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Non-Tech : Ashton Technology (ASTN)

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From: StockDung7/8/2014 7:14:58 PM
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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.

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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