September 19, 2005
SEC Charges Former Fleming Cos. Executives with Accounting Fraud
The SEC filed a civil fraud complaint alleging that five former officers of food wholesaler Fleming Cos., Inc., engaged in accounting fraud to pump up the companies revenue and earnings in 2001, before its collapse into bankruptcy. Among those named in suit are Mark David Shapiro, the company's former chief accounting officer, and Phil Murphy, a vice president in charge of the procurement division. The fraud involved a type of reverse channel-stuffing when Fleming loaded up on purchases to trigger larger rebates from vendors, which it immediately booked as income. The officers obtained side-letters from the vendors which allowed the company to book the income, as described in the SEC's Litigation Release (here):
The Commission alleges that defendants obtained misleading letters from Fleming vendors that were used to improperly accelerate recognition of the vendors' up-front payments, in violation of generally accepted accounting principles. The complaint also alleges that Shapiro and Murphy inflated earnings by executing large quarter-end inventory purchases solely to generate discounts that Fleming could immediately recognize as earnings, to help meet Wall Street analysts' earnings expectations. Fleming failed to disclose that these purchases were part of an intentional scheme to inflate earnings. In addition, Shapiro improperly inflated Fleming's 2001 earnings by directing the release of extensive accounting reserves, without proper justification or disclosure.
One of the five defendants agreed to a settlement and will pay a $100,000 civil penalty. (ph)
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