GAAP") but includes a U.S. GAAP reconciliation and condensed U.S. GAAP financial statements in the Form 20-F Ahold files annually with the Commission.
ICA Förbundet Invest AB ("ICA Förbundet") is a company organized under the laws of Sweden. Prior to April 2000, ICA Förbundet was the largest shareholder of ICA AB("ICA"), a Swedish company primarily engaged in the retail and wholesale sale of food and consumables in Scandinavia.
Canica AS ("Canica") is a company organized under the laws of Norway. Prior to April 2000, Canica was the second largest shareholder of ICA.
By agreement dated February 24, 2000 (the "Shareholders' Agreement"), Ahold, ICA Förbundet, and Canica established a joint venture company, ICA Ahold Holding AB ("ICA Ahold"), that subsequently acquired 100 percent of the shares and votes in ICA. Pursuant to the terms of the Shareholders' Agreement, Ahold held 50 percent of the votes and shares in ICA Ahold. The remaining 50 percent was held by ICA Förbundet (30 percent) and Canica (20 percent). The Shareholders' Agreement provided that ICA Förbundet and Canica (collectively the "Partners") would act jointly as one party in all matters relating to the agreement in order to create a fifty-fifty balance between Ahold and the Partners. In a separate agreement, the Partners agreed to act or vote in accordance with mutually agreed positions.
The Shareholders' Agreement also provided for the creation of a supervisory board consisting of eight directors and four deputy directors. The agreement gave the Partners the right to nominate four directors (including the chairman) and two deputy directors. Ahold also had the right to nominate four directors and two deputy directors. The agreement provided that all board decisions had to be approved by a unanimous vote and contained deadlock provisions for situations in which the board could not make a unanimous decision.
Fahlin, age 65, is a Swedish national. At the time of the formation of ICA Ahold, Fahlin was president and a member of the board of ICA Förbundet and chairman of the board of ICA. Fahlin signed the Shareholders' Agreement on behalf of ICA Förbundet. After the joint venture was formed, Fahlin became chairman of the supervisory board of ICA Ahold.
During the negotiations that led to the formation of ICA Ahold, Ahold informed ICA Förbundet and Canica that Ahold wanted to fully consolidate the joint venture in Ahold's financial statements. Fahlin was aware that Ahold wanted to consolidate ICA Ahold.
In early 2000, Ahold informed its independent auditors ("the Auditors") that it wanted to fully consolidate ICA Ahold in its financial statements. The Auditors informed Ahold that consolidation would be inappropriate in the absence of a written agreement, signed by Ahold's joint venture partners, clearly stating that Ahold controlled the joint venture. In early May 2000, a former executive vice president of Ahold and member of Ahold's executive board in charge of European operations asked Fahlin and a representative of Canica to sign a letter stating:
Our auditors have requested us that we be more specific with regard to the interpretation of the Shareholders agreement for ICA Ahold Holding AB.
The shareholder agreement stipulates that all (major) decisions with regard to ICA Ahold Holding AB will be made in consensus between you on one side and Ahold on the other side. This is the basic understanding of the partnership. However, Ahold understands that according to the best interpretation of the Shareholders' Agreement in the case that we reach no consensus decision on a certain issue which we are unable to resolve to shareholders' mutual satisfaction, Ahold's proposal to solve that issue will in the end be decisive. . .
Fahlin signed the letter (the "ICA control letter") on behalf of ICA Förbundet under the heading, "Agreed." A representative of Canica also signed the ICA control letter. Also in early May 2000, Fahlin, a representative of Canica, and the former Ahold executive vice president signed a second letter (the "ICA rescinding letter") stating:
Aware of the contents of [the ICA control letter], this is to inform you that we do not agree with the interpretation given by you of our Shareholders' Agreement.
Ahold gave a copy of the ICA control letter to the Auditors after it was executed and began consolidating ICA Ahold into its consolidated financial statements in the second quarter of 2000. The Auditors relied upon the ICA control letter in accepting the consolidation of ICA Ahold. Ahold did not give a copy of the ICA rescinding letter to the Auditors.
In May 2001, Fahlin retired from the board of ICA Ahold. On September 1, 2001, Fahlin became a member of Ahold's supervisory board. In January 2002, Fahlin became a member of the audit committee of Ahold's supervisory board. As a member of the supervisory board, Fahlin was required to review and approve Ahold's annual report and financial statements for 2001.
Prior to approving Ahold's annual report and financial statements for 2001, Fahlin received a copy of the Auditors' report to the supervisory board, the audit committee, and the executive board for Ahold's fiscal year 2001 dated February 28, 2002 (the "Auditors' report"). The Auditors' report provided, in relevant part:
3.2 Joint ventures
We have had several discussions with management during previous years concerning the accounting for joint ventures under US GAAP. Ahold believes that they may consolidate based on the fact that they control these partnerships and that this conclusion is further substantiated by actions subsequent to the agreement of the different partnerships. We note that for the Disco and ICA partnership control letters have been obtained. . . .
