UNITED STATES DISTRICT COURT DISTRICT OF MARYLAND x Civil No.: 1:03-MD-01539 IN RE ROYAL AHOLD N.V. SECURITIES & ERISA LITIGATION ALL SECURITIES ACTIONS x CONSOLIDATED AMENDED SECURITIES CLASS ACTION COMPLAINT Andrew J. Entwistle, Esq. (AE-6513) Stephen D. Oestreich, Esq. (SO-8933) Robert N. Cappucci, Esq. (RC-2193) Johnston de F. Whitman, Jr., Esq. (JW-5781) Jeffrey A. Klafter, Esq. (JK-0953) (Of Counsel) Asuncion C. Hostin, Esq. (MD Bar No. 24008) ENTWISTLE & CAPPUCCI LLP 299 Park Ave nue, 14th Floor New York, New York 10171 Telephone: (212) 894-7200 Facsimile: (212) 894-7272 Lead Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC Andrew Radding, Esq. (Bar No. 00195) Gregory M. Kline, Esq. (Bar No. 14363) ADELBERG, RUDOW, DORF & HENDLER, LLC 600 Mercantile Bank & Trust Building 2 Hopkins Plaza Baltimore, MD 21201 (410) 539-5195 (410) 539-5834 Liaison Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC Case 1:03-md-01539-CCB Document 122 Filed 02/18/2004 Page 1 of 444
Transcript
UNITED STATES DISTRICT COURT DISTRICT OF MARYLAND
x
Civil No.: 1:03-MD-01539 IN RE ROYAL AHOLD N.V. SECURITIES & ERISA LITIGATION
ALL SECURITIES ACTIONS
x
CONSOLIDATED AMENDED SECURITIES CLASS ACTION COMPLAINT
Andrew J. Entwistle, Esq. (AE-6513) Stephen D. Oestreich, Esq. (SO-8933) Robert N. Cappucci, Esq. (RC-2193) Johnston de F. Whitman, Jr., Esq. (JW-5781) Jeffrey A. Klafter, Esq. (JK-0953) (Of Counsel) Asuncion C. Hostin, Esq. (MD Bar No. 24008) ENTWISTLE & CAPPUCCI LLP 299 Park Avenue, 14th Floor New York, New York 10171 Telephone: (212) 894-7200 Facsimile: (212) 894-7272 Lead Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC Andrew Radding, Esq. (Bar No. 00195) Gregory M. Kline, Esq. (Bar No. 14363) ADELBERG, RUDOW, DORF & HENDLER, LLC 600 Mercantile Bank & Trust Building 2 Hopkins Plaza Baltimore, MD 21201 (410) 539-5195 (410) 539-5834 Liaison Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC
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TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 2
II. JURISDICTION AND VENUE ....................................................................................... 35
III. THE PARTIES.................................................................................................................. 39
A. The Public Employees’ Retirement Association of Colorado .......................................... 39
B. Generic Trading of Philadelphia, LLC ............................................................................. 40
C. The Ahold Defendants ...................................................................................................... 40
1. Royal Ahold N.V. ....................................................................................................... 40
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3. Indonesia ..................................................................................................................... 79
F. Scandinavian Acquisitions and Joint Ventures ................................................................. 79
V. AHOLD’S FEBRUARY 24, 2003 ANNOUNCEMENT................................................. 79
VI. AHOLD COMMENCES INTERNAL INVESTIGATIONS........................................... 88
VII. GOVERNMENTAL AND REGULATORY INVESTIGATIONS COMMENCE......... 90
A. The SEC Investigation...................................................................................................... 90
B. The Department of Justice Investigation .......................................................................... 91
C. The NYSE and NASD Investigations ............................................................................... 92
D. The Department of Labor Investigation............................................................................ 92
E. The Office of the Dutch Public Prosecutor’s Investigation.............................................. 92
F. The Euronext Investigation............................................................................................... 93
G. The Dutch Authority For Financial Markets’ Investigation ............................................. 94
H. Investigation Relating To Illegal Payments in Argentina ................................................. 94
VIII. FURTHER DETAILS OF AHOLD’S FRAUD EMERGE .............................................. 95
A. USF’s Chief Financial Officer “Blew The Whistle” In 2000 After Ahold Acquired USF, But Defendants Ignored His Concerns .................................................... 95
B. USF Improperly Booked Vendor Rebate Income Since At Least 1997 ........................... 97
C. Federal Regulators Launch Probe Of USF’s Vendors ...................................................... 98
D. The Internal Investigation Reveals Further Fraud At USF And Ahold Implicates Lee and Kaiser .................................................................................................................. 99
E. Ahold Terminates Defendants Miller and Resnick......................................................... 102
F. Ahold Disclses $24.8 Billion In Improper Revenues From The Company’s Joint Ventures ................................................................................................................. 105
G. Ahold Discloses Fraud At Its United States Retail Operations ...................................... 106
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H. Ahold Admits That It Falsely Reported $26 Billion In Class Period Financial Results............................................................................................................. 109
I. Van der Hoeven and Meurs Agree To Return Millions of Dollars of Improper Bonus Payments .............................................................................................. 112
J. Ahold Reports That It Is Removing Defendants Fahlin and Tobin From The Supervisory Board ................................................................................................... 113
IX. POST-CLASS PERIOD ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES ..................................................................... 113
A. Eustace Discloses Details Of Defendants’ Massive Fraud ............................................. 114
1. Eustace Admits That Executive Bonuses Were An Incentive For The Fraud At USF............................................................................................................ 114
2. Eustace States That Deloitte And Ahold’s Failure To Detect The Fraud At USF Is “Inconceivable” ....................................................................................... 115
3. Eustace Discloses That Ahold Knew Of The Woefully Inadequate Internal Controls At USF Since 2000 And Failed To Take Corrective Measures ................. 116
4. Eustace Admits That Deloitte Ignored “Red Flags”................................................. 118
B. Ahold Admits Deliberate Fraud In Its United States Retail Operations ......................... 119
C. de Ruiter Admits To 300 Internal Control Weakness At Ahold During The Class Period..................................................................................................................... 121
D. Moberg Admits That Ahold Utterly Failed To Properly Integrate Acquired Companies....................................................................................................................... 122
E. Ahold’s Restated Financial Results Demonstrate That Defendants Knowingly And/Or Recklessly Made False And Misleading Statements Throughout The Class Period..................................................................................................................... 125
F. Ahold’s “Road To Recovery Program” Acknowledges The Company’s Utter Lack Of Internal Controls During The Class Period ...................................................... 130
X. ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES IN AHOLD’S 2002 FORM 20-F ........................................................ 131
A. Ahold Admits Fraud At USF .......................................................................................... 132
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B. Ahold Admits Fraud At United States Retail Operations -- Including Ahold USA’s Tops and Giant-Carlisle Retail Chains..................................................... 134
C. Ahold Admits Fraud At Disco ........................................................................................ 136
D. Ahold Admits Fraud In Connection With Accounting For Joint Ventures .................... 137
E. Ahold Admits Issuing Materially False And Misleading Statements During The Class Period ............................................................................................................. 139
F. Ahold Admits To Material Internal Control Weakness During The Class Period ......... 141
XI. ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES IN AHOLD’S 2002 ANNUAL REPORT ........................................... 142
A. Moberg’s Letter To Shareholders Admits That Ahold Lacked Adequate Internal Controls ............................................................................................................. 142
B. Ahold’s Supervisory Board Admits That Ahold Lacked Adequate Internal Controls ............................................................................................................. 143
C. The Supervisory Board Summarizes Ahold’s Class Period Fraud ................................. 143
XII. The Truth About The Joint Ventures Is Revealed .......................................................... 147
A. Jerónimo Martins Retail.................................................................................................. 147
B. ICA.................................................................................................................................. 149
C. Paiz Ahold....................................................................................................................... 152
D. Bompreço ........................................................................................................................ 156
E. Disco Ahold International Holdings N.V. ...................................................................... 157
XIII. CLASS PERIOD EVENTS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS............................................................................................................... 159
A. March 1998 - December 1998 Events and False and Misleading Statements ................ 159
1. Ahold Issues Its 1997 Annual Report ....................................................................... 159
2. Ahold Announces First Quarter 1998 Results .......................................................... 163
3. Ahold Announces Acquisition of Giant Food, Inc. .................................................. 164
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4. Ahold Announces Results for the Second Quarter of 1998 ...................................... 167
5. Ahold Completes Global Share Offering.................................................................. 169
6. Ahold Acquires Giant Food, Inc. .............................................................................. 170
7. DAIH Acquires Disco ............................................................................................... 171
8. Analysts Embrace The Defendants’ False and Misleading Statements .................... 172
B. 1999 Events and False and Misleading Statements ........................................................ 175
2. Ahold Announces Acquisitions in Spain .................................................................. 176
3. Ahold Issues Its 1998 Annual Report ....................................................................... 177
4. Ahold Announces Intended Acquisition of Pathmark .............................................. 179
5. Ahold Announces Consolidation of United States Operations ................................. 181
6. DAIH Acquires Additional Supermarkets in Argentina ........................................... 181
7. Ahold Offers Debt Securities in the United States to Maintain its Acquisition Campaign .................................................................................................................. 182
8. Ahold Files Its 1998 Form 20-F................................................................................ 183
9. Ahold Announces Results for the First Quarter of 1999 .......................................... 184
10. Ahold Extends Time Period for Pathmark Tender Offer .......................................... 188
