Le-Nature’s Inc. Fraud
After acquiring a degree in accounting and finance, Gregory Podlucky opted to assist his father run his Jones Brewing Co., real estate properties, auto parts outlets, and an ethanol firm. However, in 1989, Podlucky launched a water bottling business in Latrobe, Pennsylvania. Moreover, by 1992 he diversified his product line to include several products such as tea drinks, fruit, and flavored water (Knapp & Knapp, 2015). Podlucky rebrand his firm to Le-Nature’s Inc. to acquire a considerable market share in the hypercompetitive niche. In 2006, Le-Nature’s Inc. was among the leading American beverage companies that recorded impressive sales worth almost $290 million (Knapp & Knapp, 2015). Le-Nature’s success attracted various investors, but Podlucky rejected their offers and opted to make it a public entity. Nonetheless, the firm’s creditors and investors did not attain their anticipated goals due to fraudulent activities that exposed Le-Nature’s internal control schemes.
Internal Control Schemes
Podlucky relied on his friends, business associates, and family to empower him to establish a prosperous company. As the chief executive officer (CEO), Podlucky, appointed his associates to key organizational positions as Le-Nature expanded. For instance, he appointed his sibling Jonathan as the chief operating officer while his son Jesse oversaw the firm’s dominant subsidiary entitled bottled tea commodities. Besides, Podlucky hired his friend, Robert Lynn, who served several leadership positions (Delevingne, 2009). Even though Podlucky had appointed Tammy Andreycak was the accounting manager, he was actively involved in assessing the company’s accounting operations. Andreycak did not have formal training or a college degree in accounting; her primary objective was to act as Podlucky’s close associate. Hence, Podlucky purported that Andreycak was his secretary when he was dealing with third parties.
Insufficient funds was a significant challenge in Le-Nature as it expanded. As a result, Podlucky depended on different strategies to finance his organizational operations. During his 14 years tenure, the outgoing and experienced CEO had almost $1 billion equity capital and debt for the firm. In 1999, Podlucky sort assistance from a financial consulting company to pinpoint potential investors to aide Le-Nature was overcome its financial challenges. According to Associated Press (2014), in 2000 and 2002, the firm secured two major investment funds that purchased almost $8 million shares of the organization’s preferred stock. The investors had the option of converting their shares into Le-Nature’s common stock, empowering them to control almost 45% of the firm’s common stock (Delevingne, 2009). Nevertheless, Podlucky owned all the outstanding common stock associated with Le-Nature’s.
The preferred stock sales stipulated Le-Nature’s organizational governance system since each investment fund that bought a preferred stock gave the investors the capacity to influence the board of director’s composition. During its existence, Le-Nature’s preferred stock sales raised to almost $30 million (Gleason, 2011). Conversely, most of the firm’s board comprised of insiders, including Jonathan and other senior executives. Podlucky exploited his authority to secure a long-term equipment lease to serve as his ideal financing practice. He used the technique to retain a North Carolina leasing agent to secure a contract with a Wisconsin-based organization that was affiliated with a German manufacturing company. The German company manufactured Le-Nature’s equipment that was used in bottling operations. The North Carolina leasing personnel was an arbitrator who ensured that Wisconsin subsidiary acquired Le-Nature’s equipment From Germany. The lease agreement obliged Le-Nature’s to deposit a tremendous bond with the leasing agent; Podlucky borrowed the capital to deposit an American lender. Therefore, Podlucky used fraudulent procedures to finance the acquisition of most organizational equipment.
Podlucky utilized convectional borrowing systems as the primary means to raise funds for Le-Nature’s. For instance, Wachovia, an established financial service organization based in North Carolina, underwrote roughly $500 million of Le-Nature’s long-term debt (Moraff, 2007). Moreover, in 2005, Wachovia advertised a $150 million escrow issue for the firm. Consequently, the high-yield bonds were retailed to retirement and pension funds. Podlucky depended mostly on Le-Nature’s reviewed financial reports to borrow funds for his firm. In the $150 million bond case, Wachovia relied on Le-Nature’s audited financial statements to market those bonds. Therefore, investor services depended on Le-Nature’s financial records to assign a credit rating to the firm’s outstanding debt obligations and bonds.
Signs of Fraudulent activities
The resignation of top officials after doubting Le-Nature’s sales records were fabricated. In August 2003, an independent audit company, Ernst & Young (EY), opted to interrogate Le-Nature’s senior directors in their second-quarter review. Mandak (2014) argued that it was a standard practice for EY to inquire from their client’s executives if they suspect any fraudulent activity in the firm during the auditing process. When EY’s audit personnel, Richard Lipovich, sort Le-Nature’s chief finance officer, John Higbee, view: Higbee expressed his worries on the reliability of his organization’s sales records. Lipovich obtained similar feedback from the vice president of administration and chief administrative officer. After expressing their doubts on Le-Nature’s sales figures, the trio submitted their resignation letters.
