U.S. SEC announces settlement with AgFeed over accounting fraud

Washington | Reuters — A Tennessee animal feed company will pay back US$18 million in alleged illicit profits to settle civil accounting fraud charges, U.S. regulators said Monday.

AgFeed Industries, which is currently in bankruptcy, was charged by the Securities and Exchange Commission in March in connection with charges that it reported fake revenue from its China-based operations to help prop up its stock price.

AgFeed previously was based in China before it merged with a U.S. company in 2010 and spread its operations between the two countries.

According to the SEC, AgFeed’s Chinese management kept two sets of books — a real one and a fake one to present to investors.

From 2008 through June 2011, it inflated the company’s revenue by US$239 million by using phony invoices for feed and hog sales and by inflating hog weights because fatter hogs fetched higher prices. To cover up the fraud, it later reported the fake hogs had died.

The case has garnered some attention because the SEC also charged the company’s former U.S.-based independent audit committee chairman, a rare move by the agency.

The SEC alleges that the former audit committee chairman, K. Ivan Gothner, and former U.S.-based chief financial officer Edward Pazdro, learned about the accounting fraud in China after the company merged with the U.S.-based company but failed to conduct any meaningful investigation or properly disclose it.

The SEC also charged four Chinese company executives with fraud. The case against the five former company executives and the former audit committee chairman is still ongoing.

Attorneys for Gothner and Pazdro have vigorously denied the charges, saying the SEC is wrongfully trying to punish them even though they tried to do the right thing and investigate the fraud as soon as they caught wind of it.

The settlement announced on Monday is subject to court approval. The company is settling without admitting or denying the charges.

The SEC said the US$18 million will be distributed to victims of the fraud.

— Sarah N. Lynch reports on financial regulation and financial crimes for Reuters from Washington, D.C.