11. Ahold Announces Results for the Second Quarter of 1999 ...................................... 189
12. Ahold Announces Further Acquisitions in Spain ..................................................... 193
13. DAIH Acquires More Supermarkets in Argentina ................................................... 193
14. Defendant Van der Hoeven’s “Day of the Stockholder Presentation” ..................... 194
15. Ahold Announces Results for the Third Quarter of 1999 ......................................... 198
16. Ahold Announces Acquisition of 50% Interest in ICA ............................................ 200
17. The FTC Opposes Ahold’s Bid to Acquire Pathmark .............................................. 203
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18. Ahold Enters Into The Paiz Ahold Joint Venture ..................................................... 203
19. Analysts Embrace The Defendants’ False and Misleading Statements .................... 204
20. Additional SEC Filings That Certain Individual Defendants Signed ....................... 206
C. 2000 Events and False and Misleading Statements ........................................................ 207
1. Disco Acquires Additional Supermarkets in Argentina ............................................ 208
8. Ahold Consummates Global Securities Offering to Finance ICA Joint Venture and USF Acquisition................................................................................... 219
9. Ahold Announces Highlights From the 1999 Annual Report .................................. 219
10. Ahold Files Its 1999 Form 20-F................................................................................ 221
11. Ahold Announces Acquisition of Golden Gallon..................................................... 224
12. Ahold Completes Global Offering to Finance ICA Joint Venture and USF Acquisition........................................................................................................ 225
13. Ahold Announces Results for the First Quarter of 2000 .......................................... 229
14. Ahold Increases Ownership in Bompreço ................................................................ 234
15. Ahold Provides Further Details on First Quarter 2000 Results ................................ 234
16. Ahold Gears for Further Expansion in the United States ......................................... 236
15. Ahold Announces Results for the Third Quarter of 2001 ......................................... 309
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16. Ahold Named “Mass Marketer of the Year” ............................................................ 313
17. Analysts Embrace The Defendants’ False and Misleading Statements .................... 314
18. Additional SEC Filings That Certain Individual Defendants Signed ....................... 317
E. 2002 Events and False and Misleading Statements ........................................................ 320
1. Ahold Announces Year 2001 Results ....................................................................... 321
2. Ahold Issues Its 2001 Annual Report ....................................................................... 330
3. Van der Hoeven And Meurs Mislead Investors During The April 8, 2002 Analyst Call............................................................................................................... 331
4. Ahold Files Its 2001 Form 20-F................................................................................ 335
5. Ahold Announces Sales for the First Quarter of 2002.............................................. 337
6. Van der Hoeven’s May 7, 2002 Shareholder Address.............................................. 338
7. Ahold Announces Results for the First Quarter of 2002 .......................................... 343
8. Ahold Is Forced to Acquire DAIH Shares From Joint Venture Partner ................... 346
9. Defendants Van der Hoeven and Meurs Reassure Investors With Lies ................... 352
10. Defendant Van der Hoeven Leaks Third Quarter 2002 Results ............................... 358
11. Ahold Announces Results For The Third Quarter of 2002....................................... 359
12. Defendant Van der Hoeven Continues To Mislead Class Members ........................ 362
13. Defendants Meurs and Miller Continue To Mislead Investors During the Third Quarter 2002 Analyst Presentation........................................................................... 363
14. USF Announces Planned Acquisition of Allen Foods.............................................. 369
15. Defendant Van der Hoeven Withdraws From ABN AMRO Supervisory Board..................................................................................................... 370
16. Analysts Embrace The Defendants’ False and Misleading Statements .................... 370
17. Additional SEC Filings That Certain Individual Defendants Signed ....................... 372
F. 2003 Events and False and Misleading Statements ........................................................ 375
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1. Ahold Previews Year 2002 Results .......................................................................... 376
XIV. DEFENDANTS’ VIOLATION OF DUTCH AND UNITED STATES ACCOUNTING PRINCIPLES AND AUDITING STANDARDS ............................... 379
A. MISREPRESENTATIONS CONCERNING DUTCH AND U.S. GAAP..................... 380
1. The Representations Concerning Dutch and U.S. GAAP......................................... 380
2. Violations of Dutch GAAP ....................................................................................... 381
a. Overstated Vendor Allowances .............................................................................. 381
b. Improper Consolidation of Joint Ventures.............................................................. 383
c. Improper Acquisition Accounting .......................................................................... 384
d. Improper Recording of Reserves, Allowances and Provisions............................... 385
e. Improper Recording of Real Estate Transactions ................................................... 385
f. Other Accounting Issues ......................................................................................... 386
g. Interim Reports ....................................................................................................... 386
3. Violations of U.S. GAAP.......................................................................................... 386
B. Misrepresentations Concerning GAAS........................................................................... 390
XV. Deloitte’s Knowing Or Reckless Participation In The Scheme To Defraud .................. 392
A. Deloitte U.S. And Deloitte Netherlands Acted As One Firm With Respect To Ahold ......................................................................................................................... 393
B. Allegations Supporting A Strong Inference Of Deloitte’s Scienter................................ 395
1. Deloitte Knew of the Systemic Lack of Internal Controls at Ahold ......................... 395
2. Deloitte Failed to Properly Plan Its Audits ............................................................... 399
3. Deloitte Failed to Obtain Sufficient Evidential Matter in Support of its Opinions ............................................................................................................... 401
4. The Flawed Audit Confirmation Process.................................................................. 402
5. Improper Reliance on Management Representations ............................................... 403
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6. The Obvious Failure to Follow Applicable GAAP................................................... 405
7. Red Flags Concerning Improper Consolidation ....................................................... 406
8. Deloitte’s Failure to Adequately Consider Indicia of Fraud ..................................... 407
(i) High Management Turnover ............................................................................ 408
(ii) Inadequate Internal Controls and Management’s Failure to Remedy ............. 408
(iii) Ahold Unable to Provide Deloitte with Documentation.................................. 408
(iv) Significant Portion of Management Compensation Based on Company’s Earnings ........................................................................................................... 409
(v) Ahold Used Its Stock as Currency for Corporate Acquisitions ....................... 409
9. The Magnitude And Pervasiveness Of The Fraud .................................................... 409
XVI. GROUP PLEADING...................................................................................................... 410
XVII. FRAUD ON THE MARKET.......................................................................................... 410
XVIII. NO STATUTORY SAFE HARBOR.............................................................................. 411
XIX. CLASS ACTION ALLEGATIONS ............................................................................... 413
XX. CAUSES OF ACTION................................................................................................... 416
1. COUNT ONE VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5(b) PROMULGATED THEREUNDER............................ 416
2. COUNT TWO VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5(a) AND (c) PROMULGATED THEREUNDER............. 419
3. COUNT THREE VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT.................................................................................................... 421
4. COUNT FOUR VIOLATION OF SECTION 11 OF THE SECURITIES ACT........................................................................................................................... 422
5. COUNT FIVE VIOLATION OF SECTION 12(a)(2) OF THE SECURITIES ACT........................................................................................................................... 424
6. COUNT SIX VIOLATION OF SECTION 15 OF THE SECURITIES ACT........................................................................................................................... 426
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XXI. PRAYER FOR RELIEF ................................................................................................. 429
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The Court appointed Lead Plaintiffs, the Public Employees’ Retirement Association of
Colorado (“COPERA”) and Generic Trading of Philadelphia, LLC (“Generic Trading”)
(together, the “Lead Plaintiffs”), on behalf of themselves and a class of investors (the “Class”)
consisting of all persons and entities who purchased Koninklijke Ahold, N.V. (a/k/a Royal
Ahold, N.V.) (“Ahold” or the “Company”) common stock and/or American Depository Receipts
(“ADRs”) during the period from March 10, 1998 through February 24, 2003 (the “Class
Period”), by and through their undersigned attorneys Entwistle & Cappucci LLP (“Lead
Counsel”), allege the following for their Consolidated Amended Securities Class Action
Complaint (“Complaint”) based upon personal knowledge as to their own acts, and upon
information and belief as to all other matters.
Lead Plaintiffs’ information and belief is based upon, among other things, their
investigation, conducted by and through Lead Counsel into the facts and circumstances alleged
herein including, without limitation: (a) review and analysis of the filings that Ahold made with
the United States Securities and Exchange Commission (“SEC”) and European Securities
Exchanges (“Euronext”), and other governmental regulatory and self regulatory agencies; (b)
review and analysis of press releases, public statements, news articles, and other publications
disseminated by or concerning the defendants named herein and related parties; (c) review and
analysis of Ahold’s press conferences, analyst conference calls and conferences, corporate
websites of Ahold, other defendants and related parties; (d) review and analysis of securities
analyst reports concerning Ahold and its operations; (e) investigative efforts on three continents
including numerous face-to-face and telephonic interviews with former Ahold, USF, Disco, and
Deliotte (as respectively defined herein) employees as well as others with knowledge of the facts
related herein; and (f) review and analysis of other public and non-public information ,
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documents and materials concerning Ahold, USF, Deloitte and the other defendants named
herein.
