SEC Files Settled Financial Fraud Action
One of the key products of Monsanto Company is weed killer Roundup, sold to retailers and distributors but not directly to growers. After the product came off patent generics began to erode its profits. To address the issue the company created a series of programs rolled out initially in the U.S. and later in Canada and France and Germany. Ultimately improper accounting tied to those programs resulted in a restatement of Monsanto’s financial statements for its annual reports for 2009 and 2010 and the quarterly reports for 2011. That in turn spawned a financial fraud action against the company and those who participated in the conduct — Sara Burnquell, the External Reporting Lead at the firm during the period; Jonathan Nienas, the U.S. Strategic Account Lead for the Roundup Division; and Anthony Hartke, U.S. Business Analyst in the Roundup Division. In the Matter of Monsanto Company, Adm. Proc. File No. 3-17107 (February 9, 2016).
The programs designed to boost Roundup sales were similar. The initial program focused on retailers. It was designed to address their issues while permitting the company to meet its fiscal 2009 earnings goals. Monsanto’ sales force told U.S. retailers that if they maximized their Roundup purchases in the fourth quarters of fiscal 2009, Monsanto would allow them to participate in a loyalty program that would be rolled out in the first quarter of fiscal 2010. The program would make the inventories of the retailers profitable despite anticipated price cuts for the product. Customers purchased large amounts of Roundup in the fourth quarter.
When the program was rolled out in the first quarter of the next year it centered on rebates. Monsanto prepaid the rebates in the second quarter of fiscal 2010. The accounting for the rebates was improper. Under the applicable standards Monsanto was required to recognize the rebate obligation as a reduction of revenue based on a rational allocation of the rebate offer to each underlying transaction that results in progress by the customer towards earning the rebate. Nevertheless, Monsanto recognized the related revenue reductions in fiscal year 2010 despite the fact that it used the program to incentivize sales in the last quarter of fiscal 2009. Messrs. Hartke and Brunnquell were involved in this program.
In fiscal 2009 Monsanto also offered distributors a rebate on their total purchase of Roundup if they met specific volume targets. Each distributor had a separate agreement. Throughout 2009 the firm accrued substantial amounts for the rebates in accord with the applicable accounting standards. The rebates were to be recognized as a reduction of Roundup revenue for the year. In the last few months of the year, however, the company reversed a large portion of the accruals because seven customers failed to meet their goals. The accrual reversal boosted Monsanto’s reported revenues and gross profit for the fiscal year.
The next year Monsanto created a program for the seven customers to earn back the rebates. The rebates were prepaid. With three customers the firm entered into side agreements under which they failed to meet the minimum targets for the program but were promised the rebates. This meant that in 2009 Monsanto reversed the accruals, boosting earnings. At the same time the company deferred recording the rebate liabilities. Messrs. Hartke and Nienas participated in these transactions. Monsanto also had a similar program for the next year.
In Canada, France and Germany Monsanto utilized similar programs to boost sales but then improperly accounted for the rebates as selling, general and administrative expenses. Under the applicable standards payments to customers to perform services on its behalf are recognized as a reduction of revenue for the amount of the payments that exceed the estimated fair value of the services rendered. If there is no service provided by the customer the total amount should be recognized as a reduction of revenue which should have been the case with the rebates here.
The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) as well as the related rules.
Monsanto undertook a series of remedial efforts, including the retention of an independent ethics and compliance consultant. To resolve the proceeding the company consented to the entry of a cease and desist order based on the Sections cited in the Order, except Section 13(b)(5). The firm will also pay a penalty of $80 million.
Respondent Brunnquell consented to the entry of a cease and desist order based on each of the Sections cited in the Order, except Section 13(b)(5). In addition, she is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after two years. She will also pay a penalty of $55,000.
Respondent Hartke consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and 13(b)(2)(A). In addition, he is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after one years. He will also pay a penalty of $30,000.
Finally, Respondent Nienas consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(5). He will also pay a penalty of $50,000.