June 1st, 2007 05:11 EST
FBI, N.J. Company's Fraud Boils Over
Recipes for cooking company books vary according to taste but generally include the following ingredients: greed, theft, power, and accounting trickery. In the case of a New Jersey company, those elements congealed around a tasty ingredient found in many a kitchen cookbook: cheese.
In a scheme that mirrored the executive suite shenanigans of the granddaddy of white-collar crimes—Enron—top executives of cheese manufacturer Suprema Specialties Inc. booked fraudulent profits and inflated earnings, which in turn kept Wall Street investors happy and banks willing to loan money. Most of the Paterson-based company's sales and profits were in fact fictitious. And in some cases, low-end imitation cheese was re-labeled as all-natural, then sold at a considerable premium to boost the company's bottom line.
Meltdown. Suprema's bubble burst in 2001, when a company insider troubled by the massive fraud alerted the U.S. Attorney's Office, which in turn enlisted our Newark field office's white-collar crime squad. The insider, a former controller for the company, revealed to our special agents the extent of the scheme that cost banks about $80 million in losses and led Wall Street to halt trading on the company's stock. Unable to raise any more money, the company declared bankruptcy in 2002, leaving investors, including a Louisiana teacher's pension fund, holding millions of worthless shares.
Special Agent Michael Cahill, one of four agents on the case, described a circular scheme in which some the company's accounts who were in on the fraud would accept fake invoices to make it appear Suprema's business was flush. The accomplices in turn sent Suprema fictitious invoices, which Suprema promptly paid. Drawing on that money the accomplices sent checks back to Suprema to cover Suprema's fictitious invoices.
All the while, Suprema used the fake invoices to borrow more and more money from the banks. With each round-trip, the invoices grew incrementally, making business look robust—and a safe bet for the banks that extended more than $140 million to Suprema.
"It's like a check float," Agent Cahill said. "It kept spiraling upward because they had to cover costs."
Boom to bust. Riding high on strong (and fictitious) numbers—$1.2 billion in sales between 1996 and 2001—and the bullish press generated in part by top executives extolling Suprema's sound business model, the company put out a secondary stock offering in 2001 and raised another $41 million from investors. Top executives, including the chief executive officer and chief financial officer, cashed in stock at its peak, making millions. Six months later the company was bankrupt.
"You're dealing with a lot of people who got cheated by these guys," Agent Cahill said.
Agents searched computers at Suprema, as well as its suppliers and distributors, and carted away more than 1,000 boxes of records dating back to 1991. Half a dozen accomplices accepted pleas and laid out the architecture of the long-running scheme that ultimately led back to the corporate suite and indictments in 2002 of the CEO and CFO.
The big cheese. In April, following an eight-week trial, Suprema's founder and former CEO Mark Cocchiola and former CFO Steven Venechanos were each convicted on more than 35 separate charges.
Investigating white collar crime is one of our top priorities. At the end of the last fiscal year, FBI field offices were pursuing 490 corporate fraud cases, 19 of which involve losses to investors that individually exceed $1 billion, according to our most recent Financial Crimes Report to the Public.