I. INTRODUCTION
1. This litigation arises from one of the largest securities frauds that a European
company has ever perpetrated in the United States and abroad. During the Class Period, Ahold
engaged in a worldwide acquisition program that focused upon the United States market, but also
included joint ventures and smaller acquisitions in Europe and South America. Ahold publicly
touted the fact that it would become the dominant food service provider and grocer in the United
States. Ahold’s Maryland based U.S. Foodservice division (“USF”) was an integral and material
element of Ahold’s dramatic growth and was also the centerpiece of Ahold’s admitted fraudulent
conduct. The announcement of the restatement of primarily USF related revenues by $500
million on February 24, 2003 prompted immediate civil and criminal investigations in the United
States and abroad and, caused devastating losses to investors as the price of Ahold common
stock trading on foreign securities exchanges plummeted more than 63% to close at €3.59 per
share, and the price of Ahold ADRs trading on the New York Stock Exchange (the “NYSE”)
plunged by 61%, to close at $4.16 per share. Ahold has since announced additional restatements
that now exceed $24 billion in revenues and $1.2 billion in net income that the Company
previously fabricated and then reported to its investors. Ahold and certain of its officers have
admitted that “fraud” compelled the Company to issue these massive revenue and earnings
restatements.
2. The claims presented in this action against: Ahold, Ahold USA Inc., Ahold USA
Holdings, Inc., USF, the individually named Ahold and USF officers and directors (collectively,
the “Individual Defendants”); Deloitte & Touche Accountants (“Deloitte Netherlands”) (which is
the national practice of Deloitte Touche Tohmatsu (“DTT”) in the Netherlands) and Deloitte &
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Touche LLP (“Deloitte U.S.”) (which is the national practice of DTT in the United States)
(collectively, “Deloitte”); and ABN AMRO Rothschild (“ABN AMRO Rothschild”), ABN
AMRO Holding N.V. (“ABN AMRO Holding”), ING Bank (“ING”), Rabo Securities, N.V.
(“Rabobank”), Goldman Sachs International (“Goldman”), Kempen & Co. N.V., and Merrill
Lynch International (“Merrill”) (collectively, the “Underwriter Defendants”) are meritorious in
all respects. In this regard, Ahold and USF have admitted that “fraud” during the Class Period
went unreported by Ahold and Deloitte and that the internal financial and accounting controls at
Ahold and USF were disastrously inadequate.
3. PricewaterhouseCoopers (“PwC”), which investigated the United States fraud on
behalf of the Audit Committee of Ahold’s Supervisory Board, explained the United States based
fraud at USF and Ahold’s Tops and Giant stores as follows:
The identified accounting fraud related to fictitious and overstated vendor allowances and improper or premature recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and US GAAP” (2000 Form 20-F, at 69) (emphasis added)1.
The PwC investigation also “identified numerous material weaknesses in internal controls,
including a failure to properly record and track vendor allowance transactions and balances,
inadequate accounting and financial reporting systems for vendor allowances generally, and
failure by management to understand and properly apply Generally Accepted Accounting
Principles (“GAAP”) and Ahold’s stated accounting policies in the area of vendor allowances
and rebates.” Id.
1 Unless otherwise indicated, emphasis has been added to quoted statements and text.
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4. The United States based vendor promotional allowance (“PA”) fraud was
internally notorious at USF and Ahold, (including at Ahold USA’s Tops and Giant stores which
engaged in the same type of fraud, but on a lesser scale) and was well known to both the United
States based and Netherlands based Individual Defendants some of whom directly implemented
the fraud -- some of whom were told about the wholly inadequate controls by James L. Miller
(“Miller”) at the time Ahold acquired USF and/or by “whistle blower” former USF CFO Ernie
Smith (“Smith”) in 2001 -- and some of whom were grossly reckless in their ignorance of the
true facts. Former USF CFO Smith also alerted Deloitte, USF and Ahold management,
including the Individual Defendants, about the USF based fraud involving promotional
allowances and vendor rebates -- resigning soon thereafter when no action was taken by Ahold,
the Individuals Defendants or Deloitte. The United States based PA fraud admittedly enabled
the Company, the Individual Defendants and Deloitte to misrepresent to the investing public
more than approximately $1.2 billion in fictitious earnings during the Class Period. At the same
time that the United States based PA fraud was occurring with their knowledge, Defendant
Henny de Ruiter (“de Ruiter”) (who served as Chairman of Ahold’s Supervisory and Corporative
Executive Board from 1994 until he resigned on or about May 3, 2003), Defendant Cees Van der
Hoeven (“Van der Hoeven”) (who served as Ahold’s Chief Executive and board member from at
least 1993 until he left the Company under the shadow of this scandal on February 23, 2003),
defendant Michiel Meurs (“Meurs”) (who served as Ahold’s Chief Financial Officer and
Executive Board member (from 1992 and 1997, respectively) until he left the Company in the
wake of disclosure of the fraud at USF), Jan G. Andreae (“Andreae”) who served as Ahold
Executive Vice President and Executive Board member from 1997 to the present, and whose
continuing role with Ahold is currently under scrutiny, and Roland Fahlin (“Fahlin”) has served
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in Ahold’s Supervisory Board since 2001 and who Ahold announced on February 16, 2004
would retire from the Supervisory Board for failing to meet the independence criteria of Ahold’s
new corporate governance rules. Ahold and Deloitte were directly involved in improperly
structuring the joint ventures to obscure the truth about Ahold’s lack of control from the
investing public. In fact, Deloitte opined that 50/50 ownership would not permit consolidation if
there was no actual control. Thus, Deloitte suggested the use of side letters to obscure the truth.
The use of this fraudulent structure in a series of joint ventures enabled Ahold to fraudulently
reflect more than $24 billion in false revenue on its Class Period financial statements by
consolidating the financial results of these joint ventures with Ahold’s, despite the fact that
Ahold did not actually control them.
5. Defendants Van der Hoeven, de Ruiter and Meurs’ often stated goal during their
tenure with the Company was to transform Ahold from a conservative retail grocer into a
multinational retail and wholesale conglomerate. The currency for this global expansion was the
Company’s then gold plated access to the capital and financial markets due to its strong stock
price and credit ratings. Continued access to debt and equity financing and to bank debt was
critical if Ahold was to follow the course charted by defendants Van der Hoeven, de Ruiter, and
Meurs. Van der Hoeven, de Ruiter, Meurs, and the other Individual Defendants led Ahold’s
efforts to improperly bolster revenues and earnings to meet quarterly and annual targets, and
fanatically guarded the Company’s credit rating and stock price -- regardless of financial reality -
- and despite their knowledge that Ahold’s internal control systems were wholly unable to keep
pace with the frantic spree of acquisitions, mergers, and joint ventures that the Company
embarked upon during the Class Period.
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6. To further this goal, defendants Van der Hoeven, de Ruiter, Meurs, Andreae and
Fahlin surrounded themselves with like-minded persons within the Company such as: now
convicted insider trader and former Ahold Supervisory Board Member Cor Boonstra
(“Boonstra”); former USF CEO and Ahold Executive Borad Member Miller; Ahold USA
President and CEO Bill Grize (“Grize”); Ahold USA Chairman and Ahold Executive Borad
member Bob Tobin (“Tobin”); former USF CFO Michael Resnick (“Resnick”); and former USF
executives Mark Kaiser (“Kaiser”) and Tim Lee (“Lee”) [collectively (including Van der
Hoeven, de Ruiter, Meurs, Andreae and Fahlin) known as “Ahold Management” or the
“Individual Defendants”].
7. None of this would have been possible without the substantial participation of
Deloitte and the Underwriter Defendants. In Deloitte’s case, James Copeland (“Copeland”) was
the CEO (and a senior partner) of Deloitte U.S., the CEO of DTT and the Advisory Partner in
charge of coordinating Ahold’s entire relationship with Deloitte. As the head of both Deloitte
U.S. and DTT, Copeland acted as Advisory Partner for only a very small number of prestige
accounts. As the Ahold Advisory Partner, the U.S.-based Copeland supervised and coordinated
all of Deloitte’s work for Ahold during most if not all of the Class Period. Deloitte and Ahold
had a fifteen-year audit relationship which extended throughout the Class Period. As a long time
“prestige” client, Ahold received special consideration and treatment as evidenced by the
assignment of the head of the Deloitte’s U.S. and International Practices to act as its Advisory
Partner.
8. Deloitte performed auditing, accounting, tax, consulting and advisory services
including due diligence on acquisitions such as the USF acquisition and structuring the joint
ventures to obscure the truth -- effectively acted as an outsourced internal audit function for
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Ahold -- and performed other work for Ahold and USF during the Class Period. In this regard,
Lead Plaintiff’s investigation has revealed that Deloitte’s staff were literally “camped out” in a
conference room at USF, but nevertheless failed to correct the lack of internal controls and they
failed to take to steps to report on and correct the promotional allowance and vendor rebate fraud
which was internally notorious and which had been highlighted by at least one whistle blower,
former USF CFO Smith, during Deloitte’s time on the USF account. Deloitte is the target of
several of the concurrent investigations into the fraud at Ahold and USF, including the
investigation that the SEC is currently conducting.
9. During the Class Period, Deloitte U.S. was also the auditor and accountant for:
Fleming Companies, Inc., Great Atlantic & Pacific Tea Co. (“A&P”) and Kroger, Inc., each of
which are leading United States grocers facing similar SEC probes into their accounting for
promotional allowances and vendor rebates -- that Deloitte failed to report -- as well as Con Agra
-- a USF co-conspirator and a subject of SEC and US Attorney investigations in this matter.
With this experience and background, promotiona l allowances and vendor rebate -related frauds
should have been the largest “red flag” item on Deloitte’s aud it plan for USF and Ahold.
Deloitte nevertheless went forward year after year, issuing unqualified audit opinions,
performing non audit work and earning tens of millions of dollars in fees without disclosing the
fraud: (1) despite acknowledging a wholesale lack of internal controls which persisted year after
year; (2) despite conducting due diligence in connection with Ahold’s acquisition of USF, during
which Miller informed Ahold, Deloitte and others of USF’s inability to track vendor rebates;
related problems; (3) despite experiencing similar problems with its other grocery clients; and
(4) despite assisting in structuring the fraudulent joint ventures.
