SEC FILES ACTIONS INVOLVING THE UNDERREPORTING OF THE COST FOR WALNUTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission ("Commission") filed separate actions against Diamond Foods, Inc. ("Diamond"), a San Francisco-based snack food company, and its former chief executive officer (CEO) Michael Mendes, and its former chief financial officer (CFO) Steven Neil for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts.

According to the Commission's complaints against former CFO Steven Neil and Diamond, which were filed in federal court in San Francisco, Neil directed the effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods. In internal e-mails, Neil referred to these commodity costs as a "lever" to manage earnings in Diamond's financial statements. By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts' estimates for fiscal quarters in 2010 and 2011. After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011.

Diamond Foods agreed to pay $5 million to settle the SEC's charges. Former CEO Michael Mendes, who allegedly should have known that Diamond's reported walnut cost was incorrect at the time he certified the company's financial statements, also agreed to settle charges against him. The SEC's litigation continues against Neil.

According to the Commission's complaints filed against Neil and Diamond, one of the company's significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers. With sharp increases in walnut prices in 2010, Diamond encountered a situation where it needed to pay more to its growers in order to maintain longstanding relationships with them. Yet Diamond could not increase the amounts paid to growers for walnuts, which was its largest commodity cost, without also decreasing the net income that Diamond reports to the investing public. And Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts.

The Commission alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways. He devised two special payments to please Diamond's walnut growers and bring the total yearly amounts paid to growers closer to market prices, but improperly excluded portions of those payments from year-end financial statements. Instead of correctly recording the costs on Diamond's books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered. By disguising the reality that the payments were related to prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed estimates by analysts. For instance, after adjusting the walnut cost in order to meet an EPS target for the second quarter of 2010, Diamond went on to tout its record of "Twelve Consecutive Quarters of Outperformance" in its reported EPS results during investor presentations.

The Commission further alleges that Neil misled Diamond's independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments. Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond's reported EPS in fiscal years 2010 and 2011.

In a separate settled administrative proceeding filed today against former CEO Michael Mendes, the Commission found that Mendes should have known that Diamond's reported walnut cost was incorrect because of information he received at the time, and that he omitted facts in certain representations to Diamond's outside auditors about the special walnut payments. Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations. Mendes already has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting.

The Commission's complaint against Diamond alleges that Diamond violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the allegations, Diamond has consented to the entry of a permanent injunction against future violations of the relevant federal securities laws, and the imposition of a $5 million penalty.

The Commission's complaint against CFO Neil alleges that Neil violated Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and Section 304 of the Sarbanes-Oxley Act of 2002, and aided and abetted Diamond's violations of 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The complaint against Neil seeks a permanent injunction, civil penalties, an officer and director bar, disgorgement plus prejudgment interest, and relief pursuant to the Sarbanes-Oxley Act of 2002.

The cease and desist order against CEO Mendes alleges that he directly violated Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and caused Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the factual findings, Mendes has consented to the entry of a cease and desist order against committing violations of Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and causing Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13, and the imposition of a $125,000 penalty. The Commission's order against Mendes noted that he already has returned to Diamond or has forfeited over $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting.

The Commission took into account Diamond's cooperation with the SEC's investigation and its remedial efforts once the fraud came to light. The penalties collected from Diamond and Mendes may be distributed to harmed investors if SEC staff determines that a distribution is feasible.

FORMER CFO TBW PLEADS GUILTY TO FRAUD

The following excerpt is from the Department of Justice website:
Tuesday, March 20, 2012
WASHINGTON – Delton de Armas, a former chief financial officer (CFO) of Taylor, Bean & Whitaker Mortgage Corp. (TBW), pleaded guilty today to making false statements and conspiring to commit bank and wire fraud for his role in a more than $2.9 billion fraud scheme that contributed to the failures of TBW and Colonial Bank.

 The guilty plea was announced today by Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride for the Eastern District of Virginia; Christy Romero, Deputy Special Inspector General, Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP); Assistant Director in Charge James W. McJunkin of the FBI’s Washington Field Office; David A. Montoya, Inspector General of the Department of Housing and Urban Development (HUD-OIG); Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC-OIG); Steve A. Linick, Inspector General of the Federal Housing Finance Agency (FHFA-OIG); and Rick A. Raven, Acting Chief of the Internal Revenue Service Criminal Investigation (IRS-CI).

De Armas, 41, of Carrollton, Texas, pleaded guilty before U.S. District Judge Leonie M. Brinkema in the Eastern District of Virginia.  De Armas faces a maximum penalty of 10 years in prison when he is sentenced on June 15, 2012.

“As TBW’s chief financial officer, Mr. de Armas concealed a massive $1.5 billion deficit in TBW’s funding facility and another large deficit on TBW’s books,” said Assistant Attorney General Breuer.  “He tried to conceal the gaping holes by falsifying financial statements and lying to investors as well as the government.  Ultimately, Mr. de Armas’ criminal conduct, along with that of his co-conspirators, contributed to the collapse of TBW and Colonial Bank.  With today’s guilty plea, Mr. de Armas joins seven other defendants – including the former chairman of TBW Lee Bentley Farkas – who have been convicted of participating in this massive fraudulent scheme.”

