NutraCea settles with SEC over alleged accounting irregularities

On January 13, 2011, the SEC charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate sales revenues.

Yesterday, NutraCea announced the case was settled without admitting or denying the charges, and no financial or regulatory penalties were assessed against the Arizona-based company.

Moving on​

"We are pleased to have resolved this matter,”​ said W. John Short, NutraCea’s CEO since late 2009. “It has been a time consuming and expensive process. During the course of the SEC investigation, our management and Board of Directors have cooperated fully with the SEC.”​

Short also said the company initiated a number of measures to “strengthen our Company as we worked toward emergence from Chapter 11”​. The measures included engaging special counsel during the SEC investigation to assist in developing and implementing best practices in corporate governance, compliance and internal control policies and procedures, appointing experienced accounting professional John Quinn in April 2010 as head of the audit committee, and appointing Dale Belt in June 2010 as chief financial officer (CFO) and chief accounting officer (CAO)."

"Overall, we have made dramatic improvements in our internal processes and controls while significantly strengthening our staff. None of the management or accounting staff investigated by the SEC remain with the company,”​ added Short.

History​

According to NutraCea, initial investigations began in the fall of 2008 by the Audit Committee of NutraCea's Board of Directors when the company's internal staff reported accounting irregularities. This was subsequently referred to the SEC and an informal investigation launched, which turned into a formal investigation in February 2009.

Following the SEC investigation, charges were brought against NutraCea's former CEO Bradley Edson, former CFO Todd Crow, and former Sr VP and secretary Margie Adelman for their roles in the scheme. Charges were also brought against the company’s former controller Joanne Kline and former director of financial services Scott Wilkinson.

To read the SEC’s complaint, please click here​.

In addition to the NutraCea settlement, the SEC states that four of the five individuals agreed to settle the SEC's charges against them. However, the Commission said its litigation against Mr Crow continues.

“I don’t want to hear it”​

The case revolves around alleged accounting irregularities concerning $2.6 million in false sales in the second quarter of 2007to Bi-Coastal Pharmaceutical Corp.

According to the SEC's complaint, Mr Edson instructed Bi-Coastal's president to falsify his family’s financial statements to reflect a higher net worth in order to support the false sales to Bi-Coastal. In reality, the ‘down-payment’ from Bi-Coastal came from NutraCea's former COO. When Ms. Kline discovered this and tried to discuss with Mr Crow, she says that Mr Crow “covered his ears and said, 'No, no, no, no, no, no, no, no, no. I don't want to hear it.'”​

The SEC also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007.

As a result the ITV Global and Bi-Coastal transactions, NutraCea is alleged to have overstated its product sales revenue by 36.8 percent for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by more than 89 percent in the second quarter of 2007, more than 17.6 percent in the third quarter, and nearly 7 percent for the fiscal year.

Mr Edson resigned from NutraCea in March 2009.

Chapter 11​

The company filed for protection under Chapter 11 of the US Bankruptcy Code on November 10, 2009, and exited Chapter 11 a year later on November 30, 2010.

"While there is still much to be done, our recent emergence from Chapter 11 and this settlement with the SEC, will allow us to redirect significant management and financial resources toward building a profitable and sustainable business for our shareholders and other constituencies,”​ said Short.