The Securities and Exchange Commission filed enforcement actions last week against nine individuals alleging they aided and abetted a massive financial fraud by signing and returning materially false audit confirmations sent to them by the auditors of the U.S. Foodservice, Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.). The actions filed name as defendants 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.
The Commission's complaints allege that U.S. Foodservice personnel contacted vendors and urged them to sign and return the false confirmation letters. In some cases U.S. Foodservice pressured the vendors; in other cases they provided side letters to the vendors assuring the vendors that they did not owe U.S. Foodservice the amounts reflected as outstanding in the confirmation letters. The letters clearly stated that the confirmations were being used in connection with the annual audit and the letters directed the defendants to return the confirmations directly to the company's auditors.
Each of the individuals aided and abetted the fraud by signing and sending to the company's independent auditors confirmation letters that they knew materially overstated the amounts of promotional allowance income paid or owed to U.S. Foodservice. The amounts overstated in the confirmations were often inflated by millions of dollars and by more than 100 percent.
Bailin, Hannigan, Nettle, Redgate, and Rogers have each agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to permanent injunctions and payment of a $25,000 penalty. Also today, the U.S. Attorney's Office for the Southern District of New York announced criminal charges in this matter.
"Financial frauds often depend on the assistance of outsiders to succeed and remain undetected. The individuals and salespersons charged today, while not employed by Ahold, helped the company commit a fraud and helped hide that fraud from Ahold's auditors. 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," said Linda Chatman Thomsen, Deputy Director of the Commission's Division of Enforcement.
"Third party confirmations are an integral part of the auditing process. Confirmations are intended to provide an auditor with independent corroboration of financial statement assertions made by management. Undermining the confirmation process increases the risk that the public can be misled by the reporting of inaccurate financial results," said Susan Markel, Chief Accountant of the Commission's Division of Enforcement.
The complaints allege that U.S. Foodservice engaged in a scheme to report earnings equal to or greater than its targets, regardless of the company's true performance. U.S. Foodservice inflated its promotional allowance income by at least $700 million for fiscal years 2001 and 2002 and thereby caused Ahold to report materially false operating and net income for these periods. The annual audit confirmation process at U.S. Foodservice was systematically corrupted to help keep the fraud from being discovered.
On July 27, 2004, the SEC filed a complaint in the United States District Court for the Southern District of New York alleging that Michael Resnick, Mark P. Kaiser, Lee and Carter engaged in or substantially participated in a scheme to overstate Ahold's income in SEC filings and other public announcements for at least fiscal years 2001 and 2002. Resnick, Kaiser, Lee, and Carter were top executives at Columbia, Maryland based wholesale food distributor U.S. Foodservice, a major subsidiary of Ahold (Litigation Release No. 18797). The Commission also filed actions against Royal Ahold and others on Oct. 13, 2004 (Litigation Release No. 18929).
The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, and the New York Office of the Federal Bureau of Investigation.