Read the release and the related SEC Complaint. Summarize the release and complaint in 2-3 pages (12-point, double spaced).U.S. Securities and Exchange CommissionLitigation Release No. 21819 / January 20, 2011Accounting and Auditing Release No. 3234 / January 20, 2011Securities and Exchange Commission v. NutraCea, et al., United States District Court, District of Arizona, Civil Action No. CV 11-0092-PHX-DGCSEC CHARGES ARIZONA-BASED HEALTH FOOD COMPANY AND FORMER EXECUTIVES WITH ACCOUNTING FRAUDOn January 13, 2011, the Securities and Exchange Commission charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate NutraCea’s product sales revenues.The SEC alleges that NutraCea overstated its sales revenues for the second and third quarters of its fiscal year 2007 and fiscal year 2007 by booking false sales and engaging in improper revenue recognition practices. Through misstated financial statements, NutraCea disguised its true operating results in the second and third quarter of 2007 and fiscal year 2007.The SEC charged NutraCea’s former chief executive officer, Bradley D. Edson, former chief financial officer, Todd C. Crow, and former senior vice president and secretary, Margie Adelman, for their roles in the fraudulent accounting scheme. The SEC also charged former controller, Joanne D. Kline, and former director of financial services, Scott Wilkinson, for their roles in the improper accounting.NutraCea, an Arizona-based company that manufactures and sells health food products, agreed to settle the SEC’s charges. Edson agreed to pay a $100,000 penalty, reimburse NutraCea $350,000 in bonuses he received in 2008, and agreed to a permanent officer and director bar to settle the SEC’s charges against him. Adelman, Kline, and Wilkinson also agreed to settle the SEC’s charges.The SEC’s complaint, filed in federal district court in Arizona, alleges that NutraCea, Edson, Crow, and Adelman falsified NutraCea’s sales revenues in 2007, and Kline and Wilkinson engaged in improper accounting by recording these false revenues. NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp. in the second quarter of 2007, resulting in overstated product sales revenue of as much as 35% in the second quarter of 2007.According to the SEC’s complaint, Edson instructed Bi-Coastal’s president to falsify his family’s financial statements to reflect a higher net worth in order to support the false sales to Bi-Coastal. In reality, Bi-Coastal’s “down payment” for the $2.6 million sale came from NutraCea’s former COO. When Kline tried to discuss with Crow in 2007 her discovery that the $1 million deposit for the Bi-Coastal sale came from a loan from the former COO to Bi-Coastal in order to justify NutraCea’s recognition of revenue from this sale, she says that Crow “covered his ears and said, ‘No, no, no, no, no, no, no, no, no. I don’t want to hear it.'”The complaint also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007. As a result of the Bi-Coastal and ITV Global transactions alone, NutraCea overstated its product sales revenue by 36.8% for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by over 89% in the second quarter 2007, over 17.6% in the third quarter 2007, and nearly 7% in fiscal year 2007.Without admitting or denying the SEC’s allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settle this matter on the following terms:NutraCea consented to the entry of an order that permanently enjoins it from future violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.Edson consented to a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. Edson also agreed to a permanent officer and director bar, to pay a civil penalty of $100,000, and to reimburse NutraCea, pursuant to the Sarbanes Oxley Act of 2002, the $350,000 in bonuses he received in 2008.Adelman consented to a final judgment permanently enjoining her from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. Adelman further consented to a five year officer and director bar.Kline and Wilkinson both consented to final judgments permanently enjoining them from future violations of Section 13(b)(5) of the Exchange Act, and Rules 13b2-1 and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. Kline and Wilkinson also agreed to each pay a civil penalty of $25,000. Kline and Wilkinson further consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after one year.These settlements are subject to the approval of the U.S. District Court of Arizona.The complaint against Crow alleges that he violated and aided and abetted violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws. The complaint also alleges that Crow violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. The SEC’s complaint