Instructions
For the week 8 research assignment, you will locate and research a case on Earnings Management found in an Accounting and Auditing Enforcement Release (AAER) of the Securities and Exchange Commission (SEC). Select a publicly traded company that uses U.S. GAAP for which an AAER was published on the SEC website in the past five years.After selecting your case, review any credible articles published relating to this company as well as information available on the company’s Investor Relations website to evaluate the following items:• Identify specific facts of the case that caused the SEC to become involved in the investigation • Discuss how the SEC handled the complaints.• How did the company react to the investigation? • Were any sanctions imposed by the SEC? If so what, were they.• What steps did the company take to rectify the situation?• What’s the current status of the investigation today? UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 10977 / September 3, 2021
SECURITIES EXCHANGE ACT OF 1934
Release No. 92874 / September 3, 2021
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 4248 / September 3, 2021
ADMINISTRATIVE PROCEEDING
File No. 3-20523
CORRECTED ORDER INSTITUTING CEASEAND-DESIST PROCEEDINGS, PURSUANT
TO SECTION 8A OF THE SECURITIES ACT
OF 1933 AND SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF 1934,
MAKING FINDINGS AND IMPOSING A
CEASE-AND-DESIST ORDER
In the Matter of
THE KRAFT HEINZ CO.,
and
EDUARDO PELLEISSONE,
Respondents.
I.
The Securities and Exchange Commission (“Commission”) deems it appropriate that
cease-and-desist proceedings be, and hereby are, instituted against The Kraft Heinz Co.
(“KHC”) and against Eduardo Pelleissone (“Pelleissone”), pursuant to Section 8A of the
Securities Act and Section 21C of the Exchange Act.
II.
In anticipation of the institution of these proceedings, KHC and Pelleissone (collectively
“Respondents”) have submitted Offers of Settlement (the “Offers”) which the Commission has
determined to accept. Solely for the purpose of these proceedings and any other proceedings
brought by or on behalf of the Commission, or to which the Commission is a party, and without
admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and
the subject matter of these proceedings, which are admitted, and except as provided herein in
Section V, Respondents consent to the entry of this Order Instituting Cease-And-Desist
Proceedings Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act,
Making Findings and Imposing a Cease-And-Desist Order (“Order”), as set forth below.
III.
On the basis of this Order and Respondents’ Offers, the Commission finds 1 that:
Summary
1.
This matter concerns a multi-year expense management scheme by KHC’s
procurement division to improperly reduce KHC’s cost of goods sold and achieve cost savings that
were externally touted to the market and internally tied to performance-based targets. The
misconduct resulted in KHC reporting inflated earnings before interest, taxes, depreciation and
amortization (“EBITDA”), a key performance metric for investors. From the fourth quarter of
2015 through the end of 2018 (the “Relevant Period”), procurement employees negotiated
agreements with numerous suppliers to obtain upfront cash payments and discounts, in exchange
for future commitments to be undertaken by KHC, while improperly documenting the agreements
in ways that caused the company to prematurely and improperly recognize the expense savings.
2.
In accordance with accounting principles generally accepted in the United States
(“Generally Accepted Accounting Principles” or “U.S. GAAP”), if the upfront cash and
discounts are tied to future commitments, then the expense savings must be recognized over the
period the future obligations are satisfied. Procurement division employees, however, negotiated
and maintained false and misleading supplier contracts that made it appear as if expense savings
were provided in exchange for past or same-year events performed by KHC, when, in reality,
they were upfront payments in exchange for a future benefit from KHC, in order to improperly
recognize costs savings prematurely.
3.
Over the Relevant Period, KHC entered into approximately 59 transactions which
were improperly recognized as a result of the false and misleading documentation negotiated and
generated by procurement division employees. Had these transactions been properly documented
and accounted for, KHC’s cost of goods sold during that period would have been approximately
$50 million higher than reported.
4.
