Tuesday, July 12, 2005

Follow the Cheese As It Goes Round and Round

The U.S. Attorney's Office for the District of New Jersey and the SEC announced the filing of criminal and civil charges against Mark Cocchiola and Steven Venechanos, the former CEO and CFO of Suprema Specialties, Inc., a Patterson NJ-based cheese company related to fraudulent transactions in the company's products.  The defendants were indicted on 38 counts that include conspiracy, bank, securities, mail, and wire fraud (that's just about all the big ones) related to a scheme that resulted in over $600 million in bogus sales through a series of round-trip transactions with customers and vendors until Supreme collapsed in bankruptcy in 2002.  According to a press release issued by the USAO (here):

The Indictment alleges that the defendants participated with several of its major customers in a conspiracy to falsely inflate Suprema's sales by creating false invoices and other documents to make it appear as if Suprema had sold and shipped product to these customers, when it had not. According to the Indictment, the defendants also participated in a scheme to inflate its inventory by having certain Suprema vendors ship imitation cheese and other non-cheese products, which Suprema then re-labeled as higher-priced premium cheese and booked in its inventory. Certain vendors also shipped cheese to Suprema which Suprema booked as inventory on its fiscal year-end financial statements. These vendors had agreed not to invoice Suprema until after the fiscal year ended; this enabled Suprema to avoid booking the cost of the cheese, which would have offset the added inventory value. Suprema reported owning $60 million in inventory at the end of 2001; the Indictment alleges that this inventory figure was greatly inflated.

According to the Indictment, the bogus sales and inventory were recorded in Suprema's books, and the inflated numbers were reported to Suprema's lenders, to the SEC and to the investing public. This made Suprema appear far more successful and profitable to the investing public than it actually was. The Indictment alleges that Cocchiola and Venechanos participated in "road shows" in connection with the November 2001 secondary stock offering where they traveled the country touting these inflated numbers directly to potential investors.

The company's stock price hit a high of $14 -- trading under the symbol "CHEZ" naturally -- and the SEC Litigation Release (here) notes that Cocchiola and Venechanos sold shares while they were allegedly inflating the Suprema's sales, earning $4.8 and $1.4 million, respectively.  Like the collapse of Parmalat, there must be something about dairy products that makes them attractive for fraudulent schemes. (ph)

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Civil Enforcement, Fraud, Prosecutions, Securities | Permalink

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