Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, September 17, 2007

SEC Charges Two Former Penn Traffic Executives with Accounting Fraud

The SEC today announced that it filed civil fraud charges against two former officers of the Penn Traffic Company, a Syracuse-based retail and wholesale food company, for repeatedly inflating reported income by improperly accounting for vendor rebates and other promotional allowances.  The SEC alleges that the former Senior Vice President and Chief Marketing Officer, Leslie H. Knox, and a former Vice President, Linda J. Jones, orchestrated a scheme to inflate Penn Traffic's income and other financial results by prematurely recognizing promotional allowances at Penn Traffic. Promotional allowances — also referred to as rebates, slotting fees, or vendor allowances — are fees paid from vendors in exchange for various marketing and promotional activities, such as inclusion in a supermarket's weekly circular.  According to the complaint, from approximately the second quarter of Penn Traffic's Fiscal Year 2001 through at least the fourth quarter of FY 2003, Penn Traffic prematurely recognized promotional allowances in advance of Penn Traffic's performance of certain key, contingent activities. Knox and Jones orchestrated, directed, and participated in this scheme in an effort to meet internal budget plans. The complaint alleges that as a result of the willful misconduct of Knox and Jones, Penn Traffic pulled forward approximately $10 million in operating income, and these falsified financials were included in Penn Traffic's public filings.

The U.S. Attorney for the Northern District of New York, Glenn T. Suddaby, today separately announced that a federal grand jury impaneled within the Northern District of New York has returned an indictment against Knox and Jones on related criminal charges.

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