These misleading transactions, along with numerous other misstated accounting
entries, led KHC, in June 2019, to restate its financial statements on Form 10-K. The restatement
included financial data reported for fiscal year (“FY”) 2015, as well as the financial statements
contained in Forms 10-Q and 10-K for FYs 2016 and 2017 and the first three quarters of FY 2018
that were filed with the Commission. KHC corrected a total of $208 million in cost savings
arising from 295 transactions, and also corrected its Adjusted EBITDA during the relevant
period, as reflected in the restatement.
5.
Pelleissone, KHC’s then Chief Operating Officer and Global Head of Operations,
was presented with several warning signs indicating that expenses were being managed through
manipulating supplier agreements, imposed pressures on the procurement division to deliver
unrealistic savings targets, and, as a member of the company’s disclosure committee,
1
The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other person
or entity in this or any other proceeding.
2
unreasonably approved KHC financial statements that he should have known were materially false
and misleading.
6.
A procurement executive who reported to Pelleissone (“Procurement Executive”),
managed the procurement division, approved certain of KHC contracts with suppliers, and had
sub-certification responsibilities in 2018. Despite numerous warning signs that should have
alerted him that procurement division employees were circumventing KHC’s internal controls in
order to achieve cost savings targets, the Procurement Executive approved and failed to prevent
several supplier contracts that masked the true nature of the underlying transactions. The
Procurement Executive also should have known that this false and misleading contract
documentation was provided to KHC’s finance and controller groups, thus causing KHC to
prematurely recognize cost savings in contravention of U.S. GAAP.
RESPONDENTS
7.
KHC is a food and beverage manufacturing company co-headquartered in
Chicago, Illinois, and Pittsburgh, Pennsylvania. The company has a class of shares registered
with the Commission pursuant to Exchange Act Section 12(b), which trades on NASDAQ under
the symbol “KHC.” KHC was created in July 2015 through the merger of public company Kraft
Foods Group Inc. (“Kraft”) with and into private company H.J. Heinz Co. (“Heinz”).
8.
Pelleissone, age 47, resides in Chicago, Illinois. Pelleissone was KHC’s Global
Head of Operations and Chief Operating Officer between July 2015 and November 2018, and its
Head of Strategic Projects from November 2018 until June 2019, when he left the company.
During the period of 2016 through 2018, Pelleissone served as a member of KHC’s disclosure
committee, which was tasked with reviewing and affirming the accuracy and completeness of the
company’s quarterly and annual filings. Before the merger with Kraft, Pelleissone was the
Global Head of Operations for Heinz. Pelleissone is currently the president of operations in a
regional subsidiary of a different publicly traded company.
FACTS
Background
9.
Following the Kraft-Heinz merger in July 2015, newly-formed KHC made
concerted efforts to eliminate redundancies and reduce operational costs. As part of its merger
strategy, KHC disclosed to investors that the company would deliver on certain cost savings
results throughout the company, including in the procurement division, a large cost center for
KHC. The cost savings strategy, including its impact on costs of goods sold, was widely covered
by analysts at the time. Although the company achieved the promised cost savings, individual
procurement employees had key performance targets tied to additional cost savings from the
procurement division.
10.
To implement this cost savings strategy, the company set performance targets for
procurement division employees tied to savings realized through negotiations with suppliers.
For a period immediately following the merger between Kraft and Heinz, these targets were
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generally achieved, due to, among other things, synergies from renegotiating supplier contracts
in light of the newly-combined company’s increased purchasing power.
11.
By 2017, however, the procurement division had largely exhausted its ability to
extract synergies from the merger. In addition, the cost of many ingredient and packaging
supplies increased significantly due to adverse inflation and unfavorable foreign exchange rates.
12.
The combined impact of the increased raw material costs and savings already
realized in prior years made it more difficult for procurement division employees to achieve
additional, incremental savings in 2017 and 2018. The procurement division, under the
Procurement Executive’s direction and with Pelleissone’s oversight, implemented overly
ambitious annual budget and division-level savings targets, based on corporate KHC targets.
They, in turn, pushed procurement division employees to come up with ideas to generate
additional immediate, same-year, savings, and did not adjust the internal targets.
