SEC Charges Penn Traffic with Accounting Fraud

SYRACUSE, N.Y.-- Federal regulators charged an upstate New York-based regional grocery chain with fraud, the Associated Press reported, claiming a multimillion dollar accounting scheme made the company's finances look better than they were.

In a complaint filed in U.S. District Court, the U.S. Securities and Exchange Commission (SEC) said The Penn Traffic Co. inflated operating income by approximately $10 million over a nearly three-year period and overstated its after-tax net income by about $7 million the AP said.

SEC officials also said the company failed to file certain required financial reports or filed reports that did not fully comply with SEC regulations, the AP said.

Without admitting or denying the allegations, Penn Traffic agreed to settle the charges by consenting to a permanent injunction against any future violations of federal securities laws, the AP said. The SEC imposed no fines or monetary penalties on Penn Traffic, Rosenfeld said.

Additionally, Penn Traffic agreed to hire an independent examiner who will provide annual reports to the SEC, the U.S. Attorney and the company's board of directors the AP reported. It has also reformed its internal controls and policies to prevent future violations.

According to the SEC's 25-page complaint, which was cited by the AP, Penn Traffic intentionally inflated its operating income and other financial results by prematurely recognizing promotional allowances in a scheme that lasted from approximately the second quarter 2001 through at least the fourth quarter 2003.

Promotional allowances -- also referred to as rebates, slotting fees, or vendor allowances -- are paid by vendors to retailers in exchange for various marketing and promotional activities, such as in-store product displays or cooperative advertising the AP said.

The SEC's complaint also alleged a separate scheme from 2000 to 2003 involving the Penny Curtiss bakery, a wholly-owned subsidiary that Penn Traffic closed earlier this year, the AP said. The SEC said Penny Curtiss fabricated accounting records to overstate inventory and reduce the cost of goods sold.

-- NYSSCPA.org News Staff

Posted on 10/1/08