SEC Charges East Coast Supermarket Operator Penn Traffic With Accounting Fraud

FOR IMMEDIATE RELEASE
2008-233

Washington, D.C., Sept. 30, 2008 — The Securities and Exchange Commission today charged East Coast supermarket operator and wholesale food distributor The Penn Traffic Company with fraud for orchestrating multi-million dollar accounting schemes that inflated its operating income and overstated its after tax net income.

The SEC's complaint, filed in the U.S. District Court for the Northern District of New York, alleges that Syracuse, N.Y.-based Penn Traffic carried out the accounting fraud over multiple reporting periods, and failed to file certain required financial reports with the SEC or filed reports that did not fully comply with SEC regulations. Penn Traffic agreed to settle the SEC's charges without admitting or denying the allegations.

"Penn Traffic's fraudulent conduct lasted several years and distorted the company's financial reports," said David Rosenfeld, Associate Director of the SEC's New York Regional Office. "The Commission continues to focus on accounting improprieties and will take action when a company engages in fraudulent conduct that falsifies the company's true financial condition."

According to the SEC's complaint, Penn Traffic intentionally inflated its operating income and other financial results by prematurely recognizing promotional allowances in a scheme that lasted from approximately the second quarter of Penn Traffic's fiscal year 2001 through at least the fourth quarter of its FY 2003. Promotional allowances — also referred to as rebates, slotting fees, or vendor allowances — are fees paid from vendors in exchange for various marketing and promotional activities, such as inclusion in a supermarket's weekly circular. As a result of Penn Traffic's willful misconduct, the company prematurely recorded a total of approximately $10 million in operating income and reported these false results in financial reports filed with the Commission.

The SEC's complaint also alleges a separate scheme from at least the first quarter of Penn Traffic's FY 2000 through the first quarter of its FY 2003. Penn Traffic recorded fraudulent entries to the books and records of Penny Curtiss, its wholly-owned bakery manufacturing subsidiary that has since closed. For example, Penny Curtiss fabricated accounting records to overstate inventory and reduce cost of goods sold. As a result, Penn Traffic overstated after tax net income by more than $7 million and reported these false results in financial reports filed with the Commission.

The SEC's complaint further alleges that Penn Traffic failed to file financial reports or filed non-compliant reports with the Commission between the fourth quarter of its FY 2003 and the fourth quarter of its FY 2008.

Penn Traffic has consented to the entry of a permanent injunction against 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, and to certain undertakings that require it to employ an independent examiner, among other things. The settlement is subject to the court's approval.

The SEC previously charged two former senior Penn Traffic executives and one Penny Curtiss executive for their roles in the fraudulent schemes alleged in the complaint. The Commission's case is pending against Leslie H. Knox, Penn Traffic's former Senior Vice President and Chief Marketing Officer, and Linda J. Jones, Penn Traffic's former Vice President of Non-Perishable Merchandising. In 2005, the Commission obtained a consent judgment against Michael J. Lawler, the former Director of Manufacturing at Penny Curtiss, permanently enjoining him from violating the antifraud and books and records of the securities laws.

The Commission acknowledges the assistance of the U.S. Attorney's Office for the Northern District of New York and the Federal Bureau of Investigation in this matter.

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For more information, contact:

David Rosenfeld
Associate Director, SEC's New York Regional Office
(212) 336-0153

Ken C. Joseph
Assistant Director, SEC's New York Regional Office
(212) 336-0097

http://www.sec.gov/news/press/2008/2008-233.htm