U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20285 / September 17, 2007
Accounting and Auditing Release No. 2719 / September 17, 2007
SEC v. Linda Jones and Leslie H. Knox, 5: 07-Civ-957 (DNH) (N.D.N.Y.)
SEC Charges Two Former Supermarket Executives With Financial Fraud
The Securities and Exchange Commission today filed civil fraud charges against Leslie H. Knox and Linda J. Jones, two former officers of The Penn Traffic Company, a Syracuse based retail and wholesale food company.
The Commission's complaint, filed in the United States District Court for the Northern District of New York, alleges that Knox, Penn Traffic's former Senior Vice President and Chief Marketing Officer, and Jones, a former Penn Traffic Vice President, orchestrated a scheme to inflate income and other financial results by prematurely recognizing promotional allowances at Penn Traffic. Promotional allowances - also referred to as rebates, slotting fees, or vendor allowances — are fees paid from vendors in exchange for various marketing and promotional activities, such as inclusion in a supermarket's weekly circular.
According to the complaint, from approximately the second quarter of Penn Traffic's Fiscal Year (FY) 2001 through at least the fourth quarter of FY 2003, Penn Traffic prematurely recognized promotional allowances in advance of Penn Traffic's performance of certain key, contingent activities. Knox and Jones orchestrated, directed, and participated in this scheme in an effort to meet internal budget plans. The complaint further alleges that Knox and Jones lied to and otherwise deceived Penn Traffic accounting personnel in order to carry out their fraudulent scheme. For example, at Knox and Jones' direction, personnel in Penn Traffic's marketing department routinely submitted false invoices and other information to Penn Traffic's accounting department so that promotional allowances were booked before they were actually earned. The complaint alleges that as a result of Knox and Jones' willful misconduct, Penn Traffic pulled forward approximately $10 million in operating income, and these falsified financials were included in Penn Traffic's public filings.
The Commission's complaint against Knox and Jones alleges that, based on this conduct, they violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Exchange Act of 1934, and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. The complaint further alleges that under Section 20(e) of the Exchange Act, Jones and Knox aided and abetted Penn Traffic's violations 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Commission seeks as relief permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil money penalties, and officer and director bars.
The Commission acknowledges the assistance of the United States Attorney's Office for the Northern District of New York and the Federal Bureau of Investigation in this matter. The Commission's investigation is continuing.