On 9 February 2016, the SEC settled charges of securities violations against Monsanto Company (“Monsanto”) and three of its employees relating to alleged accounting violations from 2009 to 2011 concerning sales of its flagship product, an herbicide called Roundup. Monsanto agreed to pay $80 million and engage in substantial remedial efforts, but neither admitted nor denied the SEC’s allegations. The SEC described Monsanto’s actions as “the latest page from a well-worn playbook of accounting misstatements” and stated that “[f]inancial reporting and disclosure cases continue to be a high priority for the Commission.”
The allegations here arose out of Monsanto’s accounting for steps it took to compensate retailers and distributors in the US, Canada, Germany and France that purchased Roundup when Monsanto was planning on soon decreasing the price to compete with lower-cost generic competitors. The SEC alleged that Monsanto encouraged its US retailers to purchase greater amounts of Roundup at the end of Monsanto’s fiscal year 2009 by making the retailers eligible for rebates in the following fiscal year to compensate them for Monsanto’s upcoming price reduction. Monsanto was also alleged to have encouraged certain of its US distributors to fail to qualify for rebates in Monsanto’s fiscal years 2009 and 2010 in exchange for the distributors’ being given the opportunity to earn back those rebates in the following years. According to the SEC, accounting rules required Monsanto to recognise the cost of these rebates and similar incentives at the time they were offered, rather than in the following years when they were formally paid. Monsanto’s failure to do so increased its revenues in the earlier years in which it did not account for these benefits provided to its customers. In addition, Monsanto was alleged in Canada, France and Germany to have accounted for rebates as business expenses rather than as a reduction in revenues, thereby improperly boosting its revenues.
Monsanto’s allegedly improper conduct in managing the programmes described above included making false statements to its auditor concerning when some of these programmes were implemented and extending certain of these incentives even though its customers did not meet the sales and marketing requirements for receiving them. Monsanto has restated several financial statements to correct some of these errors. The SEC alleged that these accounting improprieties violated provisions of the Securities Act and the Exchange Act dealing with the sale of securities, reporting requirements and duties to keep accurate books and records.
In addition to paying an $80 million civil penalty, Monsanto agreed: (i) to engage an independent ethics and compliance consultant to review the company’s internal accounting controls relating to the alleged violations; (ii) to report the consultant’s findings to the SEC; and (iii) to adopt the consultant’s recommendations. The three Monsanto employees who were alleged to have been involved in the practices at issue agreed to pay a total of $135,000 in monetary penalties and two of them were denied the ability to appear as an accountant before the SEC for a limited period of time, after which they could apply for reinstatement. The SEC found no personal misconduct on the part of the company’s chief executive officer and former chief financial officer (“CFO”). In addition, the SEC explained that because these top executives reimbursed the company for the relevant portions of the compensation that they received during the period at issue (which totaled approximately $4 million), the SEC did not need to pursue a clawback action under the SarbanesOxley Act to try to recoup their money for the company. The SEC’s decision not to pursue these claims against the company’s leading executives highlights the more favorable treatment available when such executives voluntarily reimburse their companies and otherwise cooperate with regulatory inquiries. It also underscores, however, that certain senior executives are potentially responsible for securities and accounting violations even if they are not personally involved in the alleged misconduct. Overall, this matter serves as a reminder of the SEC’s interest in bringing cases arising from accounting deficiencies in companies’ financial statements.