against Crow seeks a permanent injunction, a civil penalty, and an officer and director bar. The case against Crow is ongoing.Case 2:11-cv-00092-DGC Document 11234567Filed 01/13/11 Page 1 of 25SPENCER E. BENDELL, Cal. Bar No. 181220E-mail: [email protected] C. KIM, Cal. Bar No. 212438Email: [email protected] for PlaintiffSecurities and Exchange CommissionRosalind Tyson, Regional DirectorJohn M. McCoy III, Associate Regional Director5670 Wilshire Boulevard, 11th FloorLos Angeles, California 90036Telephone: (323) 965-3998Facsimile: (323) 965-390889UNITED STATES DISTRICT COURT10DISTRICT OF ARIZONA1112SECURITIES AND EXCHANGECOMMISSION,Plaintiff,13141516171819202122232425262728vs.NUTRACEA; BRADLEY D. EDSON;TODD C. CROW; JOANNE D. KLINE;SCOTT WILKINSON; and MARGIEADELMAN;Defendants.Case No.COMPLAINT FOR VIOLATIONSOF THE FEDERAL SECURITIESLAWSCase 2:11-cv-00092-DGC Document 112Plaintiff Securities and Exchange Commission (the “Commission”) allegesas follows:34Filed 01/13/11 Page 2 of 25SUMMARY1.This matter involves false financial information reported by5Phoenix, Arizona-based NutraCea (formerly known as NutraCea, Inc.) and6certain of its senior management and accounting staff in its periodic reports filed7with the Commission for fiscal year 2007.892.NutraCea manufactures and sells health food products. NutraCeaoverstated its sales revenues for the second and third quarters of fiscal year 200710and its entire fiscal year 2007 by booking false sales and engaging in improper11revenue recognition practices.123.Through misstated financial statements, NutraCea disguised its13second and third quarter 2007 and fiscal year 2007 true operating results.14NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp.15(“Bi-Coastal), resulting in overstated product sales revenue of as much as 35% in16the second quarter of 2007. The false sales to Bi-Coastal had a continuing17material impact through the third quarter of 2007 when NutraCea overstated18product sales revenue by 29% for the nine month period ending September 30,192007. In addition, NutraCea improperly recorded revenue on a bill and hold20transaction related to a $1.9 million sale of product to ITV Global, Inc. (“ITV”)21in the fourth quarter of 2007.224.As a result of these two transactions alone, NutraCea overstated its23product sales revenue by 36.8% for fiscal year end 2007. As a result of the24overstated product sales revenue from these two transactions, NutraCea misstated25its operating loss by over 89% in the second quarter 2007, over 17.6% in the third26quarter 2007, and nearly 7% in fiscal year 2007.27285.On March 28, 2008, NutraCea incorporated by reference itsmisstated Form 10-K for fiscal year 2007 in a Form S-3/A filed in connection1Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 3 of 251with an amended registration statement with a potential $125 million offering of2common stock, preferred stock, warrants, and depositary shares. As a result of3Defendants’ fraudulent conduct, NutraCea restated its financial statements on4October 20, 2009.56JURISDICTION AND VENUE6.This Court has jurisdiction over this action pursuant to Sections720(b), 20(d)(1), and 22(a) of the Securities Act of 1933 (“Securities Act”), 158U.S.C. §§ 77t(b), 77t(d)(1), and 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e),9and 27 of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§1078u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa. Defendants have directly or indirectly11made use of the means or instrumentalities of interstate commerce, of the mails,12or of the facilities of a national securities exchange in connection with the13transactions, acts, practices and courses of business alleged in this Complaint.147.Venue is proper in this district pursuant to Section 22(a) of the15Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 1516U.S.C. § 78aa, because defendants reside and transact business within this district17and certain of the transactions, acts, practices and courses of conduct constituting18violations of the federal securities laws alleged in this Complaint occurred within19this district.2021THE DEFENDANTS8.NutraCea is a California corporation with its principal executive22offices located in Phoenix, Arizona and is engaged in the business of23manufacturing health food products. NutraCea’s common stock is registered24with the Commission pursuant to Section 12(g) of the Exchange Act and trades25on the OTC:BB under the symbol “NTRZ”.269.Bradley D. Edson, age 51, of Scottsdale, Arizona, is the former27chief executive officer and a former director of NutraCea. Edson was NutraCea’s28CEO from December 2005 to March 2009, and a member of NutraCea’s board of2Case 2:11-cv-00092-DGC