U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20715 / September 15, 2008
Accounting and Auditing Enforcement Release No. 2877 / September 15, 2008
SEC v. American Italian Pasta Company, Civil Action No. 4:08-CV-00675 (W.D. Mo.); SEC v. Timothy S. Webster, Civil Action No. 4:08-CV-00674 (W.D. Mo.); SEC v. Warren B. Schmidgall and David E. Watson, Civil Action No. 4:08-CV-00677 (W.D. Mo.); SEC v. Stephanie S. Ruskey, Civil Action No. 4:08-CV-00676 (W.D. Mo.)
SEC Charges American Italian Pasta and Senior Executives with Accounting Fraud
The Securities and Exchange Commission ("Commission") today filed several actions charging Kansas City-based American Italian Pasta Company ("AIPC"), and its senior executives with securities fraud and other violations of the federal securities laws. The Commission's complaints allege that, from its fiscal year 2002 through the second quarter of its fiscal year 2004, AIPC, AIPC's former chief executive officer Timothy S. Webster, former chief financial officer Warren B. Schmidgall, and former executive vice president of corporate development and strategy David E. Watson, engaged in a fraudulent scheme to mislead the investing public about the growth of the company's earnings and to increase artificially the company's stock price. According to the Commission's complaints, the fraudulent accounting and other errors arising from inadequate internal controls, resulted in the overstatement of AIPC's pre-tax income for the relevant period by approximately $59 million, or 66 percent.
In a related criminal action, the U.S. Attorney's Office for the Western District of Missouri announced today that it resolved its investigation of AIPC and that Webster and Schmidgall both pled guilty to one count of conspiracy to commit wire fraud for their roles in concealing AIPC's true financial condition and filing materially false reports with the Commission. [United States v. Timothy S. Webster, 08-00259-01-Cr-W-DGK (W.D. Mo.); United States v. Warren B. Schmidgall, No. 08-00260-01-Cr-W-DW.] AIPC agreed to resolve the criminal investigation of the company by paying a $7.5 million monetary penalty.
The Commission's complaints, filed in federal district court in the Western District of Missouri, allege that Webster, Schmidgall, and Watson engaged in a variety of fraudulent accounting from AIPC's fiscal year 2002 through the second quarter of its fiscal year 2004 to inflate AIPC's reported earnings. This caused period costs to be fraudulently capitalized in order to meet AIPC's external targets. The Commission further alleges that AIPC and its former executives manipulated AIPC's trade promotion accounting; failed to write off obsolete or missing spare parts; structured fraudulent round-tripping of cash transactions; and recorded false receivables.
The Commission additionally charged AIPC's former controller Stephanie S. Ruskey in a civil action in federal court. The Commission alleges that Ruskey knew or was reckless in not knowing that AIPC's quarterly and annual financial statements were misleading, and alleges that she signed representation letters to AIPC's auditor that falsely stated that the financial statements were prepared in accordance with generally accepted accounting principles.
Without admitting or denying the allegations in the Commission's complaints, AIPC, Webster, and Ruskey agreed to settle the matters. AIPC consented to a final judgment enjoining it from violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13.
Webster consented to a final judgment enjoining him from violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13, imposing disgorgement of $751,978, plus prejudgment interest of $32,610; imposing a $250,000 civil money penalty; and barring him from serving as an officer or director of a public company.
Ruskey consented to a final judgment enjoining her from violations of Rule 13b2-1 and 13b2-2 under the Exchange Act, and for her aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13, and imposing a $25,000 civil money penalty.
The Commission's case against Schmidgall and Watson is ongoing.
The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Western District of Missouri and the Kansas City Field Office of the Federal Bureau of Investigation.