Spagehtti Scandal

I assume Josh sent this one to me because I am his “ethnic Italian” friend, you can tell because my name ends in a vowel. Although I have attached the full text after the jump, I’ll sum it up here:

The American Italian Pasta Company is being charged with fraud, well at least the CEO and CFO are, other top execs are facing other charges. Basically the SEC is claiming that the heads of AIPC mislead investors and doctored their books in order to increase stock prices.

That’s the bare-bones-basics right there. As if there wasn’t enough financial news today we can tack that on as well. Now some might be outraged by this, question the ethics of these shady business men. Personally I take issue with some other points in the article.

1. American Italian Pasta Company is located in Kansas City, Missouri.
Doesn’t exactly strike me as a city with a dense community of Italians or Italian-Americans, but what do I know, right? I mean a Pasta company being charged with Fraud, this has mob written all over it…

Which brings us to issue #2

2. The CEO of American Italian Pasta Company is Timothy Webster.
Okay, not the most Italian of names, but you fiugre there has to be organized crime in there somewhere right? So we look at the others being charged: Warren B. Schmidgall, David E. Watson, Mark Peterson and Stephanie Ruskey. How is it that no one associated with the American Italian Pasta Company is actually Italian? Personally I think the folks in charge of AIPC got a little too wrapped up in the idea that they were an “Italian” company and felt they had to go ahead and act as if they were part of organized crime.

Lastly, I am going to take issue with their name-
Besides the fact that it is made in America and doesn’t appear to have a single Italian associated with how the company is run (which, in light of recent events, is probably a good thing), what the hell is an American Italian? I mean an Italian American is some one whose family is originally from Italy, but was born here. Does that mean that an American Italian is from a family that is originally American, but was born in Italy? Or maybe, after Sept. 11th, when there was such a backlash against non-US companies they thought it would be wise to toss the American in before the Italian? Though if you look at the product lines they produce for, like Pennsylvania Dutch and Heartland, you’ve got to kind of wonder if they even need the Italian at all.

SEC CHARGES PASTA EXECUTIVES WITH ACCOUNTING FRAUD

Defense Counsel:

FOR IMMEDIATE RELEASE                                                                    2008-200

SEC CHARGES PASTA EXECUTIVES WITH ACCOUNTING FRAUD

Washington, D.C., Sept. 15, 2008 – The Securities and Exchange Commission today charged Kansas City-based American Italian Pasta Company (AIPC) and its former senior executives for engaging in a fraudulent accounting scheme to artificially increase the company’s stock price and mislead investors about the company’s earnings.

The SEC’s complaints allege that AIPC’s former chief executive officer Timothy S. Webster, former chief financial officer Warren B. Schmidgall, and former executive vice president of corporate development and strategy David E. Watson orchestrated the scheme.  Webster agreed to pay more than $1 million to settle the SEC’s charges.

In a related criminal action, the U.S. Attorney’s Office for the Western District of Missouri announced today that it resolved its investigation of AIPC and that Webster and Schmidgall both pled guilty to one count of conspiracy to commit wire fraud for their roles in concealing AIPC’s true financial condition and filing materially false reports with the SEC.  In addition, AIPC agreed to resolve the criminal investigation of the company by paying a $7.5 million penalty.

“This is another case where executives at the highest levels of a public company sought to meet Wall Street’s earnings expectations at all costs,” said George B. Curtis, Deputy Director of the SEC’s Division of Enforcement.  “The Commission will hold those individuals accountable for breaching the public trust and putting shareholders at risk by falsely reporting the financial condition of their companies.”

Donald M. Hoerl, Acting Director of the SEC’s Denver Regional Office, added, “This case demonstrates the severe civil and criminal consequences to companies and corporate officers who choose to engage in financial fraud.  The Commission and the criminal authorities will combine efforts and take strong action, as we did in this case, to protect the integrity of corporate financial reporting, which is at the foundation of our capital markets.”

The SEC’s complaints, filed in federal district court in the Western District of Missouri, allege that Webster, Schmidgall, and Watson engaged in a variety of fraudulent accounting from AIPC’s fiscal year 2002 through the second quarter of its fiscal year 2004 to inflate AIPC’s reported earnings.  This caused period costs to be fraudulently capitalized in order to meet AIPC’s external targets.  The SEC further alleges that AIPC and its former executives manipulated AIPC’s trade promotion accounting; failed to write off obsolete or missing spare parts; structured fraudulent round-tripping of cash transactions; and recorded false receivables.

According to the SEC’s complaints, the fraudulent accounting and other errors arising from inadequate internal controls, resulted in the overstatement of AIPC’s pre-tax income for the relevant period by approximately $59 million, or 66 percent.

The SEC additionally charged AIPC’s former controller Stephanie S. Ruskey in a civil action in federal court, and brought a settled administrative proceeding against AIPC’s former vice president of accounting and finance Mark A. Peterson.  The SEC alleges that Ruskey knew or was reckless in not knowing that AIPC’s quarterly and annual financial statements were misleading, and alleges that she signed representation letters to AIPC’s auditor that falsely stated that the financial statements were prepared in accordance with generally accepted accounting principles (GAAP).  The Commission found that Peterson knew or should have known that AIPC’s accounting was contrary to GAAP.

AIPC and Webster agreed to settle the SEC’s charges without admitting or denying the allegations.  Both will be permanently enjoined from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws.  Webster will be permanently barred from serving as an officer or director of a public company, and will pay $751,978 in disgorgement, $32,610 in prejudgment interest, and a $250,000 penalty.  The terms of the SEC’s settlement with AIPC reflect the cooperation that the company provided during the course of the SEC investigation.

Without admitting or denying the SEC’s allegations, Ruskey consented to a final judgment enjoining her from violations of the reporting, record-keeping, and internal controls provisions of the federal securities laws and imposing a $25,000 penalty.

The Commission also entered an order today ordering Peterson to cease and desist from causing any violations and any future violations of the reporting, record-keeping, and internal controls provisions.  Peterson consented to the issuance of the order without admitting or denying any of the Commission’s findings.

The SEC’s case against Schmidgall and Watson is ongoing.

The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Western District of Missouri and the Kansas City Field Office of the Federal Bureau of Investigation (FBI).

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