U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18929 / October 13, 2004
Accounting and Auditing Enforcement
Release No. 2124 / October 13, 2004
Securities and Exchange Commission v. Koninklijke Ahold N.V. (Royal Ahold), Civil Action No. 04-1742 (RMU) (D.D.C.) (October 13, 2004)
Securities and Exchange Commission v. A. Michiel Meurs and Cees van der Hoeven, Civil Action No. 04-1743 (RMU) (D.D.C.) (October 13, 2004)
Securities and Exchange Commission v. Johannes Gerhardus Andreae, Civil Action No. 04-1741 (RMU) (D.D.C.) (October 13, 2004)
In the matter of Ture Roland Fahlin, Administrative Proceeding File No. 3-11707
SEC CHARGES ROYAL AHOLD AND THREE FORMER TOP EXECUTIVES WITH FRAUD; FORMER AUDIT COMMITTEE MEMBER CHARGED WITH CAUSING VIOLATIONS OF THE SECURITIES LAWS
On October 13, 2004, the Securities and Exchange Commission filed fraud and other charges in the United States District Court for the District of Columbia against Royal Ahold (Koninklijke Ahold N.V.) (Ahold) and three former top executives: Cees van der Hoeven, former CEO and chairman of the executive board; A. Michiel Meurs, former CFO and executive board member; and Jan Andreae, former executive vice president and executive board member. The Commission also filed a related administrative action charging Roland Fahlin, a former member of Ahold's supervisory board and audit committee, with causing violations of the reporting, books and records, and internal controls provisions of the securities laws. The SEC's complaints allege that, as a result of the fraudulent inflation of promotional allowances at U.S. Foodservice, Ahold's wholly-owned subsidiary, the improper consolidation of joint ventures through fraudulent side letters, and other accounting errors and irregularities, Ahold's original SEC filings overstated: (a) net income by approximately 17.6%, 32.6%, and 88.1% for the fiscal years 2000, 2001 and first three quarters of 2002, respectively; (b) operating income by approximately 28.1%, 29.4%, and 51.3% for the fiscal years 2000, 2001 and first three quarters of 2002, respectively; and (c) net sales by approximately 20.8%, 18.6%, and 13.8% for the fiscal years 2000, 2001 and 2002, respectively. Ahold and three of the individual defendants have agreed to settlements with the Commission.
The Earnings Fraud At U.S. Foodservice
With respect to the fraud at U.S. Foodservice ("USF"), Ahold's wholly-owned subsidiary based in Columbia, Maryland, the Commission's complaint against Ahold alleges as follows:
- A significant portion of USF's operating income was based on vendor payments known as promotional allowances. USF executives materially inflated the amount of promotional allowances recorded by USF and reflected in operating income on USF's financial statements, which were included in Ahold's Commission filings and other public statements.
- USF executives also provided, or assisted in providing, Ahold's independent auditors with false and misleading information by, for example, persuading personnel at many of USF's major vendors to falsely confirm overstated promotional allowances to the auditors in connection with year-end audits.
- The overstated promotional allowances aggregated at least $700 million for fiscal years 2001 and 2002 and caused Ahold to report materially false operating and net income for those and other periods.
The earnings inflation at USF, which began at least a year before Ahold's acquisition, is the subject of the SEC's complaint against four former USF executives filed July 27, 2004 in the United States District Court for the Southern District of New York
The Joint Venture Sales and Operating Income Fraud
Ahold and the Top Officers
With respect to the fraudulent consolidation of joint ventures, the Commission's complaints against Ahold, van der Hoeven, Meurs, and Andreae allege as follows:
- Ahold fully consolidated several joint ventures in its financial statements despite owning no more than fifty percent of the voting shares and despite shareholders' agreements that clearly provided for joint control by Ahold and its joint venture partners. To justify full consolidation of certain joint ventures, Ahold gave its independent auditors side letters to the joint venture agreements, signed by Ahold and its joint venture partners, which stated, in effect, that Ahold controlled the joint ventures ("control letters").
- However, at the time or soon after executing the control letters, Ahold and its joint venture partners executed side letters that rescinded the control letters - and thus the basis for full consolidation (the "rescinding letters").
- Meurs signed all but one of the control and rescinding letters on behalf of Ahold. He also knew that Ahold's auditors were relying on the control letters and were unaware of the existence of the rescinding letters.
- Van der Hoeven cosigned one of the rescinding letters and he was at least reckless in not knowing that the auditors were unaware of its existence.
