Summary of Complaint & Release, Article Review Example

Complaint Summary

The complaint was officially filed by the Security and Exchange Commission (SEC) in the federal district court of Arizona, alleging that the five conspirators of NutraCea, formerly known as NutraCea, Inc., falsely claimed $2.6 million in fictional revenue from sales that were actually never transacted. The specific allegation noted in the complaint summary was that the five employees intentional misrepresented revenues in the financial statements for the thirds and fourth quarter of the 2007 fiscal year. The complaint specifically notes these misrepresented sales were to Bi-Coastal Pharmaceutical Corp. which resulted in 35% overstated product sales revenue of as much as 35% in the second quarter of 2007. The false sales impacted the company over the course of the year and carried over into progressive fiscal terms. This can be seen in the fact that in the third fiscal quarter of 2007 after NutraCea overstated product sales revenue by 29% and NutraCea  incorrectly documented their earnings on a bill issued to  ITV Global, Inc. for $1.9 million, the natural progression of these acts resulted in the company overstating its product sales revenue by 36.8% by the end of the 2007 fiscal year. As a result of the overstated product sales revenue from these two transactions, NutraCea misstated its operating loss by more than 89% in the second quarter of 2007, and over 17.6% in the third fiscal quarter. On March 28, 2008, NutraCea incorporated filed a fraudulent 10-K form for fiscal year 2007 where the company issued $125 million dollar offering of common stock and they were forced to refile an update in 2009.

The complaint details the biography of each defendant, including the company as a defendant as well. All of the Defendants are in their 50’s or older other than Crow and Joanne D. Kline, who is 48, while Crow is the oldest at 62 years old. Under the Defendant’s fraudulent scheme section, the complaint further explains some of the financial behind the crime, pointing out that, “through false sales of $2.6 million of product to Bi-Coastal in the second quarter, NutraCea was able to record $10.3 million in sales and thereby exceed its previously announced guidance for gross sales of between $9 million and $10 million.” It is revealed that the funds that were falsely claimed as revenue were actually the product of a loan provided to the company by the previous Chief Financial Officer, Crow. The complaint summary further notes that around the time the transaction was being documented, Kline told Scott Wilkinson the $1 million down payment might have come from a loan from the former COO. Kline stated however that she didn’t discuss this issue with anyone else because she feared being terminated.

Release Summary

The following is a summary of accounting and auditing release No. 3234, which was issued on January 20, 2011. The title of the release is “Securities and Exchange Commission v. NutraCea, et al.” The release was issued by the  United States District Court, District of Arizona. The release notes that on January 13, 2011, five high level employees of NutraCea, an Arizona based health food product manufacturer, were charged by the Securities and Exchange Commission accounting fraud, specifically in regards to the false reporting of revenues from product sales. The five employees were composed of three executives and two accountants, who were charged with falsely reporting earnings for the third and fourth quarter of the company’s 2007 fiscal year. The SEC charged NutraCea’s previous chief executive officer, Bradley D. Edson, the previous chief financial officer, Todd C. Crow, and the previous senior vice president and secretary, Margie Adelman, as well as the previous controller, Joanne D. Kline, and the previous director of financial services, Scott Wilkinson. The complaint was officially filed by the SEC in the federal district court of Arizona, alleging that the five conspirators falsely claimed $2.6 million in made up revenue from sales that never occurred.

The release summary then breaks down the details of each judgment for each defendant in the complaint by the SEC, noting that, the company NutraCea, Edson, Adelman, Kline, and Wilkinson all consented to the entry of an order that permanently enjoins them from future violations of “Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.” Part of Edson’s also agreed to being permanently barred from being an officer and a director, and to pay a civil penalty of $100,000. He was also obligated to reimburse NutraCea, based on the Sarbanes Oxley Act of 2002, for the $350,000 in bonuses he was awarded in 2008. A part of Adelman’s consent agreement was that he had to be barred from being an officer or director for 5 years. Kline and Wilkinson consented and agreed to pay civil penalties for $25,000. They also consented to the issuance of administrative orders of the Commission’s Rules of Practice, which suspends for a year from practicing as an accountant or appearing before the Commission as an accountant. All of these settlements must be approved by the U.S. District Court of Arizona. The complaint against Crow states that he aided and abetted violations of the anti-fraud, lied to auditors, doctored books and records, violated financial records and internal controls and that he violated Exchange Act Rule 13a-14 by falsely signing certifications mandated by Section 302 of the Sarbanes Oxley Act with the intention to mislead and misrepresent the financial performance of the company.  While SEC is perusing a permanent injunction, a director and officer bar and a civil penalty, the case against Crow is still ongoing.