SEC Charges Seven in Ahold Fraud

''The use of third-party confirmations is an important part of the audit process, and the commission will hold accountable those who work to subvert it,'' maintains the commission.

The Securities and Exchange Commission has filed enforcement actions against seven individuals stemming from the massive financial fraud at the U.S. Foodservice Inc. subsidiary of Royal Ahold.

The individuals worked as independent food brokers, sales directors, and, in one case, as the owner of a company that supplied vegetables, pasta, and dairy products to supermarket chains, according to Bloomberg. They were accused of signing and returning materially false audit confirmations sent to them by the U.S. Foodservice’s auditors.

The SEC alleged that U.S. Foodservice personnel contacted vendors and urged them to complete the false confirmations. In some cases personnel pressured the vendors, according to the commission; in other cases they allegedly provided side letters assuring the vendors that they did not owe U.S. Foodservice the amounts they were signing off on.

According to the SEC, the individuals knew that these confirmations materially overstated the amounts of promotional allowance income paid or owed to U.S. Foodservice — often by millions of dollars and by more than 100 percent, according to the commission.

The SEC’s complaint alleged that U.S. Foodservice inflated its promotional allowance income by at least $700 million for fiscal years 2001 and 2002, causing Ahold to report materially false operating and net income for these periods. In 2003, Bloomberg noted, Ahold admitted that it overstated earnings by $1.28 billion, mostly related to promotional allowances at U.S. Foodservice.

The seven individuals are Brian Crowley, Robert Henuset, Ritchie Langfield, Frank Lysiak, Ernie Rosenberg, Dale Schulz, and Larry Stone. All seven agreed to settle the commission’s action, without admitting or denying the allegations, by consenting to permanent injunctions and paying a $25,000 penalty. In addition, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against all seven for conspiracy to falsify books and records.

The new actions raise to 16 the number of non-Ahold individuals against whom the SEC has brought charges for misrepresenting financial information to Ahold’s independent auditors, said Scott Friestad, associate director of the commission’s Division of Enforcement. “The use of third-party confirmations is an important part of the audit process, and the commission will hold accountable those who work to subvert it,” he added. The commission added that its investigation is continuing.

In January, the SEC filed enforcement actions against nine other individuals who worked for vendors, alleging they aided and abetted the same financial fraud by signing and returning materially false audit confirmations.

Charges have also been brought against former U.S. Foodservice chief financial officer Michael Resnick and former marketing manager Mark Kaiser. Their trial is scheduled for next year in Manhattan federal court, according to Bloomberg.

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