On or about March 7, 2002, Fahlin and the other members of Ahold's supervisory board approved Ahold's annual report and financial statements for 2001.
Prior to approving Ahold's annual report and financial statements for 2001, Fahlin reviewed the Auditors' report, which disclosed that the Auditors were relying on an ICA "control letter" in allowing the full consolidation of ICA Ahold's financial results. The audit committee plays an essential role in assuring that a company's financial statements have been presented fairly and in conformity with GAAP. Members of the audit committee must take this responsibility seriously. As a member of Ahold's supervisory board and audit committee, Fahlin had a duty to determine whether the "control letter" referenced in the Auditors' report was related to the letter he had initially signed and then rescinded in May 2000 and, if so, he should have informed the Auditors and the other members of the supervisory board of the existence of the ICA rescinding letter prior to approving Ahold's annual report and financial statements for 2001. Fahlin failed to fulfill these duties.
In October 2002, Ahold's executive board informed the full audit committee and the Auditors of the existence of the ICA rescinding letter. Ahold initiated an internal investigation that was completed in January 2003. Following the investigation, Ahold concluded that it did not have the ability to control ICA and therefore should not have consolidated ICA in its financial statements under Dutch or U.S. GAAP.
In February 2003, Ahold's supervisory board and the Auditors learned of the existence of undisclosed rescinding letters for joint ventures in Latin America that had been consolidated on the basis of control letters similar to the ICA control letter. Ahold subsequently initiated an internal investigation into the circumstances surrounding the control and rescinding letters for these joint ventures.
On February 24, 2003, Ahold announced that it would issue restated financial statements for previous periods and would delay filing its consolidated 2002 financial statements as a result of internal investigations into its joint venture accounting and other accounting irregularities. On or about October 17, 2003, Ahold published its annual report for 2002 and filed its 2002 Form 20-F with the Commission. The annual report and Form 20-F contain restatements for fiscal years 2000 and 2001, accounting adjustments for fiscal year 2002, and restated amounts for fiscal years 1998 and 1999 included in the five-year summary data. The restatements reflect numerous accounting adjustments, including the deconsolidation of ICA Ahold and other joint ventures.
Ahold stated in the 2002 annual report and Form 20-F that it had historically consolidated ICA Ahold and other joint ventures on the basis of the control letters. Ahold also stated that the undisclosed rescinding letters nullified the control letters and resulted in the decision to deconsolidate ICA Ahold and other joint ventures under Dutch and U.S. GAAP. On or about October 14, 2003, Fahlin and the other members of Ahold's supervisory board approved the 2002 annual report. On June 2, 2004, Fahlin stepped down from his positions on Ahold's supervisory board and audit committee.
As a result of the improper consolidation of ICA Ahold, Ahold made materially false and misleading statements in filings with the Commission and in other public statements including, without limitation, year-end results included in Forms 20-F and quarterly information included in Forms 6-K and earnings press releases. For example, as a result of the improper consolidation of ICA Ahold, Ahold's originally reported net sales were overstated by approximately EUR 6.5 billion ($5.8 billion) for fiscal year 2001 and EUR 4.5 billion ($4.2 billion) for fiscal year 2000. Ahold's originally reported operating results were overstated by approximately EUR 247 million ($221 million) for fiscal year 2001 and EUR 192 million ($177 million) for fiscal year 2000.2
Section 13(a) of the Exchange Act requires issuers to file such annual and quarterly reports as the Commission may prescribe and in conformity with such rules as the Commission may promulgate. Pursuant to Section 13(a), the Commission has promulgated Rules 13a-1 and 13a-16, which require foreign issuers to file annual and other reports, respectively. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). .
As a result of the improper consolidation of ICA Ahold, Ahold's financial statements included in its Forms 20-F and 6-K filed with the Commission during fiscal years 2000, 2001, and the first three quarters of 2002 were materially false and misleading because they significantly misstated revenue, operating income, and other figures. Ahold therefore violated Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16. As a result of Fahlin's failure to fulfill his duties described above as a member of Ahold's supervisory board and audit committee, Fahlin was a cause of Ahold's violation of Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16 with respect to Ahold's Form 20-F for 2001 and Forms 6-K for the first three quarters of 2002.
Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles and to maintain the accountability of assets.
As a result of the improper consolidation of ICA Ahold, Ahold violated Section 13(b)(2)(A) by failing to make and keep accurate books and records. Ahold also violated Section 13(b)(2)(B) by failing to maintain sufficient internal accounting controls to prevent the concealment of the ICA rescinding letter and to ensure that Ahold's financial statements were not materially misleading. As a result of Fahlin's failure to fulfill his duties described above as a member of Ahold's supervisory board and audit committee, Fahlin was a cause of Ahold's violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Fahlin's Offer.
Accordingly, it is hereby ORDERED that Respondent Fahlin cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder.
By the Commission.
Jonathan G. Katz
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