Document 112Filed 01/13/11 Page 4 of 25directors from December 2004 to March 2009.10.Todd C. Crow, age 62, of Granite Bay, California, is the former3chief financial officer of NutraCea. Crow was NutraCea’s chief financial officer4from October 2005 to May 2008 and July 2008 to November 2008.511.Joanne D. Kline, age 48, of Phoenix, Arizona, is the former6controller of NutraCea. Kline was the controller from March 2007 to June 2009.7Kline has been a licensed certified public accountant in Arizona since April 1993,8but her license was suspended in November 2010.912.Scott Wilkinson, CPA, age 54, of Phoenix, Arizona, is the former10director of financial services of NutraCea. He held this position from April 200711to February 2009. Wilkinson has been a licensed certified public accountant in12Arizona since 2006.1313.Margie Adelman, age 50, of Paradise Valley, Arizona, is a former14senior vice president and secretary of NutraCea. Adelman was NutraCea’s senior15vice president from January 2005 to November 2008. Adelman served as16NutraCea’s secretary from January 2005 to early 2008.1718DEFENDANTS’ FRAUDULENT SCHEME14.In order to meet earnings and/or gross sales expectations and19guidance throughout 2007, NutraCea management falsified its product sales20revenues. The tone from the top – specifically Bradley Edson (“Edson”) – was to21do anything necessary to ensure NutraCea met its earnings goals, especially after22the first quarter of 2007 when NutraCea had a revenue shortfall primarily23attributable to its inability to recognize $2.6 million in sales. Through false sales24of $2.6 million of product to Bi-Coastal in the second quarter, NutraCea was able25to record $10.3 million in sales and thereby exceed its previously announced26guidance for gross sales of between $9 million and $10 million.272815.Through its premature recognition of $1.9 million in revenue fromthe ITV sale in the fourth quarter, NutraCea was able to meet its previously3Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 5 of 251announced earnings expectation of between $5 million and $7 million by2reporting fourth quarter revenues of $5.6 million.3I.4Second Quarter 2007 Sale to Bi-Coastal Pharmaceutical16.In the second quarter of fiscal year 2007, NutraCea improperly5recorded a $2.6 million sale of four different products to Bi-Coastal. NutraCea6had attempted to book revenue from the sale of these same products to three7different customers in the previous quarter, but Perry-Smith, NutraCea’s outside8auditors, disagreed with NutraCea’s assessment that revenues from the sales were9appropriately recognized.1017.Edson fought hard with Perry-Smith to convince them that the11revenue from these first quarter sales should be booked. However, Perry-Smith12refused to change its position and made NutraCea reverse the revenue, causing a13shortfall in revenues by 47% from the same period one year before.1418.The next quarter, Edson was determined to recognize revenue from15the sale of these same products. Specifically, in the second quarter of 2007,16Edson approached Bi-Coastal’s president and asked him to issue purchase orders17for $2.6 million of product. This transaction was a complete sham. Bi-Coastal18had no intention of purchasing and selling these products. Edson told Bi-19Coastal’s president that “he had several avenues of potential distribution for these20products and that [Bi-Coastal was] never going to take possession of them and21that at a later date [Edson] was going to sell the products to a third party.”2219.NutraCea then improperly booked the entire sale in the second23quarter. Staff Accounting Bulletin (“SAB”) No. 104 references four basic24criteria for revenue recognition as follows: (1) persuasive evidence of an25arrangement exists; (2) delivery has occurred or services have been rendered;26(3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is27reasonably assured. In this instance, collection from Bi-Coastal was not28reasonably assured. See also Accounting Research Bulletin No. 43, Chapter1A,4Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 6 of 251Para. 1, which states that collection must be reasonably assured before profit can2be recognized. Here, due to Bi-Coastal’s and its owners’ precarious financial3condition, as well as the dubious sales arrangement between NutraCea and Bi-4Coastal, collection of the receivable from this transaction could not be deemed5reasonably assured.620.To further substantiate this sham sale and to support recognizing the7entire sale in the second quarter, Edson did the following: (1) worked out a $18million loan from NutraCea’s former COO to Bi-Coastal so that Bi-Coastal could9make a down payment on the $2.6 million