The SEC recently brought an enforcement action against the Chairman of the Audit Committee of AgFeed Industries, Inc. The Director of the SEC’s Division of Enforcement, called the AgFeed action “a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”

SEC's Allegations

The SEC alleged that Ivan Gothner, the chairman of AgFeed’s audit committee, failed to act after receiving information that AgFeed’s Chinese hog-feeding operations were keeping two sets of books, inflating the number of hogs owned and overstating the weight of the hogs they did own. The SEC also accused the company of conducting accounting fraud to make the company's revenue and net income look better.

The Value of Outside Counsel as Investigators

Instead of taking a fellow director’s advice to “hire professional investigators guided by outside legal counsel,” Gothner directed internal resources to assess the situation. The internal investigation resulted in late and inadequate information, so Gothner took no action to remediate the situation. The SEC charged the Audit Committee Chairman with "violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws” and with "making false statements to AgFeed’s outside auditors.”

Although AgFeed’s accounting misdeeds started in China, Andrew Ceresney, director of the SEC’s Division of Enforcement, noted that AgFeed's U.S. executives "failed to properly investigate and disclose them to investors.”

SEC Pursuing People Not Just Companies

On October 16, the SEC published an official preview of its upcoming Agency Financial Report for FY 2014. The SEC definitely appears to be sending the message that it is enforcing the law against people, not just companies, and the agency is particularly concerned with holding gatekeepers who fail to fulfill their duties accountable. The preview demonstrated the intent to go after individuals by showcasing its major enforcement actions against Fifth Third Bancorp and its former CFO, Diamond Foods Inc. and its former CEO and CFO, World Capital Market and its founder, and many, many others. Gothner was one of eight individuals charged in the AgFeed case.