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10. With respect to the Underwriter Defendants, Van der Hoeven sat on the Board of
both Ahold and ABN AMRO. R.J. Nelissen, former Vice Chairman of Ahold’s Supervisory
Board, is also the former Chairman of the Managing Board of ABN AMRO and a member of
ABN AMRO’s Supervisory Board. Karel Vuursteen, now Chairman of Ahold’s Supervisory
Board, is also a member of the ING Group Advisory Council and the ING Group Supervisory
Board. The Underwriter Defendants were also among Ahold’s largest shareholders (for example
at various times during the Class period, ING owned 7.42% of Ahold, Rabo Securities, ABN
AMRO, and both Goldman and Merrill Lynch Co. also had very substantial holdings of Ahold
securities).
11. The Underwriter Defendants also: underwrote numerous offerings of common
stock, ADRs, other securities including corporate debt (including the September 2001 Global
Offering upon which the Securities Act of 1933 (“Securities Act”) claims set forth below are
based); provided positive market analysis regarding the Company and participated or directed the
syndication of various credit facilities (including the €7 billion long term revolver and the €3.1
billion “rescue” credit facility); acted as financial advisers and/or as investment bankers on the
Company’s numerous acquisitions; and received hundreds of millions of dollars in investment
banking, underwriting, commercial banking, and advisory fees. The underwriting fees for the
offering underlying the Securities Act claims alone were in excess of €49 million. Total
underwriting fees exceeded $250 million, with ABN AMRO and Goldman each receiving more
than $75 million in Class Period underwriting fees.
12. During the Class Period, Ahold, USF, Deloitte, the Individual and Underwriter
Defendants violated the federal securities laws by, inter alia, issuing materially false and
misleading statements and by filing materially false and misleading reports with the Euronext
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exchanges and the SEC. Ahold, USF, the Individual Defendants and Deloitte deliberately and/or
recklessly materially misstated Ahold’s Class Period financial results which violated generally
accepted accounting principles in the United States (“U.S. GAAP”) and in the Netherlands
(“Dutch GAAP”) by, among other things: (1) improperly recognizing vendor allowance and
rebate payments as revenues; (2) fully consolidating the financial results of joint ventures that
Ahold did not control; (3) misapplying accounting principles and misusing facts in connection
with accounting for Company acquisitions and (4) knowingly and/or with severe recklessness
disregarding the abject lack of internal controls at USF, other United States based operating
companies, other Ahold holdings, and at the Ahold parent company. As a result of defendants’
admitted fraudulent conduct, Lead Plaintiffs and the other Class members have suffered severe
economic damages.
13. Though domiciled in the Netherlands, at the time of the disclosure of the fraud
Ahold was, for all intents and purposes, a United States company with a majority of its holdings,
revenue and earnings, located in and from the United States. Defendants de Ruiter, Van der
Hoeven, Meurs and the other defendants engaged in a $19 billion freewheeling acquisition spree
over the 7 years prior to the February 24, 2003 announcement that focused primarily on the
United States. The result is that in fiscal year 2002, as reported in Ahold’s Form 20-F issued
after the close of the Class Period, Ahold’s net sales in the United States accounted for 74% of
the Company’s total net sales, while net sales in Europe accounted for only 22% of the
Company’s total net sales. Ahold’s operations in Latin America and in the Asia Pacific region
accounted for 3% and 1% of the Company’s total net sales in fiscal 2002, respectively. In fiscal
2002, as reported in Ahold’s 2002 Form 20-F, Ahold’s U.S. operations were represented to be
profitable, while the Company’s European operations were not profitable. In that year, it was
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reported that Ahold’s operating income in the United States totaled approximately €1.5 billion,
while Ahold’s European operations suffered approximately €650 million in operating losses.
During the Class Period, Ahold’s United States operations included ownership and operation of
former USF management in connection with the acquisition; and (v) adversely impacted bonuses
and other revenue-related compensation paid to all employees, from lower level officers at USF
to senior Ahold management. In this regard, Ahold interim CFO Eustace acknowledged on May
8, 2003 that: “Bonuses were paid that would not have been [paid] under normal
circumstances”…. “It was fraud” and the “scheme of bonuses…, would have benefited quite a
large number of people at the top of the company, including the whole Management Board, of
course.”
19. As USF grew, so too did the amount of its revenue derived from fraudulently
recorded promotional allowances and vendor rebates. At least one analyst estimated that PA
revenue at Ahold was as much as 20% of the $15 billion in 2001 annual purchases by Ahold,
making PA related revenue approximately $3 billion by fiscal 2001. It is not surprising, then,
that when longtime Ahold USA executive Ernie Smith was appointed as CFO of USF at the
beginning of 2001, one of the first things he did was to assess the current magnitude of the
increasingly significant PA issues. Smith then found himself in the unexpected role of corporate
“whistle blower.” In this regard, Smith immediately discussed with USF CEO Miller how to
remedy the internal control problems, how to terminate the fraudulent PA scheme and how to
clean up USF’s accounts. Smith also alerted Ahold’s Netherlands headquarters of his concerns
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of improper revenues and earnings in early 2001 -- at the same time that Deloitte was in-house at
USF conducting the fiscal 2000 audit. Smith voluntarily terminated his longstanding tenure with
Ahold-related companies when Ahold Executive Borad member Miller, the rest of the Ahold and
USF Management, and Deloitte, completely ignored his concerns.
20. Smith was the second CFO to exit over this issue. David F. McAnally
(“McAnally”) the former CFO of Rykoff-Sexton, Inc. (“Rykoff”) alerted his board of directors to
the PA fraud at J.P. Foodservice (the Miller-controlled predecessor to USF), at the time that
Rykoff was considering a merger with J.P. Foodservice. McAnally discovered the fraud during
due diligence and recommended that his board reject the deal. For his role as whistle blower,
McAnally was apparently terminated by USF after USF and Rykoff completed the transaction.
21. Not only did Defendants Miller, de Ruiter, Van der Hoeven, Meurs, Boonstra and
the rest of Ahold’s board and management fail to remedy the USF fraud, they let the lack of
internal controls flourish throughout the Company creating an environment in which PA fraud
could spread to other Ahold companies -- which it did -- ultimately infecting Tops, and other
United States based Ahold retail companies in amounts exceeding $29 million for fiscal 2000
and 2001. The systematic growth of the United States based fraud all occurred while Ahold was
under the purportedly “watchful eye” of a Deloitte audit, consulting, tax and advisory staff that
admittedly knew about the red flag PA issues and that there was a wholesale lack of internal
controls at Ahold, USF, Tops, Giant, and Ahold’s other United States holdings, all of which were
audited by Deloitte US.
22. In this regard, Deloitte’s role was magnified because Van der Hoeven had assured
his complete and direct control over all Ahold finances by having what little internal audit
function there was report to him directly, rather than to an Audit Committee of the Board. This
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arrangement assured that Deloitte would be the first and final authority throughout Ahold on all
financial and accounting issues. The arrangement also destroyed any limited efficacy that may
have remained in Ahold’s internal audit function, and it effectively outsourced the internal audit
function to Deloitte. This circumstance -- and the fact that Deloitte had effectively abandoned its
independence in connection with Ahold because of Deloitte’s consulting, tax, advisory, risk
management, due diligence and other non-audit work -- assured that no light would shine on the
pervasive United States based fraudulent scheme.
23. Manipulating Ahold’s financials was nothing new for Deloitte and Ahold
Management, which had allowed a similar circumstance to develop in connection with the joint-
ventures. From as early as 1992, when the JMR joint venture began, Ahold with the complicity
and substantial participation of Deloitte, booked 100% of the revenue from the joint venture as
Ahold revenue even though Ahold never owned more than 49% of JMR -- a violation of US and
Dutch GAAP. The joint venture-related overstatement of revenues grew from in excess of €1.5
billion in 1997 to more than €10 billion per year after all joint ventures were consolidated in later
years. This outright fraud, like the USF based fraud, directly impacted corporate bonuses and
other revenue-related compensation from Ahold’s management, credit ratings, analyst ratings
and share price. The ultimate result was more than $24 billion in revenue restatements.
24. Just as would be the case years later when management and Deloitte turned a
“blind eye” to the United States based PA fraud, Ahold and Deloitte could not deconsolidate
JMR related revenue without dramatically and adversely impacting the Company’s ability to use
its access to the capital and financial markets to fund its ongoing acquisitions. Rather than clean
up the JMR accounts, Ahold would instead consolidate subsequent joint ventures, using a
complex side letter arrangement to hide the true nature and structure of the joint ventures from
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investors. Deloitte and Ahold continued to consolidate JMR (which with 49% Ahold ownership
could not take advantage of Deloitte’s side letter structure), even though Deloitte had opined to
the Company in connection with the ICA joint venture that even a 50/50 ownership structure
would not be sufficient to justify consolidation of revenues. Deloitte and Ahold accountant
Marjanne van Itterson ultimately concluded that the only possibility would be a side letter but,
expressed doubts concerning whether this would work. Yet, this is precisely the structure that
Ahold and Deloitte employed in violation of applicable accounting standards (as described in
detail herein) to obscure the truth from investors and to fraudulently bolster Ahold’s revenues
throughout Class Period.