Expense Management Misconduct
13. The expense management misconduct was carried out by KHC’s procurement
division employees, across multiple geographic zones, and involved several strategies employed to
misrepresent the true nature of transactions, resulting in accounting errors and misstatements. Out
of the 295 transactions that KHC ultimately corrected in connection with the restatement,
approximately 59 were part of the procurement division’s expense management misconduct,
including the following types of transactions:
14.
•
“Prebate Transactions” – KHC procurement division employees agreed to futureyear commitments, like contract extensions and future-year volume purchases, in
exchange for savings discounts and credits by suppliers (“Prebates”), but
mischaracterized the savings in contract documentation, which stated that they
were for past or same-year purchases made by KHC (“Rebates”);
•
“Clawback Transactions” – KHC procurement division employees agreed to take
upfront payments subject to repayment through future price increases or volume
commitments, but documented the transaction in ways which obscured the
repayment obligation; and
•
“Price Phasing Transactions” – Suppliers agreed to reduce their prices during a
certain period in exchange for an offsetting price increase in a future period, but
the full nature of the arrangement was not communicated by KHC procurement
division employees to KHC controller group employees.
In accordance with U.S. GAAP, 2 KHC should have recognized the savings
2
GAAP requires that a “rebate or refund of a specified amount of cash consideration that is payable pursuant to a
binding arrangement only if the entity completes a specified cumulative level of purchases or remains a customer
for a specified time period shall be recognized as a reduction of the cost of sales based on a systematic and rational
4
provided in exchange for future commitments over the period of time that KHC performed the
commitments. Accordingly, when a prebate was provided in exchange for a contract extension
or future-year volume commitment, the savings should have been recognized over the life of the
extension, or the future period in which KHC purchased the goods from the supplier.
Conversely, rebate savings from past or same-year commitments should have been recognized
ratably over the period in which they were earned. Finally, clawback transactions should have
been recognized ratably over the clawback period—when it was reasonably estimable that KHC
would satisfy its repayment obligation.
2014-2015: Early Expense Management Misconduct
15.
In the months leading up to the merger with Kraft, the procurement division of
Heinz was faced with a $10 million year-end cost savings gap. This gap created pressure for the
division to come up with ideas to generate additional same-year savings. As a result, the
Procurement Executive, who worked at Heinz at the time, took steps with regard to a previouslynegotiated transaction with a packaging supplier to improperly recognize additional cost savings
in 2015. Pelleissone received monthly performance reports of these negotiations.
16.
The original agreement, which the Procurement Executive signed the year earlier
on behalf of Heinz, provided that the supplier would make a $3.5 million upfront payment
(commonly referred to as a “prebate”) to Heinz in exchange for the parties’ signing a new threeyear contract in 2015. The letter of intent further stated that the supplier was not obligated to
provide the $3.5 million prebate payment if the parties failed to execute the new contract.
Consistent with this contract language, the Procurement Executive delivered a presentation to
Pelleissone which communicated that the cost savings from the $3.5 million prebate transaction
was linked to the three-year period covered by the new contract.
17.
In late 2015, following the merger, KHC renegotiated the language describing the
$3.5 million prebate, entered into a new contract which stated the payment was “a non-refundable
2015 payment . . . for purchases made in 2015,” and prematurely recognized the cost savings in
2015.
18.
This accounting treatment was improper because the final contract, which the
Procurement Executive approved and signed, mischaracterized the true nature of the supplier
payment by concealing the fact that the $3.5 million prebate payment remained linked to a threeyear contract.
19.
Planning documents that the Procurement Executive presented to Pelleissone
acknowledged that Heinz was in the process of negotiating a new supplier contract for the
purpose of generating “improved, backdated impact for CY15” in the form of a “rebate.” The
allocation of the cash consideration offered to each of the underlying transactions that results in progress by the
entity toward earning the rebate or refund provided the amounts are probable and can be reasonably estimated. If
the rebate or refund is not probable and cannot be reasonably estimated, it shall be recognized as the milestones are
achieved.” Accounting Standards Codification (“ASC”) 705-20 Accounting for Certain Consideration Received
from a Vendor.