purchase; (2) requested Bi-Coastal’s10president to send NutraCea an internally prepared financial statement for Bi-11Coastal’s owners that would support Bi-Coastal’s ability to pay the balance due12of $1.6 million; and 3) asked Bi-Coastal’s president to falsify the numbers in the13original financial statement to reflect a higher net worth for Bi-Coastal’s owners.1421.Specifically, Edson told Bi-Coastal’s president that “the only way15that [Edson] could book the sale and the auditors would be able to accept the sale16and book the sale for that period of time was if a substantial deposit was made for17that amount, because of Bi-Coastal’s lack of financial strength . . . .” Edson18further told Bi-Coastal’s president that Edson had arranged a loan for the down19payment from NutraCea’s former COO to Bi-Coastal. Specifically, the former20COO would transfer his NutraCea options to Bi-Coastal to affect a loan. After he21sent the original financial statement to NutraCea, Bi-Coastal’s president received22instructions from Edson to falsify the numbers in the financial statement to reflect23a higher net worth for Bi-Coastal’s owners.2422.Bi-Coastal was also contacted by NutraCea’s former COO, who told25him what changes to make to the financial statements. Ultimately, based on the26former COO’s and Edson’s directions, Bi-Coastal’s president falsified his27family’s financial statements to reflect a net worth of over $20 million. This was28$15 million more than the net worth originally stated in the financial statement5Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 7 of 251dated three days earlier, in which Bi-Coastal’s owners reported a net worth of2over $4.9 million.323.CFO Todd Crow (“Crow”) knew that Bi-Coastal’s down payment4for the $2.6 million sale came from the former COO. Sometime between June521, 2007 and June 30, 2007, NutraCea’s former COO attempted to tell Crow6about his loan to Bi-Coastal for the down payment, but “[Crow] basically said, ‘I7don’t want to hear this.’”824.Around July 10, 2007, Joanne Kline (“Kline”), NutraCea’s former9controller, received some documents from NutraCea’s former COO that included10documents related to the loan from the former COO to Bi-Coastal. She believed11that the loan from NutraCea’s former COO may have been used for the one12million-dollar deposit by Bi-Coastal to justify NutraCea’s recognition of revenue13from this sale. When Kline tried to discuss with Crow her thought that the $114million deposit for the Bi-Coastal sale came from a loan from the former COO to15Bi-Coastal or one of its owners, “[Crow] covered his ears and said, ‘No, no, no,16no, no, no, no, no, no. I don’t want to hear it.’”1725.Around this time, Kline believes she told Scott Wilkinson18(“Wilkinson”) that the $1 million down payment may have been from a loan the19former COO made to Bi-Coastal. Kline did not discuss the loan from the former20COO to Bi-Coastal with anyone else, particularly Perry-Smith and NutraCea’s21audit committee, because she was afraid she would be terminated.2226.Despite their knowledge and/or belief that Bi-Coastal’s $1 million23down payment on the $2.6 million sale was from NutraCea’s former COO’s loan,24Edson, Crow, Kline and Wilkinson failed to disclose this information to Perry-25Smith. Instead, they affirmatively misled the auditors when they all signed an26August 14, 2007 management representation letter related to Perry-Smith’s27review of the interim financial information of NutraCea for the second quarter28Form 10-Q falsely representing that (1) the interim financial information was6Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 8 of 251presented in accordance with accounting principles generally accepted in the2U.S.; (2) all financial records and related data were made available to Perry-3Smith; and (3) they had no knowledge of any fraud or suspected fraud affecting4NutraCea involving management, employees who have significant roles in the5internal control, or others where fraud could have a material effect on the interim6financial information.7II.Fourth Quarter 2007 Sale to ITV Global, Inc.8A.ITV’s November 2007 Order Of Rice n Shine927.In November 2007, NutraCea sold 150,000 units of Rice n Shine, a10meal replacement product, to ITV for over $1.9 million. NutraCea engaged a co-11packer, Innovative Health Products, Inc. (“IHP”), to manufacture this order of12Rice n Shine for ITV. To that end, in late November 2007, NutraCea shipped its13proprietary raw ingredient, dextrinized rice bran (hereinafter, “raw material”) to14IHP, to manufacture ITV’s order of Rice n Shine. After manufacturing the Rice15n Shine, IHP was to hold the product at its facilities for shipping to ITV.1628.Around the