SEC V. AGFEED INDUS.
In a case described by SEC Enforcement Director, Andrew J. Ceresney, as a “cautionary
tale,” the SEC alleges in SEC v. AgFeed Indus. that K. Ivan Gothner, an AgFeed director and
chair of the audit committee, not only missed numerous red flags that should have alerted
him to accounting improprieties, but he aided and abetted the company’s fraudulent
activity, violating Exchange Act Section 10(b), Rule 10b-5, and Securities Act Section 17(a).
According to the complaint, Gothner learned of several red flags beginning in 2010 and
continuing through May of 2011 that indicated accounting problems in the company’s
Chinese operations. These included significantly worse than expected quarterly results, an
email from the COO describing operations as “completely out of control,” the CFO
reporting concerns he had about the accuracy of the Chinese operation’s reported results,
and reports from the COO that the Chinese unit maintained two sets of accounting
books—one real and one fabricated (for reporting purposes).5 Gothner, in response,
contacted a former director, who recommended Gothner hire outside investigators and
counsel to look into the allegations. Rather than do so, he directed company management
to investigate. Management’s investigation in June 2011 found that there had been fraud,
but Gothner failed to inform AgFeed’s outside auditor, hire a professional firm to conduct
a review or otherwise further investigate.6 In June 2011, an outside consulting firm further
corroborated the fraud, yet Gothner failed to cause the company to disclose the fraud or
correct reported numbers in public filings in July and August 2011. It was not until the
end of September 2011 that a special board committee was formed, and publicly disclosed,
to investigate the fraud.7
In addition to fraud charges, the SEC charged Gothner with multiple violations related to
falsifying books and records, lying to auditors, and control person liability for false SEC
filings. In the SEC’s press release, the Director of the SEC’s Denver Regional Office stated,
“Officers and directors have an obligation to exercise diligence and ensure that their
financial reporting is accurate. Despite learning about false and misleading financial
information, AgFeed executives failed to come clean.”8 In its case against Gothner, the SEC
is seeking civil penalties, an injunction, and a permanent bar from serving as an officer or
director of a public company.
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