5
document stated that the parties needed to “align on wording,” without which, the company
could “book only 1/3 of benefit” in 2015. The Procurement Executive also met with the CEO of
the supplier in order to determine if the supplier would be “open to reword” the description of
the payment to “allow [Heinz] to book” the full “3,5 Mi[llio]n USD into 2015”, and discussed
internally that wording of the $3.5 million payment would enable Heinz to book the amount in
2015. Finally, Pelleissone and the Procurement Executive understood that a final board
presentation regarding procurement, unlike prior drafts, did not contain the details surrounding
the $3.5 million prebate payment from the supplier.
20. In a separate transaction involving the same supplier, the Procurement Executive
and Pelleissone discussed the restructuring of a $2 million retention bonus that the supplier had
awarded to legacy Kraft before the merger, in order for newly merged KHC to recognize the full
amount in 2015, resulting in a credit to the savings targets of Heinz procurement personnel. The
Procurement Executive and Pelleissone had access to information that was not communicated to
the controller group that would have caused the controller group to question whether immediate
recognition of the $2 million was appropriate. In this transaction, procurement division
employees negotiated two new contracts with the supplier—one in which legacy Kraft returned
the bonus back to the supplier, and another, in which the supplier re-conveyed the $2 million
rebate, but this time, to legacy Heinz, and purportedly in exchange for purchase volumes in
2015. Recharacterizing the $2 million retention bonus as a supposed purchase volume rebate
enabled KHC to improperly recognize the full $2 million in 2015. The Procurement Executive
and Pelleissone were provided a global operations presentation that discussed the transaction as
part of a plan to recognize cost savings in 2015, but did not take steps to address whether the
rebate was accurately reflected in the new contract with legacy Heinz.
21.
These rebate transactions at legacy Heinz and KHC following the merger should
have placed Pelleissone and the Procurement Executive on notice of the appropriate accounting
treatment for these types of transactions, that procurement division employees misrepresented
the true economic nature of rebate transactions, and the importance placed on not linking
payments from suppliers to future contract obligations in order to achieve premature costs
savings. For instance, in a pre-merger transaction involving a potato supplier, Heinz’s
procurement division tried to improperly recognize $10 million in cost savings in 2014 by
drafting side credit notes which improperly stated that a total of $10 million was being provided
in exchange for 2014 purchases of potatoes and other vegetables, rather than for the new multiyear contract (the real reason for the $10 million payment). Although this payment was
ultimately recorded correctly—and spread over the life of the contract— the Procurement
Executive and Pelleissone should have understood through this transaction that pre-merger
Heinz’s controllers were being presented agreements with suppliers that mischaracterized the
true nature of the transactions. In an email communication, for example, the Procurement
Executive informed Pelleissone of the need to align on a “story” for the Heinz global controller
regarding the purpose of the supplier payments and the importance of not linking payments from
suppliers to future obligations.
6
2017-2018 Expense Management Misconduct
22.
Beginning in 2017 and continuing into 2018, KHC encountered significant
headwinds in its effort to meet annual budget and savings targets, principally due to inflation and
unfavorable foreign exchange rates, the exhaustion of merger-related savings, and the
incremental, year-over-year nature of the procurement division savings targets. The expense
management misconduct was more limited in 2016 because the procurement division exceeded its
gross savings targets that year.
23.
However, from 2017 on, as market conditions deteriorated, Pelleissone should
have known that continued incremental savings were unrealistic, but he failed to adjust expense
reduction expectations for the procurement division, creating a high-pressure environment
focused on obtaining same-year cost savings. Procurement division employees discussed
internally that Pelleissone “push[ed] like crazy” for them to meet cost savings goals, and
increased cost savings targets to unreasonable levels. At least in part due to this pressure, in 2017
and 2018, members of the procurement division—across multiple geographic zones—
manipulated 54 supplier transactions (out of approximately 59 during the Relevant Period) to
improperly obtain premature recognition of cost savings.
24.
