SEC Charges Animal Feed Company and Top Executives in China and U.S. with Accounting Fraud (with Bondi Comment)

The SEC charged top executives at AgFeed Industries with conducting an accounting fraud in which they repeatedly reported fake revenues from their China operations in order to meet financial targets and prop up the stock price.

The SEC found that AgFeed Industries, a China-based company that publicly traded in the U.S. before merging with a U.S. company in September 2010, used a variety of methods to inflate revenue from 2008 to 2011, including fake invoices for the sale of feed and the purported sale of hogs that didn't exist. The SEC alleged that AgFeed later tried to cover up its actions by saying the nonexistent hogs died. Additionally, the SEC found that they inflated the weights of actual hogs, since fatter hogs meant higher market prices, and correspondingly inflated the sales revenues for those hogs.Additionally, the SEC charged the chair of AgFeed's audit committee, K. Ivan ("Van") Gothner, with scheming to avoid or delay the disclosure of the accounting fraud once the SEC learned of it in 2011, while Gothner was still engaged in efforts to raise capital for expansion and acquisitions.

Bondi Comment: The case serves as a warning shot across the bow for public company audit committees. Traditionally, the SEC has not charged independent directors, so there is a real concern that this action begins a new era of aggressive enforcement aimed at boards.It is a reminder that audit committees must follow up on red flags and seek outside counsel for assistance.

See: SEC Complaint; SEC Order Stadler; SEC Order Marshall; SEC Press Release.