“When Mr. de Armas learned of a hole in Ocala Funding’s assets, he used his position as CFO to cover it up and mislead investors,” said U.S. Attorney MacBride.  “Today’s plea is the eighth conviction in one of the nation’s largest bank frauds in history.  As CFO, Mr. de Armas could have put a stop to the fraud the moment he discovered it.  Instead, the hole in Ocala Funding grew to $1.5 billion on his watch, and as it grew, so did his lies to investors and the government.”

According to court documents, de Armas joined TBW in 2000 as its CFO and reported directly to its chairman, Lee Bentley Farkas, and later to its CEO, Paul Allen.  He admitted in court that from 2005 through August 2009, he and other co-conspirators engaged in a scheme to defraud financial institutions that had invested in a wholly-owned lending facility called Ocala Funding.  Ocala Funding obtained funds for mortgage lending for TBW from the sale of asset-backed commercial paper to financial institutions, including Deutsche Bank and BNP Paribas. The facility was managed by TBW and had no employees of its own.

According to court records, shortly after Ocala Funding was established, de Armas learned there were inadequate assets backing its commercial paper, a deficiency referred to internally at TBW as a “hole” in Ocala Funding.  De Armas knew that the hole grew over time to more than $700 million.  He learned from the CEO that the hole was more than $1.5 billion at the time of TBW’s collapse.  De Armas admitted he was aware that, in an effort to cover up the hole and mislead investors, a subordinate who reported to him had falsified Ocala Funding collateral reports and periodically sent the falsified reports to financial institution investors in Ocala Funding and to other third parties.  De Armas acknowledged that he and the CEO also deceived investors by providing them with a false explanation for the hole in Ocala Funding.

De Armas also admitted in court that he directed a subordinate to inflate an account receivable balance for loan participations in TBW’s financial statements.  De Armas acknowledged that he knew that the falsified financial statements were subsequently provided to Ginnie Mae and Freddie Mac for their determination on the renewal of TBW’s authority to sell and service securities issued by them.

In addition, de Armas admitted in court to aiding and abetting false statements in a letter the CEO sent to the U.S. Department of Housing and Urban Development, through Ginnie Mae, regarding TBW’s audited financial statements for the fiscal year ending on March 31, 2009.  De Armas reviewed and edited the letter, knowing it contained material omissions.  The letter omitted that the delay in submitting the financial data was caused by concerns its independent auditor had raised about the financing relationship between TBW and Colonial Bank and its request that TBW retain a law firm to conduct an internal investigation.  Instead, the letter falsely attributed the delay to a new acquisition and TBW’s switch to a compressed 11-month fiscal year.

“With our nation in a housing crisis, de Armas, as chief financial officer of TBW, one of the country’s largest mortgage lenders, papered over a gaping hole in the balance sheet of TBW subsidiary Ocala Funding and lied to regulators and investors to cover it up,” said Deputy Special Inspector General Romero for SIGTARP.  “The fraud provided cover to others at TBW to misappropriate more than $1 billion in Ocala funds and sell fraudulent, worthless securities to conspirators at Colonial BancGroup.  SIGTARP and its law enforcement partners stopped $553 million in TARP funds from being lost to this fraud and brought accountability and justice that the American taxpayers deserve.”
“Mr. de Armas has admitted that, during his tenure at TBW, he purposefully misled investors in a massive scheme to defraud financial institutions,” said FBI Assistant Director in Charge McJunkin.  “The actions of Mr. de Armas and his co-conspirators contributed to the financial crisis and led to the collapse of one of the country’s largest commercial banks.  The FBI and our partners remain vigilant in investigating such fraudulent activity in our banking and mortgage industries.”

“The guilty plea of Mr. de Armas is one small measure in our continued efforts to restore the trust and confidence of the general public and of investors in our financial system,” said HUD Inspector General Montoya.  “In response to the many recent articles of mortgage fraud and misconduct, the mortgage industry needs to do much to rethink their values and their idea of client service in order to help rebuild a stronger economy and to restore the confidence of American homeowners.”

“The Federal Deposit Insurance Corporation Office of Inspector General is pleased to have played a role in bringing to justice yet another senior official in a position of trust who was involved in one of the biggest and most complex bank fraud schemes of our time,” said FDIC Inspector General Rymer.  “The former chief financial officer of Taylor, Bean & Whitaker is the latest participant who will be held accountable for seeking to undermine the integrity of the financial services industry.  Even as the financial and economic crisis seems to be easing, we reaffirm our commitment to ensuring that those contributing to the failures of financial institutions and corresponding losses to the Deposit Insurance Fund will be punished to the fullest extent of the law.”
“Mr. de Armas and his colleagues committed an egregious crime,” said FHFA Inspector General Linick.  “FHFA-OIG is proud to be part of the team that continues to protect American taxpayers.”