time the purchase order for Rice n Shine was issued,17Edson instructed Margie Adelman (“Adelman”), the vice president who18negotiated this sale, to obtain letters from both ITV and IHP stating that the Rice19n Shine would be manufactured and shipped out by the end of 2007.2029.Specifically, Edson told Adelman to obtain a letter from ITV that21stated ITV would take possession of the shipment by a certain date (December2231, 2007). Edson wanted this particular letter from the purchaser (ITV) – and the23specific language contained in it – because he knew this letter would be provided24to NutraCea’s outside auditors to support NutraCea booking the revenue from the25sale to ITV in the fourth quarter of 2007.2630.Adelman made numerous attempts to get a letter from IHP to27provide to NutraCea’s outside auditors, but was not successful. Ultimately,28Edson secured a letter from IHP in July 2008 to try to further support NutraCea’s7Case 2:11-cv-00092-DGC Document 112booking of the revenue from this sale in 2007.B.Doubts That IHP Completed Manufacturing ITV’s Order OfRice n Shine Prior To The End Of 200734Filed 01/13/11 Page 9 of 2531.Adelman had concerns about whether the 150,000 units of Rice n5Shine could be manufactured by the end of 2007 because of the amount of time it6would take to procure the raw materials and manufacture such a large order.7Adelman told Edson about her concerns that the product could not be8manufactured by the end of 2007, but Edson told her “not to worry, that it was9common practice to obtain letters like this and we had done it prior.”1032.In January 2008, Adelman’s doubts that IHP could manufacture all11150,000 units of Rice n Shine before December 31, 2007 were confirmed when12she saw a statement that ITV issued on its website stating that Rice n Shine was13on back order. Edson was also aware of ITV’s statement. In response to ITV’s14statement, Edson made comments regarding ITV such as “what a bunch of jerks”15or “I can’t believe they did that.”1633.Sometime in early 2008, Kline asked Adelman about the November172007 sale of Rice n Shine, which prompted Adelman to call IHP’s CEO and ask18why ITV was back-ordered on Rice n Shine. IHP’s CEO told Adelman that IHP19was waiting for phytosterols (an antioxidant needed to manufacture Rice n Shine)20from China. When Adelman relayed this information to Kline, Kline became21“freaked out” and said “I don’t want to hear that.”2234.Kline then asked Adelman who wanted to book the revenue from23this sale in 2007, and Adelman responded that it was Edson. After this24conversation with Kline, Adelman again went to Edson to discuss her concerns25that they were booking revenue for product that had not been manufactured by26the end of 2007. Edson told her “not to worry” since NutraCea had obtained the27letter from ITV indicating it had taken possession of the product. Adelman also28told Edson about her conversation with Kline, and Edson told her “not to have8Case 2:11-cv-00092-DGC Document 112Filed 01/13/11 Page 10 of 25that conversation with Joanne and to be very careful about what [Adelman] said.”35.After Kline’s conversation with Adelman, Kline had a conversation3with Wilkinson in which they “both shared very strong concerns that [the ITV4transaction] was not a valid sale . . . .” Kline’s concerns resulted from her5conversation with Adelman and the fact that IHP had not invoiced NutraCea for6the manufacturing of Rice n Shine by the beginning of 2008. It appears7Wilkinson’s concerns were caused by both the invoice issue and the inventory of8NutraCea’s raw material that IHP still had on hand as of January 7, 2008.936.Based on a January 7, 2008 email from Wilkinson to IHP’s general10manager of operations, Wilkinson acknowledged that IHP had raw material that11NutraCea shipped to IHP that had not been manufactured into Rice n Shine.12Specifically, Wilkinson wrote: “we’ve shipped a lot of [raw material] which13hasn’t yet been turned into Rice-n-Shine for us.” Kline and Wilkinson discussed14whether they needed to resign.1537.The day after her discussions with Wilkinson, Kline expressed her16concerns about the ITV sale to Crow, while NutraCea was closing its books for17the fourth quarter of 2007. Specifically, Kline told Crow that she was very18disturbed “that [NutraCea was] recording a sale when everything [she] heard and19saw led [her] to believe that there was no inventory to sell.” Kline further told20Crow “if this issue were to ever come up, and [she] was under oath and had to21testify . . . that [she] would have to say [she] had strong reasons to believe that22the sale is not valid.” Crow responded by stating, “he did not see a problem with23it, that ‘we are relying on IHP’s