Pelleissone and the Procurement Executive had access to information, including
from their involvement in the earlier transactions described above, that should have alerted them
to the fact that certain contracts with suppliers submitted by procurement division employees to
KHC’s controllers did not reflect the true nature of the underlying agreements and would result
in improper accounting treatment. Similarly, the Procurement Executive and Pelleissone also
should have known that certain agreements with suppliers did not generate any new costs
savings, despite purported cost savings being reflected in the company’s accounting books and
records and public disclosures.
25.
In 2017, for example, procurement division employees negotiated a $2 million
prebate to KHC from a sugar supplier in exchange for a three-year contract extension and future
sugar purchases. In addition, the agreement called for KHC to return the $2 million back to the
supplier, in the form of paying higher prices for sugar over the three-year period. Thus, the
agreement did not produce any actual cost savings. The Procurement Executive and Pelleissone
should have known the true structure of the transaction, including through their participation in
monthly performance reviews, during which it was disclosed that the $2 million was tied to a
contract extension and future volume purchases, but that KHC planned to recognize the full cost
savings in August 2017.
26.
The Procurement Executive also provided Pelleissone with a “risk mitigation
plan,” which listed $2 million in 2017 savings from the transaction and identified three other
transactions that were part of the expense management misconduct. The Procurement Executive
highlighted in the email attaching the plan that he would “need to find a way to make them count
in 2017 by getting them signed off by the controllers.” Nonetheless, Pelleissone, as a member of
KHC’s disclosure committee, raised no questions or concerns, and affirmed the accuracy and
completeness of KHC’s quarterly filings spanning the recognition of this transaction.
7
27.
During the Relevant Period, as a member of the disclosure committee, Pelleissone
failed to review the quarterly and annual SEC filings provided to him as part of his disclosure
committee responsibilities, yet he still certified that he was unaware of inaccuracies or omissions
in those filings. Pelleissone, thus, failed to implement the internal accounting control of
disclosure committee review of SEC filings.
28.
In 2018, the agreement with the sugar supplier was extended to provide KHC with
more time to repay the supplier for the 2017 prebate, through inflated sugar prices. To accomplish
this, KHC was given an immediate sugar price reduction, but later in the year, the inflated prices
resumed, and thereafter, continued over a longer future period in order to effectuate full
repayment. However, KHC recognized an immediate price reduction of $500,000 as purported
new cost savings. In an email message from a procurement division employee to colleagues
(though not Pelleissone), the employee stated that Pelleissone proposed procurement “re-open [the
sugar supplier] deal and extend contract in exchange for longer amortization of pre-payment.”
Thereafter, the Procurement Executive was informed of the deal’s structure, and both Pelleissone
and the Procurement Executive received presentations communicating the anticipated and
improper 2018 savings recognition.
29.
In 2017 and 2018, KHC’s procurement division entered into additional agreements
with suppliers which provided KHC with upfront payments that were recognized prematurely,
even though they were tied to future commitments and allowed the suppliers to “clawback” an
agreed-upon percentage of the upfront prebate. In one such transaction, the Procurement
Executive was sent a presentation reflecting that KHC obtained a $4 million price reduction and
$7.5 million in other efficiencies in exchange for committing to a new contract with a “5 year
term” for the purchase of new cardboard grades from the supplier, and the supplier could “claw
back a portion if any of the implementation is delayed after 2018.” According to the presentation
provided to the Procurement Executive, the supplier could recoup the prebate through increased
pricing on 2019 KHC purchases.
30.
The Procurement Executive acknowledged that the cost savings from the
agreement would be “booked in July [2018]” in his self-evaluation that he provided to
Pelleissone in connection with his performance review. He also was informed by one of his
subordinates that there was potential “upside in the year [] if we get the wording correct[].”
Thereafter, the Procurement Executive had a call with the CEO of the supplier, during which they
discussed contract wording for the two supplier payments which did not link either of the
prebates to a contract extension or a clawback obligation. The Procurement Executive approved
the final contract, which did not reflect the true nature of the transaction, while understanding that
KHC’s controllers would rely on the contract to make an accounting determination.
31.