In April 2011, a jury in the Eastern District of Virginia found Lee Bentley Farkas, the chairman of TBW, guilty of 14 counts of conspiracy, bank, securities and wire fraud.  On June 30, 2011, Judge Brinkema sentenced Farkas to 30 years in prison.  In addition, six individuals have pleaded guilty for their roles in the fraud scheme, including: Paul Allen, former chief executive officer of TBW, who was sentenced to 40 months in prison; Raymond Bowman, former president of TBW, who was sentenced to 30 months in prison; Desiree Brown, former treasurer of TBW, who was sentenced to six years in prison; Catherine Kissick, former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division (MWLD), who was sentenced to eight years in prison; Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD, who was sentenced to three months in prison; and Sean Ragland, a former senior financial analyst at TBW, who was sentenced to three months in prison.

The case is being prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Robert Zink of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Charles Connolly and Paul Nathanson of the Eastern District of Virginia.  This case was investigated by SIGTARP, FBI’s Washington Field Office, FDIC-OIG, HUD-OIG, FHFA-OIG and IRS-CI.  The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury also provided support in the investigation.  The Department would also like to acknowledge the substantial assistance of the U.S. Securities and Exchange Commission in the investigation of the fraud scheme.

FORMER WASTE MANAGEMENT CFO ORDERED TO PAY $25 MLLION

Te folowing excerpt is fromthe SEC website: July 29, 2011 Former CFO of Waste Management Ordered to Pay $2.5 Million The Securities and Exchange Commission announced today that on July 28, 2011, the United States District Court for the Northern District of Illinois entered an Amended Final Judgment against James E. Koenig, the former Chief Financial Officer of Waste Management Corporation, ordering that he pay $2.5 million in SEC v. James E. Koenig, 02 C 2180 (N.D. Ill. filed Mar. 26, 2002). Koenig was ordered to make an upfront payment of $1.25 million and to pay the remaining $1.25 million in regular installments over the next two years. The Commission’s complaint alleged that beginning in 1992 and continuing into 1997, Koenig and others engaged in a systematic scheme to falsify and misrepresent Waste Management’s financial results with profits being overstated by $1.7 billion. In June 2006, after an 11-week trial, a jury returned a verdict in the Commission’s favor against Koenig on all 60 violations charged, including securities fraud, falsifying company books and records, making false statements in filings with the Commission, lying to auditors, and aiding and abetting the company’s violations. On December 21, 2007, following a two-day bench trial on remedies, the district court entered a Final Judgment against Koenig that permanently barred him from acting as an officer or director of a public company, and enjoined him from violating, or aiding and abetting violations of, Sections 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934; Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder; and Section 17(a) of the Securities Act of 1933. The judgment also required Koenig to pay disgorgement, prejudgment interest, and civil penalties. On February 26, 2009, the U.S. Court of Appeals for the Seventh Circuit affirmed all issues of liability and trial procedure, but remanded for further proceedings with respect to the monetary amount of the judgment. On November 23, 2009, the district court on remand reaffirmed its prior Final Judgment, and Koenig appealed. The Amended Final Judgment represents a compromise reached through mediation before the Seventh Circuit’s Settlement Conference Office while the case was on appeal. The permanent officer and director bar and injunction remain unchanged and in full force and effect."

SEC GETS FAVORABLE JURY VERDICT AGAINST COMPANY CFO

July 12, 2011
The following case is an excerpt from the SEC website:

On July 8, 2011, following a February 25, 2011 jury verdict in favor of the Commission and partial summary judgment granted in the Commission’s favor on November 18, 2009, the Honorable William Q. Hayes of the United States District Court for the Southern District of California issued a final judgment permanently enjoining Ran H. Furman, the former CFO of Island Pacific, Inc., and a resident of San Diego, California, from violating the antifraud, books and records, lying to auditors, and certification provisions of the federal securities laws, prohibiting him for seven years from acting as an officer or director of a public company, and assessing a $75,000 civil penalty.
On September 4, 2008, the Securities and Exchange Commission filed a Complaint alleging that
Island Pacific improperly recorded and reported $3.9 million in revenue from a sham transaction that was based on a License Agreement that had been altered by Furman, unbeknownst to the other party to the transaction. In its June 23, 2011 Order granting relief, the Court found, among other things, “the evidence presented at trial and on summary judgment demonstrates that Furman knowingly participated in and facilitated the alteration of the License Agreement, [engaged in] repeated violations of GAAP and the company’s revenue recognition policy, [participated in] the firing of [a whistle-blowing company employee] and [made] repeated misrepresentations to the auditors” which merited imposition of requested relief. The Court further concluded that “Furman played an essential and knowing role in the securities law violations at issue.”
The Court permanently enjoined Furman from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the record-keeping and internal control provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, the false statements to auditors provisions of Exchange Act Rule 13b2-2, and the officer certification provisions of Rule 13a-14 of the Exchange Act, and aiding and abetting violations of the issuer reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. In addition, the Court prohibited Furman from acting as an officer or director of a public company for a period of seven years and assessed a third tier civil penalty of $75,000.
Previously, on October 16, 2008, the Court entered final judgments of permanent injunction and other relief against Island Pacific and former CEOs Barry M. Schechter and Harvey Braun, pursuant to their consents, and on October 24, 2008, the Commission instituted an administrative proceeding against Schechter, pursuant to which he was permanently suspended from appearing or practicing before the Commission as an accountant."