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General Mills may face charges from SEC
by Bill Catlin, Minnesota Public Radio
February 4, 2004

Golden Valley-based General Mills says it may face civil charges in an investigation by the Securities and Exchange Commission. The company says it has received a "Wells notice" that also covers General Mills' CEO and chief financial officer. The company disclosed the SEC's investigation of its sales practices and related accounting last October.

Golden Valley, Minn. — The SEC issues a Wells notice when the commission staff has made a preliminary determination that a company or individual has broken the law. The Wells notice goes out before the staff makes a recommendation to the Commission for legal action. The subject of the Wells notice then has the chance to respond and make their case that their actions were not illegal.

General Mills maintains its sales practices and related accounting are in compliance with rules and regulations. The company declined to comment beyond a written statement. But John Gavin, president of the research firm SEC Insight, says a Wells notice goes out when the SEC staff is convinced it has the goods on a company.

"The fact that a Wells notice was issued on its own is serious. But then, we also know that this particular Wells notice covers General Mills' CEO and their CFO. Now you're talking about senior executives, you're talking about executives who could ultimately be barred from serving as executives of public companies. This is very serious," says Gavin.

General Mills says the Wells notice involves the company's sales practices and disclosures related to those practices. The company says the inquiry into its sales practices and related accounting is ongoing, and that the firm is cooperating with regulators.

You're talking about senior executives, you're talking about executives who could ultimately be barred from serving as executives of public companies. This is very serious. - John Gavin, SEC Insight

Stephen Crimmins, a former top SEC attorney now in private practice says the 2002 Sarbanes-Oxley Act, enacted in the wake of corporate accounting scandals, made it easier for the SEC to bar executives from serving as officers and directors of public companies. But he says there's not enough information to know what jeopardy General Mills CEO Steve Sanger and CFO James Lawrence face.

"It could well be that their involvement is perhaps not being as attentive to matters, just to take a hypothetical, as the SEC would have liked," says Crimmins. "Or, at the other end of the spectrum, it could be some allegation that they were directly involved in whatever is most troubling to the SEC, and if you're at that end of the spectrum then we could well see a change."

The SEC has a long-running investigation of the food industry. Last November three firms -- Kraft Foods, Dean Foods and Pepsico's Frito-Lay -- all said they'd received Wells notices. But none indicated corporate executive officers were involved.

Last month the AP reported a former General Mills manager has accused company executives of telling sales workers to ship more products than customers needed -- a practice sometimes called loading. The former manager is suing for wrongful termination.

Early last year, General Mills was facing a payment of up to $395 million in connection with its purchase of Pillsbury. The payment amount was based on its stock price. The former manager alleges a senior vice president told participants at a January sales meeting to do everything possible to meet shipment goals, including loading.

The Wells notice hits General Mills amid intensifying regulatory attention, not only in the food industry. Securities analyst Doug Christopher with the brokerage Crowell Weedon and Company says the seriousness of the Wells notice should not be downplayed.

"But over the long term, with General Mills, we do not see this as being a substantial or material long-term event," Christopher says.

Christopher says General Mills has a steady business with well established brands. SEC specialist Stephen Crimmins says the Wells notice could mark the start of a negotiating process that leads to a settlement between the commission and General Mills.

"They realize that the public trust and public confidence are critical to their ability to raise capital and the perception that they need to operate," Crimmins says. "Typically they will not want to litigate with the SEC. Typically they'll want to work things out."

Crimmins predicts a settlement announcement within a few weeks to a few months. He says there can be many cases in which the CEO and CFO would stay on, even if the settlement involves penalties against them specifically.

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