invoice,’ and if, in fact, IHP did not have the24inventory, that they were the ones committing fraud . . . .”25C.Recognizing The Entire Sale In 20072638.Despite all of these red flags, Edson, Crow, Adelman, Kline, and27Wilkinson failed to disclose this information to Perry-Smith, and NutraCea28booked the revenue from the entire sale in its 2007 year-end financial statements.9Case 2:11-cv-00092-DGC Document 1139.Filed 01/13/11 Page 11 of 25NutraCea recorded all of the revenue from this sale in 2007 based on2a bill and hold revenue recognition theory. However, as described above, this3transaction did not meet all of the factors required for basic revenue recognition,4let alone the requirements for bill and hold.540.Generally Accepted Accounting Principles require that delivery6occur before recognition of revenue is appropriate. Under a bill and hold revenue7recognition criteria, a company may recognize revenue when delivery has not8occurred when the following specific requirements are met: (1) the risk of9ownership must have passed to the buyer; (2) the customer must have made a10fixed commitment to purchase the goods, preferably in written documentation;11(3) the buyer, not the seller, must request that the transaction be on a bill and hold12basis and the buyer must have a substantial business purpose for ordering the13good on a bill and hold basis; (4) there must be a fixed schedule for delivery of14the goods; (5) the seller must not have retained any specific performance15obligations such that the earning process is not complete; (6) the ordered goods16must have been segregated from the seller’s inventory; and (7) the product must17be complete and ready for shipment. See SAB 104. Here, the requirements for18bill and hold had not been met because the product had not yet completed the19manufacturing process.2041.Specifically, the entire order was not manufactured prior to the end21of 2007. In fact, some of the Rice n Shine ordered in November 2007 was still22being manufactured in November 2008.2342.Moreover, Edson, Crow, Kline, and Wilkinson signed a March 17,242008 management representation letter related to Perry-Smith’s audit of25NutraCea’s year-end financial information falsely representing that (1) the year-26end financial statements were presented in accordance with accounting principles27generally accepted in the U.S.; (2) all financial records and related data were28made available to Perry-Smith; and (3) they had no knowledge of any fraud or10Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 12 of 251suspected fraud affecting NutraCea involving management, employees who have2significant roles in the internal control, or others where fraud could have a3material effect on the interim financial information.443.After NutraCea filed its 2007 Form 10-K, Edson and Adelman were5again alerted to the fact that IHP still had not manufactured all of the Rice n6Shine from the November 2007 order. In a May 2008 email from an ITV7consultant to Edson, ITV explained that it was not paying NutraCea’s invoice8pursuant to the agreed upon terms because IHP had not delivered all of the Rice n9Shine ITV ordered. Again, Edson never disclosed this information to Perry-10Smith.1144.Further, on at least two occasions in 2008, IHP asked NutraCea to12send it more raw materials to replace insect infested raw material so it could13finish manufacturing the Rice n Shine for ITV’s November 2007 order. The first14insect infestation issue occurred in late December 2007 or early January 2008,15prior to the filing of the 2007 Form 10-K. The second infestation occurred in16May 2008, and Adelman worked with IHP to get the infested raw material17replaced. Adelman also kept Edson apprised of the infestation issues, and on18May 19, 2008, she informed him that NutraCea needed to send IHP enough19replacement raw material to fulfill the remaining 56,998 units of Rice n Shine20IHP owed to ITV.21III.NutraCea’s Form 10-K for Fiscal Year 2007 and Forms 10-Q for the22Second and Third Quarters of 2007 Contained Materially False23Information2445.The Bi-Coastal and ITV transactions had a material impact on25NutraCea’s financial statements. NutraCea overstated its reported product26sales revenue and misstated its reported operating loss in its financial27///28///11Case 2:11-cv-00092-DGC Document 1Filed 01/13/11 Page 13 of 251statements filed with the Commission in 2007 by improperly reporting the2Bi-Coastal and ITV transactions as revenue as follows:3Q2 2007(6 months)Q3 2007(9 months)FYE 2007(12 months)PreviouslyReportedProduct SalesRevenue$9,983,000$11,480,000$16,821,000AdjustedProduct SalesRevenue$7,382,000$8,879,000$12,300,000Overstatementof ProductSales RevenueBy P…