The SEC's complaints, filed in the United States District Court for the District of Columbia, allege that, as a result of the fraudulent inflation of promotional allowances at U.S. Foodservice, Ahold's wholly-owned subsidiary, the improper consolidation of joint ventures through fraudulent side letters, and other accounting errors and irregularities, Ahold's original SEC filings for at least fiscal years 2000 through 2002 were materially false and misleading. For fiscal years 2000 through 2002, Ahold overstated net sales by approximately EUR 33 billion ($30 billion). For fiscal years 2000 and 2001 and the first three quarters of 2002, Ahold overstated operating income by approximately EUR 3.6 billion ($3.3 billion) and net income by approximately EUR 900 million ($829 million).
Ahold has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of a judgment permanently enjoining the company from violating the antifraud and other provisions of the securities laws. The charges against the individuals, all foreign nationals, are based solely on their roles in the improper consolidation of joint ventures. Van der Hoeven and Meurs have agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to permanent injunctions and officer and director bars. Fahlin has consented, without admitting or denying the Commission's allegations, to the entry of a cease-and-desist order finding that he was a cause of Ahold's violations of certain provisions of the securities laws.
The Commission has not sought penalties in the enforcement actions against the individuals because the Dutch Public Prosecutor's Office, which is conducting a parallel criminal investigation in The Netherlands, has requested that the Commission not seek penalties against the individuals because of potential double jeopardy issues under Dutch law. Because of the importance of this case in The Netherlands and the need for continued cooperation between the SEC and regulatory authorities in other countries, the Commission has agreed to the Dutch prosecutor's request.
The Commission did not seek a penalty from Ahold because of, among other reasons, the company's extensive cooperation with the Commission's investigation. Ahold self-reported the misconduct and conducted an extensive internal investigation. On its own initiative, Ahold expanded its internal investigation beyond the fraud at U.S. Foodservice and the improper joint venture accounting to analyze accounting practices and internal controls at seventeen operating companies. Ahold promptly provided the staff with the internal investigative reports and the supporting information and waived the attorney-client privilege and work product protection with respect to its internal investigations. Ahold also made its current personnel available for interviews or testimony, significantly assisted the staff in arranging interviews with, or testimony from, former Ahold personnel located in the United States and, of even greater importance, abroad. Ahold promptly took remedial actions including, but not limited to, revising its internal controls and terminating employees responsible for the wrongdoing.
"This case is yet another deplorable example of a massive, multifaceted fraud at a major corporation. Today, Ahold and former top executives are charged with fraudulently overstating sales by billions of dollars. The company is also charged with fraudulently fabricating hundreds of millions of dollars of earnings," according to Thomas C. Newkirk, Associate Director of the SEC's Division of Enforcement. "This case is also an example of the clear corporate advantage to conducting a comprehensive internal investigation and fully cooperating with the SEC," he said.
"This case also reflects the failure of a member of the company's audit committee to perform his duties to oversee the reporting process of a public company," said James Coffman, Assistant Director of the SEC's Division of Enforcement. "The proceeding initiated against Mr. Fahlin today demonstrates the Commission's commitment to bring enforcement actions against those board and audit committee members who fail to perform these important duties."
The Earnings Fraud At U.S. Foodservice
With respect to the fraud at U.S. Foodservice ("USF"), Ahold's wholly-owned subsidiary based in Columbia, Maryland, the Commission's complaint alleges as follows:
- A significant portion of USF's operating income was based on vendor payments known as promotional allowances. USF executives materially inflated the amount of promotional allowances recorded by USF and reflected in operating income on USF's financial statements, which were included in Ahold's Commission filings and other public statements.
- USF executives also provided, or assisted in providing, Ahold's independent auditors with false and misleading information by, for example, persuading personnel at many of USF's major vendors to falsely confirm overstated promotional allowances to the auditors in connection with year-end audits.
- The overstated promotional allowances aggregated at least $700 million for fiscal years 2001 and 2002 and caused Ahold to report materially false operating and net income for those and other periods.
The earnings inflation at USF, which began at least a year before Ahold's acquisition, is the subject of the SEC's complaint against four former USF executives filed July 27, 2004 in the United States District Court for the Southern District of New York.
The Joint Venture Sales and Operating Income Fraud Ahold and the Top Officers
With respect to the fraudulent consolidation of joint ventures, the Commission's complaints against Ahold, van der Hoeven, Meurs, and Andreae allege as follows:
- Ahold fully consolidated several joint ventures in its financial statements despite owning no more than fifty percent of the voting shares and despite shareholders' agreements that clearly provided for joint control by Ahold and its joint venture partners. To justify full consolidation of certain joint ventures, Ahold gave its independent auditors side letters to the joint venture agreements, signed by Ahold and its joint venture partners, which stated, in effect, that Ahold controlled the joint ventures ("control letters").
- However, at the time or soon after executing the control letters, Ahold and its joint venture partners executed side letters that rescinded the control letters - and thus the basis for full consolidation (the "rescinding letters").
- Meurs signed all but one of the control and rescinding letters on behalf of Ahold. He also knew that Ahold's auditors were relying on the control letters and were unaware of the existence of the rescinding letters.
- Van der Hoeven cosigned one of the rescinding letters and he was at least reckless in not knowing that the auditors were unaware of its existence.
- Andreae participated in the fraud by signing the control and rescinding letters for ICA, Ahold's Scandinavian joint venture, and by knowingly or recklessly concealing the existence of the ICA rescinding letter from the auditors.
- As a result of the fraud, Ahold materially overstated net sales by approximately EUR 4.8 billion ($5.1 billion) for fiscal year 1999, EUR 10.6 billion ($9.8 billion) for fiscal year 2000, and EUR 12.2 billion ($10.9 billion) for fiscal year 2001. Ahold materially overstated operating income by approximately EUR 222 million ($236 million) for fiscal year 1999, EUR 448 million ($413 million) for fiscal year 2000, and EUR 485 million ($434) for fiscal year 2001.
In its administrative action against Fahlin, the Commission alleges the following:
- Fahlin signed the ICA control and rescinding letters on behalf of ICA Förbundet, one of Ahold's partners in the ICA joint venture. He later left ICA Förbundet and became a member of Ahold's supervisory board and audit committee. In that capacity, he received a report indicating that the auditors were relying on a "control letter" to accept the consolidation of ICA. Fahlin's failure to determine whether this "control letter" was the same letter he had signed and then rescinded was a cause of Ahold's violations of the reporting, books and records, and internal controls provisions of the securities laws.
Settlements
Without admitting or denying the allegations in the complaints, Ahold, van der Hoeven, and Meurs have agreed to permanent injunctions against future violations of the antifraud, reporting, books and records, and internal controls provisions of the securities laws. Van der Hoeven and Meurs have also agreed to the entry of final judgments permanently barring them from serving as officers or directors of a public company.
Fahlin has agreed to the entry of an order, without admitting or denying the findings in the order, directing him to cease and desist from causing violations of the reporting, books and records, and internal controls provisions of the securities laws.
The Commission will litigate the case against Andreae and its investigation is continuing.