25. In a “shot heard around the world”, Ahold shocked investors on February 24,
2003 when it announced that its net earnings and earnings per share for fiscal 2002 would be
significantly lower than previously represented and that it would be forced to restate its financial
statements for fiscal 2001 and fiscal 2000. At the time, the Company indicated that these
financial consequences were primarily related to approximately $500 million in overstatements
of PA income at USF, which the Company attributed to “significant accounting irregularities,”
and that further restatements would be required following the deconsolidation of the financial
results of five current or former joint ventures (ICA, Bompreço, DAIH, JMR and Paiz Ahold).
Ahold also announced various internal investigations (all of which are collectively referred to as
the “Internal Investigations”) and the resignations of defendants Van der Hoeven and Meurs. As
part of this announcement, the Company disclosed that Deloitte had withdrawn its opinion on
Ahold’s audited financial statements for the fiscal years ended December 30, 2001, and
December 31, 2000, indicating that its opinions should no longer be relied upon. At the same
time, Deloitte suspended its audit of Ahold’s fiscal 2002 financial statements until necessary
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Internal Investigations were completed. Deloitte’s 2000 and 2001 audit opinions have never
been reinstated.
26. Ahold, USF, and Deloitte are each now the subject of criminal and civil
investigations in the United States and abroad. On February 26, 2003, just two days after
Ahold’s shocking disclosure, the SEC launched an investigation into the accounting irregularities
at Ahold to determine whether Ahold and/or its current and former officers, directors, and
employees violated the federal securities laws. The U.S Attorney’s office in Manhattan has
convened a Federal Grand Jury, and the Federal Bureau of Investigation and federal prosecutors
in Maryland also began investigations. In addition, the Benefits Security Administration of the
United States Department of Labor also began investigating whether the Ahold Trust USA unit
violated ERISA regulations by, among other things, breaching fiduciary duties to plan
participants.
27. Several investigations were also commenced abroad. The Dutch Public
Prosecutor is investigating Ahold and its current and former officers, directors, and employees
for alleged criminal conduct, including forgery, intentional misstatements of annual accounts,
and violations of Dutch securities regulations in connection with Ahold’s foreign joint ventures.
Dutch authorities raided Ahold’s Netherlands headquarters and three Netherlands offices of
Deloitte on July 5, 2003. The Euronext Amsterdam Exchange is investigating whether Ahold
violated that Exchange’s listing rules by inappropriately delaying the release of information
regarding the events that led to Ahold’s February 24, 2003 announcement. Similarly, the
Authority for Financial Markets (“AFM”) is conducting an investigation into possible insider
trading of Ahold common stock. The AFM is also reportedly investigating alleged bribes at
Disco and clandestine bonuses that may have been paid to executives at USF.
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28. On May 8, 2003, the Company issued a press release announcing that Ahold was
increasing its anticipated negative restatement attributable to USF from the $500 million amount
announced on February 24, 2003 to $880 million. The $880 million negative restatement
covered the time period from April 2000 through December 28, 2002, and consisted of the
following negative revisions: $110 million for 2000; $260 million for 2001; and $510 million
for 2002. The $110 million restatement for fiscal 2000 also included amounts allocable to pre-
acquisition periods at USF. That same press release also indicated that it would be necessary to
record substantial goodwill write-offs.
29. During a May 13, 2003 meeting before Ahold shareholders at The Hague,
defendant de Ruiter, the Company’s then Chairman of the Board, was asked how the Company
failed to detect $880 million in earnings overstatements over a three-year period. de Ruiter
responded: “The explanation lies in the word ‘fraud.’”
30. A week later, on May 16, 2003, Ahold announced that it was reducing its revenue
figures for the last two years by 22 billion euros (U.S. $24.8 billion) in connection with the joint
ventures (Ahold did not restate the 1997, 1998, and 1999 joint venture revenues despite the fact
that billion of dollars in additional revenues were improperly consolidated during those years).
31. Ten days later, on May 26, 2003, the Company disclosed its “discovery” of
“intentional accounting irregularities involving earnings management and misapplications of
generally accepted accounting principles” at Tops Markets in the United States of approximately
$29 million in earnings.
32. The disclosure concerning Tops Markets increased the amount of Ahold’s
earnings restatement to $909 million. One month later, on July 1, 2003, Ahold disclosed an
additional $84.5 million in “intentional accounting irregularities related to improper purchase
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accounting.” The foregoing amount is separate from the Company’s previously announced
restatement of approximately $909 million in earnings (which the Company later reduced to a
total of $885 million) attributable to its United States operations, and, together with restated
financial results attributable to the Disco unit in Argentina, brought the total earnings restatement
to $1.12 billion (which does not include the $24.8 billion in revenue restatements attributable to
Ahold’s foreign joint ventures). Serious internal control infirmities at the Dutch corporate parent
were also announced.
33. After months of conducting the Internal Investigations, Ahold published its long-
awaited restated financial results in the Form 20-F that the Company filed with the SEC on
October 17, 2003, as amended on October 31, 2003. The Company prefaced its Form 20-F as
follows:
Although these accounting adjustments primarily relate to fiscal 2002, fiscal 2001 and fiscal 2000, certain adjustments relate back to fiscal 1999, fiscal 1998 and prior periods. As a result, the figures for fiscal 1999 and fiscal 1998 included in the five-year summary data contained herein have been restated to reflect the applicable adjustments discussed herein. These accounting adjustments were primarily made to address accounting irregularities and other accounting errors made by us and our subsidiaries in the application of accounting principles generally accepted in The Netherlands (“Dutch GAAP”) and accounting principles generally accepted in the United States (“US GAAP”) and to address other issues identified or confirmed through investigations performed by outside law firms and forensic accountants and during the fiscal 2002 year-end audit of our financial statements. Upon review of the aggregate impact of all of these adjustments, we concluded that restating our consolidated financial statements for fiscal 2001 and fiscal 2000 were required.
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34. Key portions of the restated financial results are summarized below:2
Y/E 1998 (in millions of Euros)
Dutch GAAP Originally
Reported3
Restated4
Difference
% Net sales 26,484 23,165 3,319 12.5% Net income <loss> 547 509 38 7% U.S. GAAP Net income <loss> 398 360 38 9.6%
Y/E 1999 (in millions of Euros)
Dutch GAAP Originally
Reported5
Restated6
Difference
% Net sales 33,560 27,986 5,574 16.6% Net income <loss> 752 738 14 1.9% U.S. GAAP Net income <loss> 586 556 30 5.1%
Fiscal 2000 – Dutch GAAP (in millions of Euros)
Originally Reported7
Restated8
Difference
%
Net Sales 52,471 40,833 11,6389 22.2% Gross Profit 11,887 9,554 2,333 19.6% Operating Income 2,274 1,635 639 28.1%
2 The tables below do not depict the impact of Ahold’s improper consolidation of joint venture revenues for earlier years, which are also in the billions of dollars, but difficult to determine with certainity based upon the information disclosed to date. 3 Source: Ahold Form 20-F for fiscal year ended January 2, 2000, at Item 8 p. 25. 4 Source: Ahold 2002 Form 20-F, p. 5. 5 Source: Ahold Form 20-F for fiscal year ended January 2, 2000, at Item 8, p. 25. 6 Source: Ahold 2002 Form 20-F/A, p. 5. 7 Source: Ahold Form 20-F for Y/E December 31, 2000. 8 Source: Ahold Form 20-F for Y/E December 29 2002 at p. F-3. 9 Per 2002 Form 20-F, at p. F-28, 10,580 of the decrease related to Deconsolidation of Joint Ventures.
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Fiscal 2000 – Dutch GAAP (in millions of Euros)
Originally Reported7
Restated8
Difference
%
Net income 1,116 920 196 17.6%
Fiscal 2000 – U.S. GAAP (in millions of Euros)
Originally Reported
Restated
Difference
%
Net income <loss> -- U.S. GAAP 794 442 352 44.3%
Fiscal 2001 – Dutch GAAP (in millions of Euros)
Originally Reported10
Restated11
Difference
%
Net Sales 66,593 54,213 12,38012 18.6% Gross Profit 14,716 11,986 2,730 18.6% Operating Income 2,705 1,911 794 29% Net income 1,114 750 36413 32.7%
Fiscal 2001 – U.S. GAAP14 (in millions of Euros)
Originally Reported
Restated
Difference
%
Net income <loss> -- U.S. GAAP 120 <254> 374 312%
35. Regarding the Internal Investigation conducted as USF, Ahold admits in its 2002
Form 20-F that:
The USF investigation identified accounting fraud relating to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an
10 Source: Ahold Form 20-F for Y/E December 30, 2001 at p. 70. 11 Source: Ahold Form 20-F for Y/E December 29 2002 at p. F-3. 12 Per 2002 Form 20-F, p. F-27, 12,195 of the decrease related to Deconsolidation of Joint Ventures. 13 Per 2002 Form 20-F, p. F-27, the entire 364 decrease related to “other adjustments” not having anything to
do with Deconsolidation of Joint Ventures. 14 Source: 2002 Form 20-F, at p. F-102.
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understatement of cost of goods sold. The investigation found that certain senior officers of USF and other employees were involved in the fraud. It was also found that inappropriate vendor allowance accounting had existed at the date of the acquisition of USF. The investigation also identified or confirmed numerous material weaknesses in internal controls.
***
The PwC investigation found that certain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and US GAAP. As part of the fraud, certain members of USF management and other employees interfered with the audit confirmation process for vendor allowance receivables from vendors, concealed vendor contracts and their true terms, made misrepresentations regarding the absence of prepayments from vendors, and caused the creation of certain inaccurate accounting records. The PwC investigation further identified numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates.
