Milling & Baking News - September 23, 2008 - 10

Business

AIPC settles with D.O.J., S.E.C.;
ex-executives enter guilty pleas
issues and restore AIPC to sound governance and financial practices."
In a related move, the S.E.C. charged
Timothy S. Webster, former AIPC
c.e.o.; Warren B. Schmidgall, former
chief financial officer; and David E.
Watson, former executive vice-president of corporate development and
strategy, with engaging in a fraudulent accounting scheme to artificially
increase the company's stock price
and mislead investors about the company's earnings.
The S.E.C. also charged AIPC's former controller Stephanie S. Ruskey
in a civil action in federal court, and
brought a settled administrative proceeding against Mark A. Peterson,
AIPC's former vice-president of accounting and finance.
According to the S.E.C.'s complaints,
the scheme resulted in a $59 million
overstatement of
AIPC's pre-tax income for the period spanning fiscal
2002 to the second
of fiscal 2004.
Mr.
Webster
agreed to settle
his charges with
the S.E.C. by paying more than $1
million, but did
not have to admit
or deny the allegations. He also will
be permanently
prohibited from
Discussing guilty pleas of two former top executives of American Italian serving as an offiPasta Co. were, from left, U.S. Attorney John F. Wood; Donald M. Hoerl, cer or director of a
acting regional director of the Securities and Exchange Commission; and public company.
The
S.E.C.
Ian S. Karpel, attorney for the S.E.C.
complaint
alrequiring future compliance with leged that Mr. Webster and fellow
executives "engaged in a fraudufederal securities laws.
"Today's announcement brings a lent scheme to mislead the investing
welcome close to an unfortunate chap- public about the growth of AIPC's
ter in the otherwise proud history of earnings and to increase artificially
our company," said Jack Kelly, presi- the company's stock price."
All told, the S.E.C. alleged earndent and chief executive officer. Mr.
Kelly joined AIPC in November 2007 ings were overstated by more than
and was named president and c.e.o. $36 million.
Detailing the alleged misdeeds, the
in January. "I am extremely grateful to
our board of directors for their lead- S.E.C. said in fiscal 2002 through the
ership in addressing this matter in a second quarter of fiscal 2004, the comthorough and proactive manner. I also pany fraudulently capitalized costs
am proud of the meaningful reforms to long-lived assets and manipulated
our new senior management team and its trade promotions accounting to
employees have implemented over eliminate earnings shortfalls. Interthe last three years to correct the past nal accounting controls at AIPC were
KANSAS CITY - American Italian
Pasta Co. last week settled separate
agreements with the Department of
Justice (D.O.J.) and Securities and Exchange Commission (S.E.C.) to resolve
misconduct related to historical accounting and financial reporting that
occurred under prior management.
AIPC had been conducting an internal investigation of its past accounting
practices since July 2005.
As part of its agreement with the
D.O.J., AIPC acknowledged the
wrongdoing by certain former officers
and employees and agreed to pay a
monetary penalty of $7.5 million. The
company also said it would continue
to cooperate with the D.O.J. in any further investigation.
In settling with the S.E.C., AIPC
agreed to a consent injunction

10 / September 23, 2008

Milling & Baking News

faulted by the S.E.C. as "inadequate or
nonexistent."
The commission said that AIPC
management, responding to declining
pasta sales due to low-carbohydrate
dieting, tried to narrow the gap between the company's earnings targets
and actual earnings by turning to "other types of fraudulent accounting, including failing to write-off obsolete or
missing spare parts; round-tripping of
cash transactions; booking fictional receivables; and recording revenue from
sales of products not yet shipped."
The complaint noted that in June
2008, AIPC filed a restated consolidated financial statement reducing
AIPC pre-tax income for fiscal year
2002 through the second quarter of
fiscal 2004 by $59 million.
The S.E.C.'s case against Mr. Schmidgall and Mr. Watson is ongoing.
"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 S.E.C.'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."
In a related criminal action, the
U.S. Attorney's Office for the Western District of Missouri said that that
Mr. Webster and Mr. 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 S.E.C.
U.S. Attorney John F. Wood described the case as the largest corporate fraud prosecution in the history
of the Justice Department's Western
District of Missouri.
"These guilty pleas should send a
clear message that no one is above the
law," Mr. Wood said. "Corporate executives have to play by the rules just
like everyone else. When they break
the law, they will be prosecuted. This
is a complex case that involved dozens of witnesses and nearly a million
documents. These guilty pleas demonstrate that corporate fraud will be
prosecuted every bit as vigorously in
Kansas City as it is New York, Chicago, and elsewhere."
Mr. Wood said federal prosecutors
would recommend that Mr. Webster
and Mr. Schmidgall serve prison time.
They could be sentenced to as many as
five years in prison and up to $250,000
in fines and restitution. MBN
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - September 23, 2008

Table of Contents for the Digital Edition of Milling & Baking News - September 23, 2008