- Andreae participated in the fraud by signing the control and rescinding letters for ICA, Ahold's Scandinavian joint venture, and by knowingly or recklessly concealing the existence of the ICA rescinding letter from the auditors.
- As a result of the fraud, Ahold materially overstated net sales by approximately EUR 4.8 billion ($5.1 billion) for fiscal year 1999, EUR 10.6 billion ($9.8 billion) for fiscal year 2000, and EUR 12.2 billion ($10.9 billion) for fiscal year 2001. Ahold materially overstated operating income by approximately EUR 222 million ($236 million) for fiscal year 1999, EUR 448 million ($413 million) for fiscal year 2000, and EUR 485 million ($434) for fiscal year 2001.
In its administrative action against Fahlin, the Commission alleges the following:
- Fahlin signed the ICA control and rescinding letters on behalf of ICA Förbundet, one of Ahold's partners in the ICA joint venture. He later left ICA Förbundet and became a member of Ahold's supervisory board and audit committee. In that capacity, he received a report indicating that the auditors were relying on a "control letter" to accept the consolidation of ICA. Fahlin's failure to determine whether this "control letter" was the same letter he had signed and then rescinded was a cause of Ahold's violations of the reporting, books and records, and internal controls provisions of the securities laws.
Ahold has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of a judgment permanently enjoining the company from violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 (Securities Act); Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act); and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-16). The Commission noted in the complaint that Ahold cooperated fully in the SEC staff's investigation.
Van der Hoeven and Meurs have agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of judgments permanently enjoining each of them from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 13a-1 and 13a-16. Van der Hoeven and Meurs have also consented to orders barring each of them from serving as an officer or director of a public company.
Fahlin has agreed to settle the Commission's administrative action by consenting to the entry of an order, without admitting or denying the findings in the order, directing him to 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.
The Commission has not reached a settlement with Andreae. The Commission has charged Andreae with fraud (Section 17(a) of the Securities Act, Sections 10(b) of the Exchange Act, and Exchange Act Rule 10b-5), falsifying accounting records, and lying to auditors (Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2) or, in the alternative, aiding and abetting violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2. The Commission has also charged Andreae with aiding and abetting violations of the books and records and reporting requirements (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16). The Commission seeks an injunction against future violations of the above provisions, an order prohibiting Andreae from acting as an officer or director of any public company, and disgorgement of ill-gotten gains with prejudgment interest.
The Commission has not sought penalties in the enforcement actions for several reasons. First, the Dutch Public Prosecutor's Office, which is conducting a parallel criminal investigation in The Netherlands, has requested that the Commission not seek penalties against the individuals because of potential double jeopardy issues under Dutch law. Because of the importance of this case in The Netherlands and the need for continued cooperation between the SEC and regulatory authorities in other countries, the Commission has agreed to the Dutch prosecutor's request.
The Commission also did not seek a penalty from Ahold, among other reasons, because of the company's extensive cooperation with the Commission's investigation. Ahold self-reported the misconduct and conducted an extensive internal investigation. On its own initiative, Ahold expanded its internal investigation beyond the fraud at U.S. Foodservice and the improper joint venture accounting to analyze accounting practices and internal controls at seventeen operating companies. Ahold promptly provided the staff with the internal investigative reports and the supporting information and waived the attorney-client privilege and work product protection with respect to its internal investigations. Ahold also made its current personnel available for interviews or testimony, significantly assisted the staff in arranging interviews with, or testimony from, former Ahold personnel located in the United States and abroad. Ahold promptly took remedial actions including, but not limited to, revising its internal controls and terminating employees responsible for the wrongdoing.
This is the second round of enforcement actions the Commission has filed in this investigation. On July 27, 2004, the Commission filed a complaint in the United States District Court for the Southern District of New York against Michael Resnick, Mark P. Kaiser, Timothy J. Lee, and William Carter in connection with the financial fraud at USF and (with respect to Lee) insider trading of USF securities (Litigation Release No. 18797). The Commission also filed a related complaint against Peter O. Marion in connection with insider trading of USF securities (Litigation Release No. 18796).
The Commission's investigation is continuing.
SEC Complaint in this matter (Koninklijke Ahold N.V. (Royal Ahold))
SEC Complaint in this matter (A.Michiel Meurs and Cees Van Der Hoeven)
SEC Complaint in this matter (Johannes Gerhardus Andreae)