SEC Enforcement: Goldman’s ‘Fabulous Fab’ Ordered to Pay More Than $825,000

Jefferies agreed to make payments to customers totaling more than $11 million, which represents not just the ill-gotten gains of $4.2 million but the full amount of profits earned by the firm on these trades. Jefferies also agreed to pay a $4.2 million penalty to the SEC and an additional $9.8 million as part of a nonprosecution agreement with the U.S. Attorney’s office. The firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.

The SEC’s investigation is continuing.

Chinese, U.S. Animal Feed Execs Charged With Accounting Fraud

The SEC has charged executives in China and in the U.S. with accounting fraud for reporting fake revenues from operations in China so that they could keep the stock price up and appear to be making company financial targets.

Four executives in China set up the scheme, according to the SEC. The company, AgFeed Industries Inc., was based in China and publicly traded in the U.S. before it merged with a U.S. company in September 2010 and spread its operations between the two countries.

Executive Chairman Songyan Li, CEO Junhong Xiong, CFO Selina Jin, and controller Shaobo Ouyang, the managers in China behind the scheme, created the scheme after AgFeed acquired 29 Chinese farms for its new hog production division.

The four resorted to numerous strategies to inflate revenue from 2008 to mid-2011 at the majority of its hog production operations in China; these included fake invoices for the sale of feed and purported sales of hogs that didn’t really exist. Later they claimed the fake hogs died in an attempt to cover up what they’d done. However, since fatter hogs bring better prices at market, they also claimed actual hogs sold by the company weighed more than they did, and correspondingly inflated the sales revenues for those hogs.

The executives actually kept two complete sets of books — one for the auditors and one for the company, which indicated that the scheme resulted in phony revenues of about $239 million.

K. Ivan (Van) Gothner, who was chairman of AgFeed’s audit committee, and Edward Pazdro, the CFO who replaced Jin after the merger, found out about the two sets of books and that Ouyang had admitted to the scheme.

Gothner and Pazdro even got hold of a partial copy of the two sets of books, as well as a memo from AgFeed’s in-house counsel from China that concluded—based on witness accounts and documentary evidence—that the company was involved in a widespread accounting fraud. The memo said the two sets of accounting books were kept “in order to make AgFeed’s revenue and net income look better.” It also said Xiong and Jin had directed the accounting fraud, and Xiong had ordered the destruction of the second set of books.

With all this damaging information in their hands, neither Gothner nor Pazdro blew the whistle on the fraud. Instead of calling in the authorities, Gothner asked a former director and company advisor what he should do — but when that individual told him the company should bring in outside investigators and outside legal counsel, Gothner instead buried the scheme and took it even further. He and Pazdro set about a move to spin off the company’s feed division and raise capital for expansion and acquisitions that would enable profits for AgFeed and also for them personally.

The SEC charged AgFeed, Xiong, Li, Jin, Ouyang, Gothner and Pazdro with violating or aiding and abetting violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. They are also charged with making false statements to AgFeed’s outside auditors. The SEC seeks disgorgement of ill-gotten gains, plus prejudgment interest as well as financial penalties and officer-and-director bars, and also seeks to suspend Jin, Ouyang, and Pazdro from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.

AgFeed’s former chairman and interim CEO, John Stadler, separately consented to an SEC order barring him from acting as an officer or director and requiring him to pay a $100,000 penalty and cease and desist from further violations. He has neither admitted nor denied the findings.

AgFeed’s former CFO Clayton Marshall, who replaced Pazdro, entered a cooperation agreement with the SEC. His settlement terms reflect his assistance in the SEC’s investigation and anticipated cooperation in the pending court action. Without admitting or denying the SEC’s findings, Marshall has agreed to be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC for at least five years. Whether a fine will be assessed has yet to be determined.

The company has filed for bankruptcy; registrations for all classes of its securities have been revoked.

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Check out SEC, DOL Enforcement: Camelot Manager Charged With Stealing $9M From Clients on ThinkAdvisor.