The SEC's complaint, filed in the US District Court for the Middle District of Tennessee, alleges that four executives based in China orchestrated the fraud in which they reported fake revenues from their China operations and inflated hog weights to inflate sales. The agency also charged an executive and a company director in the US with trying to delay reporting the fraud once they learned about it. The director, K. Ivan (Van) Gothner, was chair of the company's audit committee.
AgFeed Industries was based in China and publicly traded in the US before merging with a US company in 2010, according to the SEC. In its complaint, the SEC alleges that executive chairman Songyan Li, CEO Junhong Xiong, CFO Selina Jin, and controller Shaobo Ouyang started the fraud in 2008 following the acquisition of 29 Chinese farms for its new hog production division. The SEC said the executives faked invoices for the sale of feed and of hogs that didn't exist. The executives later tried to cover their actions by saying the fake hogs died.
The SEC also alleges that executives with AgFeed's US operations learned of the fraud by June 2011, but failed to launch an investigation or inform investors. The agency claims that Gothner and Edward Pazdro, CFO at AgFeed, learned that the company's China operations kept two sets of books and obtained a partial copy of the documents and a memo from the in-house counsel in China acknowledging widespread fraud. The SEC said in a statement on its website: "The memo noted that two sets of accounting books were maintained “in order to make AgFeed’s revenue and net income look better.” The memo concluded that Xiong and Jin had directed the accounting fraud, and Xiong had ordered the destruction of the second set of books."
The SEC claimed that not only did Gothner and Pazdro fail to investigate the matter or report it to law enforcement "...Gothner and Pazdro instead engaged in efforts to spin off the company’s feed division and raise capital for expansion and acquisitions that would enable profits for AgFeed and them personally. Even as additional red flags arose in June and July 2011, they failed to take appropriate actions. They misled AgFeed’s outside auditor and caused the company to issue false and misleading press releases and SEC filings."
The SEC charged AgFeed, Xiong, Li, Jin, Ouyang, Gothner, and Pazdro with violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws. Additionally, Xiong, Li, Jin, Ouyang, Gothner and Pazdro face charges of making false statements to AgFeed’s outside auditors.
The SEC is seeking disgorgement of ill-gotten gains plus interest as well as financial penalties and officer-and-director bars. The agency also seeks to suspend Jin, Ouyang, and Pazdro from practicing as accountants on behalf of any publicly-traded company or other entity under SEC regulation.
AgFeed Industries, Hendersonville, Tenn., filed for Chapter 11 bankruptcyprotection in July 2013. The company agreed to sell most of its US businesses to Carlyle, Ill.-based The Maschoffs LLC for $79 million. AgFeed also ended a supply contract with Hormel Foods, Inc. following a dispute that resulted in an arbitration award of $7.9 million against AgFeed.
