Securities Law Prof Blog

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

Thursday, March 5, 2009

Three Former Krispy Kreme Officers Settle Fraud Charges

The SEC filed a Complaint in the United States District Court for the Middle District of North Carolina against three former officers of Krispy Kreme Doughnuts, Inc.: Scott A. Livengood (“Livengood”) (former CEO), John W. Tate (“Tate”) (former COO) and Randy S. Casstevens (“Casstevens”) (former CFO). The Complaint alleges that between February 2003 and May 2004, the Company inflated its quarterly and annual earnings and omitted to disclose the impact of certain adjustments on its ability to achieve what had become a prime benchmark of its historical performance, i.e., reporting quarterly earnings per share (“EPS”) that exceeded its previously announced EPS guidance by one cent. According to the Complaint, in the fourth quarter of fiscal 2003 and the first three quarters of fiscal 2004, the Company under accrued or reversed previously accrued incentive compensation expense pursuant to Krispy Kreme’s Senior Executive Incentive Compensation Plan. The respective under accrual and reversals, which were inconsistent with the formal incentive plan, were performed to inflate the Company’s earnings so as to meet the benchmark of exceeding the Company’s guidance by one cent. The Complaint alleges that the defendants understood the existence and significance of the under accrual and the reversals to the Company’s earnings, yet failed to disclose either to the public. In addition, the defendants described favorably the Company’s performance in earnings releases and analyst calls and did not disclose the under accrual and reversals or their impact on Company earnings. Further, the Complaint alleges that Livengood and Casstevens also signed and certified Krispy Kreme filings that misstated the Company’s financial performance. The Complaint also alleges that Tate caused Krispy Kreme to engage in a bogus round-trip transaction to falsely increase its quarterly earnings in the second quarter of fiscal 2004. Finally, the Complaint alleges that each of the defendants sold stock following the Company’s earnings announcement for the second quarter of fiscal 2004.

On the same day the Complaint was filed, the defendants consented to orders permanently enjoining the defendants from future violations, disgorgement of ill-gotten gains with prejudgment interest, and the imposition of civil penalties against defendants. The defendants consented to the entries of the final judgments without admitting or denying the allegations of the Complaint.

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