***
The forensic investigations found accounting irregularities at Tops and at Giant-Carlisle (although involving relatively small amounts). The investigations also concluded that certain accounting irregularities had occurred at the Ahold parent company. At Tops, these accounting irregularities consisted of intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management. At Giant-Carlisle, the accounting irregularities consisted of pervasive earnings management, including the intentional
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deferral of earned vendor allowance receivables and vendor allowance accrued reserves, as well as the improper holding of company funds at vendors. According to the investigatory findings, accounting irregularities also occurred at the Ahold parent company involving the misapplication of purchase accounting in respect of the acquisitions of ICA and Superdiplo. The investigations also resulted in findings of varying degrees of earnings management and/or other accounting errors or issues at the Ahold parent company and at the other operating and real estate companies reviewed. These errors or issues most frequently involved improper accounting for reserves through excess provisioning or inappropriate release and the unnecessary deferral or premature recognition of income from vendor allowances. The investigations also found a number of internal control weaknesses, especially relating to accounting and monitoring for vendor allowances and contracts, deviations from Dutch GAAP and US GAAP, and a general lack of sufficient technical knowledge of Dutch GAAP and US GAAP at many of the companies reviewed.
36. With respect to the Internal Investigation conducted at DAIH, Ahold admits in its
Form 20-F that:
The Disco investigation found a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.
37. As early as October 2002, the Company’s Audit Committee began an
investigation regarding Ahold’s joint ventures: (1) Bompreço, which was formed in December
1996; (2) DAIH, which was formed in January 1998; (3) Paiz Ahold, which was formed in
December 1999; and (4) ICA which was formed in March 2000; and (5) JMR which was formed
in 1992. Ahold’s 2002 Form 20-F reveals that:
All of these joint ventures had been fully consolidated in our financial statements since the respective dates of formation, except Paiz Ahold which ceased to be consolidated on January 1, 2002, when our indirect interest in the new joint venture was reduced to
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33 1/3%, at which time we began to account for our interest in the joint venture on an equity basis.
***
In light of the various side letters referred to above and on the basis of the available facts and circumstances, we decided in February 2003 that we should restate our historical financ ial statements so as to proportionally consolidate ICA and the other joint ventures for which there were side letters for the periods they were 50% owned by us, as well as our joint venture in Portugal, JMR. We have held a 49% interest in JMR since its formation in 1992 and, although no side letters existed regarding our control of JMR, we had been fully consolidating JMR in our financial statements since the formation of the joint venture, as we believed that we had control over JMR. In light of the evaluation of the accounting for the other joint ventures, we reconsidered our accounting for JMR and concluded that we had significant influence, but not control over JMR.
The Internal Investigation described above led Ahold to reduce previously reported revenues by
$24.8 billion dollars.
38. Ahold’s 2002 Form 20-F contains the Company’s characterization of the
securities class action litigation pending against Ahold and other defendants in the United States
as of October 17, 2003. Set forth immediately below is Ahold’s characterization of the claims
presented against the Company and other defendants:
• Ahold improperly overstated its income related to
vendor allowance programs by booking more discounts on invoices and rebates from vendors than it actually received during fiscal 2001 and the first three quarters of fiscal 2002 in violation of Dutch GAAP and U.S. GAAP;
• Ahold’s historical financial statements were materially
misstated because of improper consolidation under Dutch GAAP and U.S. GAAP of ICA, JMR, DAIH, Bompreço and Paiz Ahold;
• Contrary to Ahold’s statements, its unaudited interim
financial information did not include all adjustments
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necessary for a fair presentation of the results for the unaudited interim periods and were not prepared in conformity with Dutch GAAP because these results included improperly overstated operating income and the improperly consolidated results of Ahold’s joint ventures;
• Disco engaged in certain transactions that were possibly
illegal and improperly accounted for;
• Ahold’s reported growth rate was illusory and based in material respects on the improper accounting treatment of subsidiaries and accounting irregularities in the recognition of income, including prepayment amounts related to USF’s vendor allowance programs;
• Ahold was experiencing a slowdown in consumer
demand and, contrary to Ahold’s representations, its financial performance was not “very solid” and its fundamental business was not actually “quite robust;”
• contrary to its statements, Ahold was having difficulty
integrating its numerous acquisitions; and
• Ahold lacked adequate internal controls and, therefore, was unable to ascertain its true financial condition.
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39. As set forth in the table below, Ahold admits in its 2002 Form 20-F that Lead
Plaintiffs’ claims of fraud in this Complaint are true.
PRIMARY FACTUAL ALLEGATIONS IN THE SECURITIES ACTION AS DESCRIBED IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC15
CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
“Ahold improperly overstated its income related to vendor allowance programs by booking more discounts on invoices and rebates from vendors than it actually received during fiscal 2001 and the first three quarters of fiscal 2002 in violation of Dutch GAAP and U.S. GAAP;”
− “The investigations also concluded that certain accounting irregularities had occurred at the Ahold parent company. At Tops, these accounting irregularities consisted of intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management. At Giant-Carlisle, the accounting irregularities consisted of pervasive earnings management, including the intentional deferral of earned vendor allowance receivables and vendor allowance accrued reserves, as well as the improper holding of company funds at vendors. According to the investigatory findings, accounting irregularities also occurred at the Ahold parent company involving the misapplication of purchase accounting in respect of the acquisitions of ICA and Superdiplo. The investigations also resulted in findings of varying degrees of earnings management and/or other accounting errors or issues at the Ahold parent company and at the other operating and real estate companies reviewed.” (20-F, pg. 69).
− “As a result of the findings of the investigations at
USF and Tops, we determined that our income from vendor allowances for fiscal 2001 and fiscal 2000 was overstated due to the intentional and unintentional misapplication of Dutch GAAP and
15 All quoted statements in this column appear at p. 181 of the 2002 Form 20-F.
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PRIMARY FACTUAL ALLEGATIONS IN THE SECURITIES ACTION AS DESCRIBED IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC15
CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
U.S. GAAP and the intentional and improper accounting for and mischaracterization of cash receipts, which led to the recognition of vendor allowances before it was appropriate to do so under Dutch GAAP and U.S. GAAP.... “(20-F, pg. 75).
− “As a result of the findings of the investigations at
USF and Tops, the Company determined that its income from vendor allowances for fiscal 2001 and 2000 was overstated due to the intentional and unintentional misapplication of Dutch GAAP and U.S. GAAP and the intentional inappropriate accounting for and mischaracterization of cash receipts which led to the recognition of vendor allowances before it was appropriate to do so under Dutch GAAP and U.S. GAAP.... Furthermore, certain vendor allowances were misclassified as revenue instead of as a reduction of cost of sales or selling expense, general and administrative expenses, as required under Dutch GAAP and U.S. GAAP.... “(20-F, pg. F-23).
− “The Company determined that net receivables
from vendors at the date of the USF acquisition in fiscal 2000 did not exist at the time. In addition, the Company determined that, at the date of acquisition, a liability for deferred revenue related to vendor allowances that were not yet earned were not recorded.” (20-F, pg. F-27).
− Furthermore, the Company determined that a liability should have been recognized at the date of acquisition for amounts that had been overbilled to vendors for vendor allowances. The total amount of these adjustments led to an overstatement of net assets acquired by EUR 70.” (20-F, pg. F-27).
− “One such matter (raised by the USF investigation) relates to certain USF vendor
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PRIMARY FACTUAL ALLEGATIONS IN THE SECURITIES ACTION AS DESCRIBED IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC15
CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
invoicing practices. These practices resulted in overbillings by various USF local branches of various vendors with respect to vendor allowances of approximately USD 5 in fiscal 2002, USD 7 in fiscal 2001, USD 6 in fiscal 2000 and USD 13 in fiscal 1999 and prior periods.” (20-F, pg. F-97).
− “Various matters raised by the USF investigation were further reviewed and followed up by Ahold, D&T, and various outside Ahold legal counsel, and, where appropriate, by PwC, to determine their impact, if any, on Ahold and its financial statements, including certain USF vendor invoicing practices. As a result of this further review, it was determined that these practices resulted in overbillings by various USF local branches of various vendors with respect to vendor allowances.” (20-F, pg. 68).
− “In connection with the ongoing investigations at USF, we identified certain vendor invoicing practices by USF that resulted in the overbilling by various USF local branches of various vendors with respect to vendor allowances of approximately USD 5 million in fiscal 2002, USD 7 million in fiscal 2001, USD 6 million in fiscal 2000 and USD 13 million in fiscal 1999 and prior periods. We have recorded an accrual to cover any refunds that we or USF expects to be required to pay vendors for these overbillings and have restated our consolidated financial statements for fiscal 2001 and fiscal 2000 with respect to these overbillings.” (F-20, pg. 158).
− “We also identified other billing practices at USF that could result in other potential overbilling claims by vendors in an amount totaling USD 60 million.” (F-20, pg. 158).
“Ahold’s historical financial statements were materially misstated because of improper consolidation under Dutch GAAP and U.S.
− “On February 24, 2003, we announced that our net earnings and earnings per share for fiscal 2002 would be significantly lower than previously
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
GAAP of ICA, JMR, DAIH, Bompreço and Paiz Ahold;”
indicated and that we would be restating our financial statements for fiscal 2001 and fiscal 2000. We indicated that these restatements were primarily related to overstatements of vendor allowance income at USF and the deconsolidation of five current or former joint ventures (ICA, Bompreço, DAIH, JMR and Paiz Ahold).” (20-F, pg. 65).