In the resignation letters, the former directors purported that Podlucky was perpetrating fraudulent activities with Le-Nature’s equipment vendors, tea suppliers, and specific customers. As experienced audit personnel, Higbee reported that Podlucky had consistently denied him supporting documents for major transactions recorded in Le-Nature’s accounting statements (Knapp & Knapp, 2015). He suspected Podlucky’s reluctance to provide the crucial documents as an inappropriate limitation for any executive officer to enforce on their chief financial officer. The constraints had made it difficult for Higbee to fulfill his CFO-related corporate governance duties.
Higbee exposed numerous material flaws that portrayed Le-Nature’s internal controls weaknesses. Most of the weakness showed Podlucky’s dictatorial authority over the firm’s detailed financial statements. Besides, Higbee revealed the absence of balances and checks for vital organizational assets such as the large escrow deposits linked with Le-Nature’s long-term equipment contracts and its product records. The astonishing accounts from the three officials in their resignation letters compelled Lipovich to draft a write to the company’s board of directors (Pavlo, 2012). In the letter, Lipovich recommended that Le-Nature’s should outsource independent lawyers to probe and present a report on the claims made by the former Le-Nature’s executives. He informed the board of directors that EY would not be accountable to the firm’s financial statements until the legal investigations were completed, and EY reviewed the report to ascertain if more investigative procedures were necessary.
Overall Fraud Examination Process
Le-Nature’s board formed a selected committee to scrutinize the claims by the former managers. The committee comprised of outsiders who outsource the legal services of K & L Gates to oversee the investigation. Subsequently, K & L Gates hired an independent auditing firm, Pascarella & Wiker, to boost their investigation initiative. In November 2003, K& L Gates issued an interim report on their probe and the CEO response to the submitted to it (Reuters, 2009). One week later, the law firm submitted its final report to the Special Committee members. K & L Gates’s report stated that there was no apparent evidence of wrongdoing or fraud, but they isolate several internal control flaws. They proposed that mitigate the weakness of the internal control faults through strengthening the separation of responsibilities for important transactions such as inventory purchases, equipment leases, endorsing rigorous documentation principles for organizational operations, and integrating an audit team comprising of foreign directors (Reuters, 2009). The foreign executives on the Special Committee endorsed the verdicts of the investigative report. They expressed their willingness to cooperate with the Le-Nature’s board members to address internal control issues. After the investigation was completed, Le-Nature’s terminated its contract with EY as their independent auditing company and opted to work with BDO Seidman. As a result, BDO Seidman audited Le-Nature’s financial statements from 2003 to 2005.
After the 2003 probe, Podlucky focused on improving his company’s size and stature within the beverage industry. Le-Nature’s notable financial data attracted numerous private entity funds when Wachovia created and disseminated a private memo to sell the firm to the highest bidder. The best bid they received was almost $1.2 billion; however, Podlucky declined the offer (Delevingne, 2009). According to Pavlo (2012), the preferred stockholders alleged that Podlucky deliberately sabotaged the sale of Le-Nature’s by denying the prospective buyer access to the organization’s accounting statements. Podlucky dismissed the accusation and claimed that the overruled the acquisition offer since the price was relatively low. In May 2006, the preferred stockholders sued Le-Nature’s, senior executives, and Podlucky to coerce an outright sale of the firm (Pavlo, 2012). Irrespective of the lawsuit, Podlucky prepared Le-Nature’s initial public offering with the help of K & L Gates. Concurrently, Wachovia was finalizing a $300 loan-term loan for the organization.
Podlucky’s plans for Le-Nature’s were interrupted when accusations of accounting fraud in his company reemerged. The CEO reacted to the allegations by suggesting that Le-Nature’s financial records had been subjected to uncertified audit opinion annually from its independent auditors. Moreover, Podlucky acknowledged that his firm’s financial stability was unreliable. However, he projected that Le-Nature’s sales would increase steadily in the next four years to almost $1 billion yearly (Mandak, 2014). In October 2006, the company’s preferred shareholders acquired a restraining against Le-Nature’s in an appeal they filed with a Delaware court. In the petition, the principal stockholders informed the court of the fraudulent equipment transaction that Le-Nature’s had arranged. One of the creditors who facilitated the firm’s long-term leases had used an expert to confirm that some documents issued during the transaction were forged. The forged documents had assisted Le-Nature’s to secure about $20 million of the lease loan deposited by the lender after its inappropriate transfer.
The Delaware court issued a restraining directive, evicted Podlucky from the firm’s establishments, and appointed Steven Panagos to manage Le-Nature’s operations and assets. After a week, Panagos presented evidence on substantial accounting fraud with Le-Nature’s (Reuters, 2009). Besides, he presented evidence that revealed that Podlucky shredded crucial organizational documents before his eviction since the company had two distinct accounting records.
Panago’s affirmation encouraged Le-Nature’s shareholders to file an appeal to commence involuntary bankruptcy proceedings against the firm. A federal insolvency judge ratified the petition and elected a liquidation trustee to stipulate Le-Nature’s insolvency and pursue practical legal claims against entities or individuals who perpetrated the massive accounting fraud against Le-Nature’s.12345
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