Risk & Compliance

Three Krispy Kreme Ex-Execs Settle SEC Charges

Complaint alleging a 2003-2004 accounting scheme to fatten the once-fast-growing doughnut chain's earnings, and enrich the men improperly, is settl...
Stephen TaubMarch 5, 2009

Krispy Kreme Doughnuts Inc.’s former CEO and two former CFOs settled Securities and Exchange Commission charges that the three were instrumental in inflating earnings of the then-fast-growing restaurant chain in an alleged scheme designed to boost their compensation.

The three —ex-chairman, president, and chief executive Scott A. Livengood; ex-CFO and ex-COO John W. Tate; and ex-CFO Randy S. Casstevens — did not admit to or deny the allegations in their settlement. The three agreed to give up money that the SEC alleged they illegally made, and also agreed to pay civil penalties, and consented to be permanently enjoined from future violations.

The SEC alleged that between February 2003 and May 2004, the company inflated its quarterly and annual earnings and omitted any disclosure of the impact of certain adjustments on its ability to achieve what had become a prime benchmark of its historical performance: reporting quarterly earnings per share that exceeded its previously announced EPS guidance by one cent.

The complaint said that in the fiscal 2003 fourth quarter and the first three quarters of fiscal 2004, the company under-accrued or reversed previously accrued incentive compensation expense under Krispy Kreme’s Senior Executive Incentive Compensation Plan. The respective under-accrual and reversals, which were inconsistent with the formal incentive plan, were performed to inflate the company’s earnings so as to meet the benchmark of exceeding the company’s guidance by one cent.

The three former executives understood the existence and significance of the under-accrual and the reversals to earnings, the complaint alleged, yet they failed to disclose either to the public. In addition, the three described favorably the company’s performance in earnings releases and analyst calls, and did not disclose the under-accrual and reversals or their impact on company earnings.

In addition, the SEC alleged that Livengood and Casstevens signed and certified Krispy Kreme filings that misstated the company’s financial performance. It also said that Tate had caused Krispy Kreme to engage in a bogus round-trip transaction to falsely increase its quarterly earnings in the second quarter of fiscal 2004.

The SEC also alleged that each of the individuals sold stock after the company’s earnings announcement for the second quarter of fiscal 2004.

Tate was CFO and president of Krispy Kreme’s equipment and distribution subsidiary between October 2000 and January 2002, when he was promoted to become company COO, before resigning in August 2004. Casstevens joined Krispy Kreme in May 1993, holding a variety of increasingly senior finance positions before being made CFO in January 2002 – a position he held until December 2003. Livengood held his posts between 1999 and January 2005.