(By Scott Bauer, U.S. Department of Agriculture)
As part of a broader push to prosecute not just companies but corporate officials, the Securities and Exchange Commission has brought actions against AgFeed Industries Inc. and eight of its directors and officers over financial fraud.
Thomas Gorman, a partner at Dorsey & Whitney who defends public companies and individuals in SEC, U.S. Commodity Futures Trading Commission and other regulatory investigations and actions, reports that the fraud at AgFeed dates back to 2008. The publicly traded hog and feed production company with operations in the U.S. and China has since filed for bankruptcy.
According to the SEC complaint, the fraud was orchestrated by four members of AgFeed’s Chinese management: Junhong Xiong, who was the CEO from late 2006 through early 2011; Selina Jin, who was an accountant at the company from mid-2008 until early 2009 when he became CFO, a position he held until late 2010; Songyan Li, who was the firm’s chairman from late 2006 through early 2011; and Shaobo Ouyang, who was an accountant and comptroller from late October 2009 through mid-2013.
In early 2008, the firm raised around $57 million in three registered offerings, and used the proceeds to buy hog farms in China. In June 2008, the four officers named in the complaint began manipulating the accounts, inflating revenue, making fictitious accounting entries and manipulating the weight of hogs to inflate prices. In an attempt to conceal the fraud, the officers set up a parallel set of books, Gorman reports.
By early 2011, Xiong, Jin and Li had left their management positions, and most of AgFeed’s senior management and board were Americans. Two more defendants, K. Ivan Gothner and Edward Pazdro, joined the firm, Gothner becoming the chair of the audit committee and Pazdro replacing Jin as CFO.
In May 2011 Gothner and Pazdro learned of the fraud and obtained a USB drive containing the two sets of books. Ouyang admitted to them that he had been involved in the fraud, Gorman reports.
The following month, in-house Chinese counsel issued the new officers with a memorandum stating that the accounting fraud was widespread. Gothner and Pazdro, who were attempting to raise capital for expansions and acquisitions at this time, “engaged in a scheme to avoid or delay disclosure of the fraud,” according to the SEC complaint. This “scheme” included failing to disclose key evidence of the fraud to the company’s auditors and key personnel in management, misrepresenting to counsel that a third-party expert had been brought in to analyze the USB drive, and failure to conduct further inquiries into the fraud.
AgFeed finally disclosed the accounting fraud in December 2011, and in July 2013 the company filed for bankruptcy. The fraud resulted in overstatement of publicly reported revenues by approximately $239 million over a three-and-a-half year period, according to the SEC complaint.
The two other officers on the receiving end of the SEC actions—John Stadler, who served as chairman and interim CEO from February to December 2011, and Clayton Marshall, who served as a divisional CFO at the firm from mid-2011 through August 2012—settled with the commission, Gorman reports.
The SEC complaint against AgFeed and the six remaining defendants is currently in litigation.