Speech by SEC Staff:
Statement regarding Royal Ahold and its U.S. Foodservice Subsidiary
Linda Chatman Thomsen
Deputy Director, Division of Enforcement
U.S. Securities and Exchange Commission
January 13, 2005
Today, the Securities and Exchange Commission sued nine individuals who the Commission alleges signed materially false audit confirmations and sent them to the auditors for Royal Ahold and its U.S. Foodservice subsidiary. The defendants in today's actions are Mark A. Bailin, Kenneth H. Bowman, Timothy Neal Daly, Michael J. Hannigan, Peter O. Marion, John Nettle, Gordon Redgate, Bruce Robinson and Michael Rogers. All of these individuals were employees of or agents for vendors which supplied U.S. Foodservice with food and other products for resale. As to Mr. Bailin, the Commission has also filed a second action against him alleging insider trading violations arising from trades by Mr. Bailin and six other individuals in the stock of U.S. Foodservice.
Financial frauds often involve many participants, including corporate outsiders as well as insiders. The cases announced today demonstrate the Commission's commitment to identifying and bringing enforcement actions against outsiders who, while they may not have orchestrated the fraud, nevertheless violated federal securities laws by agreeing to assist the architects of the fraud. In these cases the defendants sent false confirmations to auditors, and by doing so helped to conceal and advance a fraud at U.S. Foodservice.
As alleged in our complaint, these individuals knowingly misrepresented to U.S. Foodservice's auditors what promotional monies U.S. Foodservice had earned, what promotional monies it had been paid, and/or what promotional monies it was owed. The complaints allege that these defendants often misstated amounts by millions of dollars and by more than 100 percent. In effect, these individuals made one or more of the following three misstatements to the auditors: One, U.S. Foodservice had earned more promotional money than it really had. Two, the vendor had paid more money to U.S. Foodservice than it really had. Or, three, the vendor owed U.S. Foodservice more money than it really did. The overstated promotional allowance amounts led to the overstatement of U.S. Foodservice's, and consequently Ahold's, operating and net income. The amounts totaled at least $700 million for fiscal years 2001 and 2002.
Audits test the reliability of assertions made by management in financial statements. Third party confirmations are an important part of the audit process. When done properly, confirmations provide an auditor with an independent corroboration of financial statement assertions made by management. When a third party confirms what management is telling the auditor, that confirmation provides some verification that what management is saying is true. By verifying as true information they knew to be false, the defendants corrupted the audit process and helped U.S. Foodservice commit and hide a fraud.
In its actions, the Commission seeks to enjoin these individuals from future violations of the securities laws, and asks the court to impose civil money penalties. Defendants Hannigan, Nettle, Redgate and Rogers have settled the Commission's actions against them, without admitting or denying the allegations, by consenting to the entry of injunctions and payment of civil penalties of $25,000 each. Defendant Bailin has settled both of the Commission actions against him, without admitting or denying the allegations, by consenting to the entry of an injunction and the payment of disgorgement, prejudgment interest and a penalty. Mr. Bailin's total payments exceed $3 million. The other defendants have not settled.
Today's actions demonstrate the Commission's continuing commitment to work with the Department of Justice, United States Attorneys offices and other criminal authorities in appropriate cases. We congratulate United States Attorney David Kelley, Assistant Director of the Federal Bureau of Investigation's New York Field Office Pasquale D'Amuro and the dedicated teams at the United States Attorney's office for the Southern District of New York and at the FBI's New York Field Office for the criminal actions brought today. And I especially want to congratulate and thank the team from the enforcement staff of the Commission, led by James Coffman, for their efforts leading to today's Commission actions.
The Commission's investigation is continuing.