Thereafter, the Procurement Executive signed, and along with Pelleissone,
submitted, a sub-certification of the accuracy and completeness of the financial statements
generated by global procurement over the first three quarters of 2018, during which the majority
of the savings from this transaction were improperly recognized. KHC then relied on this subcertification in making representations to its auditor regarding the completeness and accuracy of
its financial statements.
8
32.
The Procurement Executive also approved “price phasing” transactions, which
created the illusion of immediate cost savings through price decreases from suppliers, but, in
reality, were structured to include an offsetting price increase later in time. These “price
phasing” transactions violated GAAP because they purported to generate cost savings that did
not exist.
33.
In 2017, for example, KHC improperly reduced its costs by $600,000 in earlier
quarters through a price phasing deal with a sugar supplier. The transaction produced no real
savings, however, because it required KHC to remit the same amount back to the supplier in the
form of higher pricing in later quarters within the same year. In connection with this deal, the
Procurement Executive was aware that his team was contemplating sugar pricing strategies to
address pressures from Pelleissone to narrow the gap between forecasted and actual expenses to
date, and approved the transaction. The Procurement Executive and Pelleissone reviewed
presentations highlighting that the $600,000 in positive impact to KHC’s P&L was tied to “sugar
price phasing.” Similarly a draft presentation that the Procurement Executive reviewed in
advance of a trip he and Pelleissone took to visit the supplier highlighted that the deal would
“[m]ove some negative impact from Q1 CY17 through price phasing.”
KHC’s Internal Controls Deficiencies
34.
Throughout the Relevant Period, the company did not design or maintain effective
controls for the procurement division, including those implemented by the finance and controller
groups, in connection with the accounting for supplier contracts and related arrangements. The
company reported this material weakness in its annual report on Form 10-K filed on June 7, 2019.
For example, on the Friday after the close of the August 2017 books, the controller group allowed
KHC to recognize fully in 2017 a rebate that it had previously determined correctly to spread over
a future-year period. The changed decision by that Monday to allow immediate recognition was
not adequately documented nor explained to internal stakeholders, and it was made after
procurement employees were instructed by a superior in operations to “find a way . . . to get
back” the payments into the August books.
35.
During the Relevant Period, finance personnel in gatekeeping roles also
overlooked indications that some expenses were potentially being improperly managed and
accounted for in the procurement division. In one internal communication, for example, a
member of KHC’s controller group acknowledged a procurement buyer’s effort to “jam [a]
rebate in to help [KHC’s] results in 2017.” That member of the controller group took no steps to
report this conduct to legal or compliance, nor to determine whether it was part of a larger
practice within procurement.
36.
During the Relevant Period, KHC also tied internal performance metrics and
compensation of the procurement legal group staff to assisting the procurement division’s efforts
to reduce costs. Additionally, prior to 2018, KHC failed to provide the legal group with adequate
staffing and resources for reviewing numerous global supply contracts, many of which were
under negotiation at the same time. Under these conditions, the part of the legal group in charge
of reviewing procurement contracts overlooked facts indicating that contract documentation was
inconsistent with the underlying negotiated transaction, and the group failed to have reasonably
9
sufficient controls over the procurement contracting process.
37.
Pelleissone should have known that, in not properly addressing several indicia that
supplier contracts were being used to manage expenses, he caused KHC’s internal accounting
controls failures, including those relating to: (i) its accounting-related policies and procedures, (ii)
the preparation and signing of contract approval forms which were to communicate the key
commercial terms of procurement transactions to the controllers, (iii) the review of contract
documentation and contract approval forms by KHC’s controllers, (iv) the completion and
approval of management representation letters affirming the accuracy and completeness of the
financial records of KHC’s Zones, business units, and procurement division, and (v) a disclosure
committee whose function was to review and confirm the accuracy and completeness of KHC’s
draft periodic filings.
******
38.
