SEC Charges Arizona-Based Health Food Company and Former Executives With Accounting Fraud

FOR IMMEDIATE RELEASE
2011-10

Washington, D.C., Jan. 13, 2011 — The Securities and Exchange Commission today charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate sales revenues at the Arizona-based company, which manufactures and sells health food products.

The SEC alleges that NutraCea booked false sales and engaged in improper revenue recognition practices to disguise its true operating results in its 2007 annual report and financial statements for the second and third quarters of 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 scheme. The SEC also charged NutraCea's former controller Joanne D. Kline and former director of financial services Scott Wilkinson.

NutraCea and four of the five individuals agreed to settle the SEC's charges against them, and the SEC's litigation continues against Crow.

"NutraCea, its former executives, and accounting personnel violated the public's trust by falsifying NutraCea's revenues to meet earnings and gross sales expectations throughout 2007," said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office.

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, resulting in overstated product sales revenue of as much as 35 percent.

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 SEC 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 the BiCoastal and ITV Global transactions alone, NutraCea overstated its product sales revenue by 36.8 percent for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by more than 89 percent in the second quarter of 2007, more than 17.6 percent in the third quarter, and nearly 7 percent for the fiscal year.

Without admitting or denying the SEC's allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settlements with 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, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.
• 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. He 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.
• Adelman consented to a five-year officer and director bar and 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.
• Kline and Wilkinson agreed to each pay a penalty of $25,000 and 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 further consented to the issuance of administrative orders pursuant to Rule 102(e) of the SEC'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.

The settlements are subject to the approval of the U.S. District Court of Arizona.

The SEC's 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 financial penalty, and an officer and director bar. The case against Crow is ongoing.

The SEC's investigation was conducted by Ann C. Kim, Roger D. Boudreau, Jessica R. Puathasnanon, and Finola H. Manvelian of the SEC's Los Angeles Regional Office. The SEC's litigation will be led by Spencer E. Bendell.

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For more information about these enforcement actions, contact:

John M. McCoy III
Associate Regional Director, SEC's Los Angeles Regional Office
(323) 965-4561

Finola H. Manvelian
Assistant Regional Director, SEC's Los Angeles Regional Office
(323) 965-3980

Spencer E. Bendell
Senior Trial Counsel, SEC's Los Angeles Regional Office
(323) 965-3833