Posted 4/5/2012 11:34 am
Updated 2 years ago
Accounting records at Affiliated Foods Southwest Inc. were so messy that a Dallas accounting firm spent more than 3,300 hours trying to determine which vendors might have received improper payments before the grocery distributor filed for bankruptcy almost three years ago.
The firm, Lain Faulkner & Co., found that Affiliated paid 430 vendors a total of $88.5 million during the 90 days before it filed for bankruptcy protection in May 2009. Bankruptcy law forbids making preferential payments to some vendors while stiffing others, and Lain Faulkner’s analysis indicated that refunds could be pursued from 255 vendors who received a total of $77 million.
During the last several months, Bankruptcy Trustee Richard Cox of Hot Springs has been filing lawsuits and signing settlement agreements to recover a portion of the money that Affiliated paid out.
So far, Cox has entered into settlement agreements with dozens of companies for $1.1 million, which represents 12.8 percent of the money Affiliated paid them in early 2009, according to documents on file in U.S. District Bankruptcy Court in Little Rock.
To see the settlement chart, click here.
Meanwhile, Lain Faulkner & Co. received authorization to be paid $769,000 and donated another $32,000 worth of work.
“From the very start of our work, [Affiliated’s] computer system was on ‘life support,’” Lain Faulkner told the U.S. Bankruptcy Court in an Oct. 31 filing. “Only one person with any knowledge of [Affiliated’s] general ledger system was available to assist us on a part-time basis.”
When Lain Faulkner’s ac-countants finally received the electronic downloads, they were “incomplete, inaccurate, disjointed and inconsistent.”
For example, 167 wire transfers that totaled nearly $17 million weren’t recorded anywhere in Affiliated’s system.
One of the larger recoveries was from R.J. Reynolds Tobacco Co. of Winston-Salem, N.C., which received $1.6 million from Affiliated in early 2009 but has since agreed to return $112,500 of it.
Once Cox finishes collecting the money from the vendors, the assets will be pooled and distributed to the creditors who have valid claims against Affiliated Foods. A bankruptcy judge will approve the distribution plan.
It’s unclear how closely related the indecipherable accounting re-cords are to the check-kiting scheme that sent its former CEO, John Mills, and CFO, Alexander “Lex” Martinez, to federal prison.
Affiliated, once one of Arkansas’ largest private companies, listed in its bankruptcy filing $47.6 million in assets and $101.5 million in debt, of which $62.5 million was to unsecured creditors.
Thomas said last week that his firm continues to work for Cox and referred other questions to him. A secretary for Cox said he doesn’t grant media interviews, and he didn’t return calls for comment.
Thomas said it was unclear how long it will take before Affiliated’s creditors are paid and the bankruptcy case is closed.
In the months leading up to Affiliated’s bankruptcy, Mills and Martinez protected their bonuses by operating a check-kiting scheme that totaled nearly half a billion dollars, according to lawsuits and criminal filings in U.S. District Court in Little Rock.
In 2010, Mills pleaded guilty and was sentenced to 41 months in federal prison for participating in the check-kiting scheme. He is scheduled for release June 15.
A federal jury found Martinez guilty last year, and he was sentenced in October to a year in prison for his role in the scheme. He is scheduled for release on Oct. 18.
Cox has sued Affiliated’s board of directors in U.S. District Court in Little Rock and claimed that Mills and Martinez cooked up the check-kiting scheme to disguise the poor financial health of Affiliated and to keep the company limping along as long as possible. Cox blamed the board’s policy of awarding bonuses based on revenue rather than profit.
(See also $40 Million Lawsuit Set for Mediation)
It is unclear how Mills and Martinez hoped to stop the check-kiting scheme once it was set in motion. The size of the kiting steadily increased as the fraud continued.
From Sept. 29 through Nov. 21 of 2008, the amount of checks kited usually was between $1 million and less than $3 million per business day. But after Dec. 3, 2008, the daily amount kited never fell below $4 million per business day.
The daily amount reached $10.3 million on Feb. 25, 2009, and then $11.6 million on Feb. 26, 2009 — huge numbers for a company that had net income of $7.3 million for 2006 and 2007 combined.
On Feb. 27, 2009, U.S. Bank discovered that Affiliated was overdrawn by more than $11 million and declined to honor more credit requests.
In early March 2009, in the first public sign of trouble, Mills was removed as CEO. The company filed for bankruptcy on May 5, 2009, and stopped operating on July 19, 2009.
Unraveling the cooked books at Affiliated was a massive project, Lain Faulkner said in its Oct. 31 filing.
Thomas said last week that his firm wasn’t hired “to investigate or uncover a story or to see what was wrong or right or who may have done something wrong.”
He said the accountants’ main job was to find the vendors that Affiliated paid just before filing for bankruptcy.
Lain Faulkner told the bankruptcy court that Affiliated’s financial information and filing systems were “stored in a haphazard and unorganized manner.”
A number of key documents couldn’t be found, and accountants had to get them from other sources.
About 600 boxes of documents were shipped to Lain Faulkner’s Dallas office, where the paperwork was then inventoried, labeled and indexed.
For its work on the case from March 2010 through September, Lain Faulkner sought $769,000 for 3,195 hours of work. It didn’t charge for 121 hours, foregoing fees of $32,271.
On Jan. 30, U.S. District Court Judge Richard Taylor approved the request for payment.