KHC issued debt in securities offerings during the relevant period, the offerings for
which incorporated by reference the inaccurate financial reports that were later restated, and
offered the Procurement Executive and Pelleissone, among other employees, stock options and
other stock-based compensation during the Relevant Period, and bonus compensation that was
tied to their success at generating supply chain and operational cost savings. Specifically, the
bonus criteria given the largest weight for the Procurement Executive was reaching a metric
referred to as a purchase price variance target that was based on the amount of year-over-year
savings the procurement division obtained from its supplier contracts. Similarly, Pelleissone was
assigned responsibility for operational costs, which not only were a key factor in determining the
company’s annual budget, but were also directly impacted by the year-over-year savings achieved
by the procurement division.
39.
Additionally, during the period of the misconduct, Pelleissone exercised options in
August 2018 on 35,000 shares of KHC common stock and then sold the shares at a profit.
VIOLATIONS
40.
Section 17(a)(2) of the Securities Act proscribes the receipt of “money or property
by means of any untrue statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading.” Section 17(a)(3) of the Securities Act proscribes engaging “in any
transaction, practice, or course of business which operates or would operate as a fraud or deceit
upon the purchaser.” A violation of these provisions does not require scienter and may rest on a
finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980).
41.
Section 13(a) of the Exchange Act requires issuers to file such periodic and other
reports as the Commission may prescribe and in conformity with such rules as the Commission
may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of annual,
current, and quarterly reports, respectively. The obligation to file such reports embodies the
requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149,
10
1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition to the information
expressly required to be included in such reports, Rule 12b-20 of the Exchange Act requires
issuers to add such further material information, if any, as may be necessary to make the required
statements, in the light of the circumstances under which they are made not misleading. A
violation of these reporting provisions does not require scienter and may rest on a finding of
negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978).
42.
Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make
and keep books, records, and accounts that accurately and fairly reflect the transactions and
dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting
companies to devise and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles. Scienter is not
an element of the books and records and internal control provisions. See Ponce v. SEC, 345 F.3d
722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also
does not impose a scienter requirement”).
43.
Section 13(b)(5) of the Exchange Act provides: “No person shall knowingly
circumvent or knowingly fail to implement a system of internal accounting controls or knowingly
falsify any book, record, or account described in paragraph (2) [of the statute].”
44.
Rule 13b2-1 also prohibits any person from directly or indirectly, falsifying or
causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A). Rule 13b22(a) prohibits an officer or director of an issuer from, among other things, making or causing to
be made a materially false or misleading statement to an accountant in connection with any
required audit of the issuer’s financial statements or the preparation of a report required to be
filed with the Commission. Scienter is not required to establish a violation of either of these
rules. See World-Wide Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983) (addressing
Rule 13b2-1); SEC v. McNulty, 137 F.3d 732, 740-41 (2d. Cir. 1997) (addressing Rule 13b2-2).
FINDINGS
45.
Based on the foregoing, the Commission finds that Respondent KHC violated
Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a), 13(b)(2)(A), and
13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 promulgated
thereunder.
46.
Based on the foregoing, the Commission finds that Respondent Pelleissone (a)
violated Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Section 13b-5, and
Exchange Act Rules 13b2-1 and 13b2-2(a); and (b) caused KHC’s violations of Sections 13(a),
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13
promulgated thereunder.
DISGORGEMENT AND CIVIL PENALTIES
47.
The disgorgement and prejudgment interest ordered in Section IV, paragraph D
11
below is consistent with equitable principles and does not exceed Respondent’s net profits from
his violations, and will be distributed to harmed investors to the extent feasible. The
Commission will hold funds paid pursuant to paragraph D in an account at the United States
Treasury pending distribution. Upon approval of the distribution final accounting by the
Commission, any amounts remaining that are infeasible to return to investors, and any amounts
returned to the Commission in the future that are infeasible to return to investors, may be
transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the
Exchange Act.
KHC’S COOPERATION AND REMEDIAL EFFORTS
48.
In determining to accept Respondent KHC’s Offer, the Commission considered
the cooperation and remedial acts promptly undertaken by KHC. Among other efforts, KHC
proactively expanded the scope of its internal investigation, provided timely updates to the
Commission staff regarding KHC’s investigation findings, and provided courtesy translations of
foreign language documents. KHC has taken disciplinary action, enhanced review of its finance,
controllership, and legal functions, and instituted enhanced training, policies and procedures to
prevent and detect future misconduct of the type described in the Order.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions
agreed to in Respondents’ Offers.
