The Securities and Exchange Commission today (Sept. 3) publicly charged Kraft Heinz Co. with a "long-running expense management scheme" that violated federal securities laws. The agency also charged two former KH executives with misconduct, and Kraft Heinz has agreed to pay a civil penalty of $62 million.
The case has already been settled. The SEC statement claims that from the last quarter of 2015 to the end of 2018, Kraft "engaged in various types of accounting misconduct, including recognizing unearned discounts from suppliers and maintaining false and misleading supplier contracts, which improperly reduced the company's cost of goods sold and allegedly achieved 'cost savings.' "
Throughout the announcement, the SEC calls the company Kraft – we assume they mean Kraft Heinz, because the merger of Kraft with Heinz occurred in 2015.
"Kraft, in turn, touted these purported savings to the market, which were widely covered by financial analysts," the announcement continued. "The accounting improprieties resulted in Kraft reporting inflated adjusted EBITDA [earnings before income taxes, depreciation and amortization]. In June 2019, after the SEC investigation commenced, Kraft restated its financials, correcting a total of $208 million in improperly-recognized cost savings arising out of nearly 300 transactions."
The SEC charged Kraft Heinz's former Chief Procurement Officer Klaus Hofmann with failure to design and maintain effective internal accounting controls for its procurement division. And the agency said former Chief Operating Officer Eduardo Pelleissone "was presented with numerous warning signs that expenses were being managed through manipulated agreements with Kraft's suppliers, but rather than addressing these risks, he pressured the procurement division to deliver unrealistic savings targets."
Heinz and its two principal investors, 3G Capital and Berkshire Hathaway, already were burdened with debt over Heinz's privatization. The additional debt of merging with Kraft and ultimately becoming a public company caused the combined company to lay off 2,500, slash costs and maximize profits.
"The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting," said Anita Bandy, associate director of the SEC's Division of Enforcement. "Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law."
Without admitting or denying the SEC's findings, "Kraft" consented to cease and desist from future violations and pay a civil penalty of $62 million. Pelleissone consented to pay disgorgement and prejudgment interest of $14,211.31 and a civil penalty of $300,000. Hofmann will pay $100,000 and to not serve as an officer or director of a public company for five years.