− “The restated fiscal 2001 and fiscal 2000 consolidated financial statements reflect adjustments that correct accounting irregularities and other accounting errors previously made in the application of Dutch GAAP and U.S. GAAP. These adjustments relate to: (1) the deconsolidation of the joint venture companies not controlled by Ahold; (2) improper or premature recognition of vendor allowances; (3) misapplication of accounting principles and misuse of facts relating to acquisition accounting; (4) improper accounting for certain reserves, allowances and provisions; (5) improper accounting for certain real estate transactions; and (6) certain other accounting issues and items arising as a result of the misapplication of or errors in the application of Dutch GAAP and U.S. GAAP.” (20-F, pgs. 66-67).
“Contrary to Ahold’s statements, its unaudited interim financial information did not include all adjustments necessary for a fair presentation of the results for the unaudited interim periods and were not prepared in conformity with Dutch GAAP because these results included improperly overstated operating income and the improperly consolidated results of Ahold’s joint ventures;”
− “As a result of the investigation, which was completed in January 2003, Messrs. Eisma and Van Dijk concluded that, although when the ICA joint venture was formed the joint venture partners agreed that Ahold should be able to consolidate ICA under Dutch GAAP and IAS, there was no written evidence to conclude that the joint venture parties agreed that Ahold would have legal control over ICA. According to accounting experts assisting in the investigation, Ahold did not have the ability to control ICA and therefore should not have consolidated ICA in its financial statements under Dutch GAAP or U.S.
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
GAAPG.... “ (20-F, pg. 67).
− “In light of the evaluation of the accounting for the Joint Ventures, we reconsidered our accounting for JMR and concluded that we had significant influence, but not control, over JMR. We concluded that consolidation of the Joint Ventures and JMR was inappropriate under Dutch GAAP and U.S. GAAP, since we did not control them.” (20-F, pg. 75).
− “The Company recorded restructuring accruals under purchase accounting relating to the acquisition of its 50% interests in Paiz Ahold in December 1999 and in ICA in April 2000 and subsequent changes to such accruals in 2001 related to ICA. Since Ahold did not obtain control over Paiz Ahold and ICA when the respective joint venture interests were acquired, it was not appropriate to record such restructuring accruals under Dutch GAAP or U.S. GAAP.” (20-F, pgs. F-26-27).
“Disco engaged in certain transactions that were possibly illegal and improperly accounted for;”
− “In connection with the review of suspicious transactions identified in the course of the investigation of Disco, we determined that certain payments were improperly capitalized as tangible fixed assets in fiscal 2001 in the amount of EUR 10 million.” (20-F, pg. 78).
− “The Disco investigation found a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances, these payments were improperly capitalized rather than expensed.” (20-F, pg. F-23).
− “In connection with the review of suspicious transactions identified in the course of the investigation of Disco, the Company has
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
determined that certain payments were improperly capitalized as tangible fixed assets in fiscal 2001 for EUR 10.” (20-F, pg. F-23).
“Ahold’s reported growth rate was illusory and based in material respects on the improper accounting treatment of subsidiaries and accounting irregularities in the recognition of goodwill income, including prepayment amounts related to USF’s vendor allowance programs;”
− “As a result of this further review, it was determined that these practices resulted in overbillings by various USF local branches of various vendors with respect to vendor allowances. Ahold has recorded an accrual to cover any refunds that USF expects to be required to pay to vendors for these overbillings, and has restated its consolidated financial statements for fiscal 2001 and fiscal 2000 with respect to these overbillings. Other billing practices also were identified at USF that could result in other potential overbilling claims by vendors.” (20-F, pg. 68).
− “We determined that net receivables from vendors as of the date of the USF acquisition in fiscal 2000 did not exist at the time. In addition, we determined that, at the date of acquisition, a liability for deferred revenue related to vendor allowances that were not yet earned, was not recorded.” (20-F, pg. 75).
− “In connection with the acquisitions of Superdiplo and our interest in ICA in December 2000 and April 2000, respectively, we did not properly allocate purchase consideration to certain acquired real estate properties at the respective acquisition dates. Our restated consolidated financial position and results for fiscal 2001 and fiscal 2000 reflect adjustments to record such assets at their fair values at the acquisition date and the subsequent depreciation thereof.” (20-F, pg. 76).
− “In connection with several of our acquisitions in fiscal 2001, we did not allocate purchase consideration to certain identifiable intangible
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
assets upon acquisition.” (20-F, pg. 76).
− “As a result of the completion of an Internal Revenue Service review in fiscal 2001, reserves and allowances should have been reversed with a corresponding decrease in goodwill.” (20-F, pg. 76).
− “Prior to fiscal 2002, we recorded certain reserves, allowances and provisions related to income taxes, pensions and restructuring expenses. We subsequently determined that these reserves, allowances and provisions, and releases thereof, should not have been recorded under Dutch GAAP or U.S. GAAP, since the documentation available was not adequate to support the amounts recorded, or the reserves, allowances and provisions were of a non-specific nature.” (20-F, pg. 77).
− “The USF investigation identified accounting fraud relating to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold. The investigation found that certain senior officers of USF and other employees were involved in the fraud. It was also found that inappropriate vendor allowance accounting had existed at the date of the acquisition of USF.” (20-F, pg. F-23).
− “The additional internal investigations found accounting irregularities at Tops, consisting of intentional improper recognition of vendor allowances and pervasive earnings management, and at Giant Carlisle, consisting of pervasive earnings management although involving relatively small amounts. In addition, these investigations found varying degrees of earnings management and/or other accounting errors or issues at the Ahold parent company and at the other operating and real estate companies
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
reviewed.” (20-F, pg F-23).
“Ahold was experiencing a slowdown in consumer demand and, contrary to Ahold’s representations, its financial performances was not ‘very solid’ and its fundamental business was not actually ‘quite robust’;”
− “The most significant portion of this transitional impairment loss was EUR 2.1 billion, which related to USF, which was caused primarily by the fraud and accounting irregularities uncovered at USF, and the declining economic conditions in the food service industry in the United States, both of which had a significant negative impact on the carrying value of USF’s goodwill.” (20-F, pg. 98).
− “In Europe, we have experienced retail trade sales pressure in fiscal 2003 due to the weakened economy and consumers’ focus on price, combined with increased competition.” (20-F, pg. 93).
− “Although our net sales increased from fiscal 2001 to fiscal 2002 and from fiscal 2000 to fiscal 2001, our businesses have been negatively affected by the prolonged economic downturn in fiscal 2002 and fiscal 2001. In fiscal 2002, this weakened global economy significantly affected our results as high unemployment rates depressed consumer purchasing power and declining confidence in the economy caused customers to decrease consumer spending and to shift buying habits. In the southeastern United States, Argentina and Brazil, in particular, the decrease in consumer spending and the shift in buying habits of consumers to mass merchandiser clubs or other value-based operators forced us to lower prices and, in some cases, caused us to lose market share.” (20-F, pg. 98).
“Contrary to its statements, Ahold was having difficulty integrating its numerous acquisitions;”
− “[D]ue to our focus on the accounting and related issues discussed above, completion of the remaining portions of USF’s integration plan, which includes the further integration of distribution routes, the re- focus of USF’s sales force and the roll-out of centralized procurement,
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CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
has been delayed. As a result, we have not yet been able to fully recognize synergies from USF’s recent acquisitions. We have also continued our efforts to consolidate and standardize information technology systems. Although we have accomplished a number of computer system conversions, substantial system conversion projects, including the complete implementation of the SIS vendor allowance tracking system, remain. With the exception of a few vendors, we expect to be able to track all vendor allowances by mid-fiscal 2004.” (20-F, pg. 94).
− “Our results of operations for fiscal 2002 and fiscal 2001 were significantly affected by the acquisitions we made and new joint ventures we formed in fiscal 2000 through fiscal 2002.” (20-F, pg. 96).
− “In connection with the acquisitions of Superdiplo and the Company’s interest in ICA in December 2000 and April 2000, respectively, Ahold did not properly allocate purchase consideration to certain acquired real estate properties at the respective acquisition dates.” (20-F, pg. F-27).
“Ahold lacked adequate internal controls and, therefore, was unable to ascertain its true financial condition.”
− “[T]he investigations found weaknesses in internal controls at most of the subsidiaries reviewed.” (20-F, pg. 65).
− “A special task force reporting to the Audit Committee has been formed, consisting of members of Ahold management and outside advisors, to address these internal control weaknesses.” (20-F, pg. 66).
− “Ahold is in the process of taking steps to address the significant internal control weaknesses raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified.” (20-F, pg. 70).
− “We are also taking steps to address the
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PRIMARY FACTUAL ALLEGATIONS IN THE SECURITIES ACTION AS DESCRIBED IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC15
CORROBORATING ADMISSIONS IN AHOLD’S 2002 FORM 20-F FILED WITH THE SEC
significant internal control weaknesses that have been identified throughout Ahold.” (20-F, pg. 90).
− “The investigations (forensic investigations) also found a number of internal control weaknesses, especially relating to accounting and monitoring for vendor allowances and contracts, deviations from Dutch GAAP and U.S. GAAP, and a general lack of sufficient technical knowledge of Dutch GAAP and U.S. GAAP at many of the companies reviewed.” (20-F, pg. 69).
− “The investigation also identified significant internal control weaknesses.” (20-F, pg. 69).