Accordingly, it is hereby ORDERED, effective immediately, that:
A.
KHC shall cease and desist from committing or causing any violations and any
future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a),
13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13
promulgated thereunder.
B.
KHC shall, within ten (10) days of the entry of this Order, pay a civil money
penalty in the amount of $62,000,000 to the Securities and Exchange Commission. If timely
payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
C.
Pelleissone shall cease and desist from committing or causing any violations and any
future violations of Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13b-5,
13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 13b2-1, 13b2-2(a), 12b-20, 13a-1,
13a-11, and 13a-13 promulgated thereunder.
D.
Pelleissone shall, within ten (10) days of the entry of this Order, pay a civil money
penalty in the amount of $300,000, disgorgement of $12,500, and prejudgment interest of
$1,711.31 to the Securities and Exchange Commission. If timely payment of the civil money
penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717, and if timely
payment of disgorgement and prejudgment interest is not made, additional interest shall accrue
12
pursuant to SEC Rule of Practice 600.
Payment must be made in one of the following ways:
(1)
Respondents may transmit payment electronically to the Commission, which will
provide detailed ACH transfer/Fedwire instructions upon request;
(2)
Respondents may make direct payment from a bank account via Pay.gov through
the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
(3)
Respondents may pay by certified check, bank cashier’s check, or United States
postal money order, made payable to the Securities and Exchange Commission
and hand-delivered or mailed to:
Enterprise Services Center Accounts Receivable Branch HQ Bldg., Room 181, AMZ-341
6500 South MacArthur Boulevard Oklahoma City, OK 73169
Payments by check or money order must be accompanied by a cover letter identifying the
Respondents in these proceedings, and the file number of these proceedings; a copy of the cover
letter and check or money order must be sent to Anita B. Bandy, Associate Director, Division of
Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.
E.
Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created
for disgorgement, prejudgment interest and penalties referenced in paragraphs B and D
above. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
treated as penalties paid to the government for all purposes, including all tax purposes. To
preserve the deterrent effect of the civil penalties, Respondents agree that in any Related Investor
Action, Respondents shall not argue that Respondents are entitled to, nor shall Respondents
benefit by, offset or reduction of any award of compensatory damages by the amount of any part
of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If the court in any
Related Investor Action grants such a Penalty Offset, Respondents agree that Respondents shall,
within 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s
counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange
Commission. Such a payment shall not be deemed an additional civil penalty and shall not be
deemed to change the amount of the civil penalties imposed in this proceeding. For purposes of
this paragraph, a “Related Investor Action” means a private damages action brought against
Respondents by or on behalf of one or more investors based on substantially the same facts as
alleged in the Order instituted by the Commission in this proceeding.
F.
Respondent KHC acknowledges that the Commission is not imposing a civil
penalty in excess of $62,000,000 based upon its cooperation in a Commission investigation and
related enforcement action. If at any time following the entry of the Order, the Division of
Enforcement (“Division”) obtains information indicating that KHC knowingly provided
materially false or misleading information or materials to the Commission, or in a related
proceeding, the Division may, at its sole discretion and with prior notice to KHC, petition the
Commission to reopen this matter and seek an order directing that KHC pay an additional civil
13
penalty. KHC may contest by way of defense in any resulting administrative proceeding whether
it knowingly provided materially false or misleading information, but may not: (1) contest the
findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited
to, any statute of limitations defense.
V.
It is further Ordered that, solely for purposes of exceptions to discharge set forth in
Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and
admitted by Respondent Pelleissone, and further, any debt for disgorgement, prejudgment
interest, civil penalty or other amounts due by Pelleissone under this Order or any other
judgment, order, consent order, decree or settlement agreement entered in connection with this
proceeding, is a debt for the violation by Pelleissone of the federal securities laws or any
regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy
Code, 11 U.S.C. §523(a)(19).
By the Commission.
Vanessa A. Countryman
Secretary
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