Risk & Compliance

Fleming, Suppliers Settle with SEC

The commission accused grocery distributor of improperly inflating earnings by buying too much inventory near the ends of quarters.
Stephen TaubSeptember 16, 2004

The Securities and Exchange Commission settled charges against grocery wholesaler Fleming Co. and several suppliers and some employees of suppliers. The SEC’s allegations stemmed from what it said was widespread accounting fraud.

To settle the charges, Fleming, the suppliers, and the supplier employees each consented to commission orders to cease and desist from violations. The suppliers and employees also agreed to pay civil penalties ranging from $100,000 to $400,000 for the suppliers and from $25,000 to $75,000 for the suppliers’ employees involved.

The commission said it is not seeking civil penalties against Fleming, which recently emerged from bankruptcy protection. All parties settled without admitting or denying the commission’s findings.

The commission’s investigation stemmed from allegations of material earnings overstatements during late 2001 and the first half of 2002. “Fleming’s repeated wrongdoing masked the reality of an increasingly earnings-challenged company and prevented investors from discovering just how poorly the business actually was performing,” Harold Degenhardt, administrator of the commission’s Fort Worth office, said.

The commission charged that over several quarters in late 2001 and into 2002, Fleming improperly accounted for some transactions so as “to sustain an illusion of growth and financial strength.” Fleming’s earnings, however, “were under tremendous pressure from a series of business reversals,” according to the commission, which noted that the company’s woes included the failure of Kmart Corp., its largest customer.

During that time, Fleming increasingly reliant on those arrangements to “bridge the gap” between Wall Street expectations and disappointing actual operating results, the commission contended.

The commission asserted that Fleming acquired “misleading side letters from suppliers” to justify improper acceleration of accounting recognition of suppliers up-front payments to company they made to secure forward-looking contracts.

Among the suppliers and employees implicated by the SEC are Dean Foods Co. and John D. Robinson, a senior executive in its dairy division; Kemps LLC, formerly known as Marigold Foods LLC, and its CEO, James Green and vice president of financial services, Christopher Thorpe; Digital Exchange Systems, Inc. and its president, Steven Schmidt and principal owner, Rosario Coniglio; Bruce Keith Jensen, a director of national accounts for Frito Lay, Inc.; and John K. Adams, a region manager for Kraft Foods, Inc.

The commission accused Fleming of improperly inflating earnings by buying too much inventory near the ends of quarters solely to generate cash and volume discounts, which the distributor booked immediately. The goods included perishable and outdated products, according to the SEC.

The company also released sizable accounting reserves, without justification or disclosure, to increase reported earnings, the commissioner asserted.

Further, Fleming allegedly failed to set up reserves to cover known losses. The losses included its likely repayment of supplier deductions, even as the company’s reserves for disputed deductions mushroomed.

By means of those transactions, the company “materially overstated…earnings for these periods,” the SEC asserted. “For example, had Fleming properly accounted for these transactions, its pre-tax earnings for 2001 would have declined almost 40 percent.”

Lawyers for Fleming, Dean, Robinson, Kemps, Green, Thorpe, Schmidt, Coniglio, and Adams didn’t immediately return telephone calls made asking for comment, according to Reuters. Jensen’s attorney reportedly declined to comment.

Ira Sorkin, a lawyer representing Digital Exchange, said, according to the wire service, that the company “consented without admitting or denying the allegations that it acted negligently and not fraudulently.”

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