40. On February 24, 2003, Ahold’s “house of cards” had finally collapsed. In one
day, investors lost over 60% of the market va lue of their holdings in Ahold common stock and
ADRs. De Ruiter, Van der Hoeven, Meurs, Miller, Kaiser, Lee, and Resnick all resigned or were
terminated. The fraud, wholesale lack of internal controls and accounting irregularities involving
some 750 items (300 of which were internal control related) were disclosed. Illegally obtained
bonus and other payments obtained by senior management of Ahold and USF were revealed and
partially repaid. It is against this background that COPERA and Generic Trading ask that the
claims advanced by the Class be considered and that damages be awarded in the manner
provided by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) to all investors
who purchased Ahold common stock and ADRs during the Class Period.
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II. JURISDICTION AND VENUE
41. The claims of Lead Plaintiffs and the Class arise under §§10(b) and 20(a) of the
Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§78(j)(b) and 78(t), and Rule
10b-5 promulgated thereunder; and under §§ 11, 12(a)(2), and 15 of the Securities Act.
42. Jurisdiction is conferred by §27 of the Exchange Act, and 28 U.S.C. §1331, as
well as by § 22 of the Securities Act.
43. This Court has subject matter jurisdiction over the claims brought on behalf of
investors who purchased or acquired Ahold common stock on the foreign markets and/or who
purchased American Depositary Shares (“ADS”) evidenced by ADRs16 on the NYSE
(collectively, “Investors”).
44. The claims brought on behalf of all Investors satisfy the “conduct test” for
determining subject matter jurisdiction over a securities fraud case. Under the “conduct test” for
federal subject matter jurisdiction, this Court has subject matter jurisdiction over securities fraud
claims if: (1) the defendants’ activities within the United States were more than merely
preparatory to the fraudulent conduct at issue and (2) defendants’ activities or culpable failures to
act within the United States caused the Investors’ losses. Defendants’ repeated admissions, as
set forth in Ahold’s 2002 Form 20-F, concede that the overwhelming majority of the conduct that
resulted in the Company’s February 24, 2003 restatement announcement, as well as the
additional restatements announced on May 8, 2003 and on May 26, 2003, occurred in connection
with Ahold’s operations in the United States. The defendants’ repeated admissions conclusively
demonstrate that the fraudulent conduct that occurred at Ahold’s United States subsidiary, USF -
- headquartered in Columbia, Maryland -- is the centerpiece of Ahold’s fraud.
16 For purposes of this Complaint, the terms “ADR” and ADS” are used interchangeably.
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45. The fraudulent activity at USF regarding vendor promotional allowance is the
subject of investigations by the U.S. Department of Justice, the U.S. Department of Labor, the
SEC, the NYSE and the National Association of Securities Dealers (the “NASD”).
46. Primary among Defendants’ fraudulent United States conduct was the pervasive
and deliberate improper accounting in the United States for PAs at USF. In fact, Ahold has
admitted that its USF subsidiary alone is responsible for improperly inflating over $856 million
in earnings during the Class Period. Specifically, in the Company’s 2002 Form 20-F filed on
October 17, 2003, as amended on October 31, 2003 (the “2002 Form 20-F”), Ahold admitted:
The USF investigation identified accounting fraud relating to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold. The investigation found that certain senior officers of USF and other employees were involved in the fraud.
Ahold has admitted that its internal investigations uncovered accounting irregularities at two of
the Company’s U.S. retail companies, namely Tops and Giant-Carlisle. With respect to Tops,
Ahold discovered accounting irregularities consisting of intentional improper recognition of
vendor allowances and pervasive earnings management. Giant-Carlisle’s accounting
irregularities consisted of pervasive earnings management.
47. Indicating that the fraudulent conduct at issue here occurred primarily in the
United States, and that such conduct was far more than merely preparatory to the defendants’
overall fraud, the 2002 Form 20-F states:
[c]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP.
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***
[a]s part of the fraud, certain members of USF management and other employees interfered with the audit confirmation process for vendor allowance receivables from vendors, concealed vendor contracts and their true terms, made misrepresentations regarding the absence of prepayments from vendors, and caused the creation of certain inaccurate accounting records.
48. Moreover, the PA fraud spread to other Ahold U.S. operations including Tops and
Giant-Carlisle. All of Deloitte’s work for Ahold was coordinated by Deloitte U.S. CEO and
Advisory Partner on the Ahold account, Copeland.
49. Beyond the fraudulent conduct at issue here, Ahold’s United States operations
were a critical and dominant component of Ahold’s global business during the Class Period. For
example, the 2002 Form 20-F reveals that the Company’s operations are located primarily in the
United States and Europe, with net sales in the United Stat es accounting for 74% of the
Company’s total net sales in fiscal 2002. (2002 Form 20-F, at 37). Ahold’s United States
operations are divided into two divisions: its “food service” division, and its “retail trade”
division. Ahold’s “food service” division consists of USF and its subsidiaries, and accounts for a
substantial portion of Ahold’s operating income. Moreover, based on its sales in fiscal 2002,
USF is the second largest food distributor in the United States. (2002 Form 20-F, at 53).
Toward the end of the Class Period, USF had a “customer base of over 300,000 independent and
chain businesses throughout the United States,” and conducted operations that “cover a
geographic area in which 95% of the U.S. population resides.”
50. In addition to Ahold’s USF “food service” division, Ahold also maintains a “retail
trade” division in the United States. (2002 Form 20-F, at 37). Defendant Ahold USA Holdings,
Inc. (Ahold’s United States holding company) and Ahold USA are both headquartered in
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Virginia and operate Ahold’s United States businesses, which include: Stop & Shop
Supermarkets, Inc., and BI-LO LLC. These businesses are headquartered in Boston,
Massachusetts; Landover, Maryland; Buffalo, New York; Carlisle, Pennsylvania; Birmingham,
Alabama; and Mauldin, South Carolina, respectively. Ahold also operates Peapod LLC
(“Peapod”), an e-commerce business headquartered in Skokie, Illinois. Ahold Financial Services
provides all of the accounting, financial and related administrative services to all of Ahold’s U.S.
Holdings except USF which does all of that work in house in Maryland. Deloitte U.S. is the
auditor, accountant, consultant and advisor for all of Ahold’s U.S. operations. In this regard,
Deloitte U.S. offices handle the audit, and local tax and advisory work for each separate
supermarket and other operating business. No administrative, accounting or financial services
for Ahold’s U.S. operations are performed outside the United States.
51. In addition, a significant portion of defendants’ false and misleading statements
were initially made in the United States, and are contained in Ahold’s SEC filings. Ahold’s
press releases and SEC filings were broadly disseminated within the United States through the
means and instrumentalities of interstate commerce, including but not limited to, the mails,
interstate telephone communications, and the facilities of a national securities exchange. In
addition, Ahold conducted United States based investor conferences, so-called “road shows” and
analyst meetings in the United States in order to publish its false and misleading financials and to
assure Ahold’s continued access to United States capital and financial markets.
52. The foregoing admitted facts, and the other facts set forth herein, clearly
demonstrate that Ahold’s conduct in the United States was not “merely preparatory” to
defendants’ scheme to defraud. Instead, defendants’ United States conduct, which was the only
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monetarily quantified component of Ahold’s February 24, 2003 announcement, directly caused
the staggering losses suffered by Investors.
53. The claims asserted herein also satisfy the “effects test” for determining federal
subject matter jurisdiction over a securities fraud case. Under the “effects test,” this court has
subject matter jurisdiction over the Investors’ claims because the defendants’ fraudulent conduct
had an impact upon the United States markets and upon United States investors. The conduct
described herein clearly effected ADRs registered in the United States and listed on a United
States national securities exchange as well as common stock listed on foreign exchanges that was
purchased by Investors including those who are United States citizens or who are domiciled in
the United States. The interests of all Investors were affected adversely by Ahold’s misconduct.
Simply stated, the scheme to defraud, set forth herein, caused a substantial effect within the
United States. Defendants’ primarily United States based fraudulent conduct artificially inflated
the trading price for Ahold common stock and Ahold ADRs traded worldwide during the Class
Period and affected the integrity of the price of the ADRs that traded on a United States
exchange.
54. As set forth in the preceding paragraphs, venue is proper in this District pursuant
to §27 of the Exchange Act because the overwhelming majority of the acts and practices
complained of herein occurred in substantial part in this District. Moreover, by Order dated June
18, 2003, the Judicial Panel on Multidistrict Litigation transferred all of the underlying securities
fraud class actions to this Court.
III. THE PARTIES
A. The Public Employees’ Retirement Association of Colorado
55. Lead Plaintiff COPERA purchased Ahold common stock at artificially inflated
prices on foreign exchanges during the Class Period, including shares purchased pursuant to the
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registration and prospectus issued in connection with Ahold’s September 2001 Global Offering,
and suffered more than $16 million in losses thereby. COPERA, which was established in 1931,
operates by authority of the Colorado General Assembly. COPERA provides retirement and
other benefits to the employees of more than 380 government agencies and public entities in the
State of Colorado. COPERA’s membership includes employees of the Colorado state
government, most teachers in the State of Colorado, many university employees, judges, many
employees of Colorado cities and towns, Colorado State Troopers, and the employees of a
number of other public entities within the State of Colorado. With over approximately $30
billion in assets, COPERA is the 23rd largest public pension plan in the United States and the
48th largest public pension plan in the world.
B. Generic Trading of Philadelphia, LLC
56. Lead Plaintiff Generic Trading purchased Ahold ADRs at artificially inflated
prices on the NYSE during the Class Period and suffered more than $1.1 million in losses
thereby. Founded in 1991, Generic is one of the largest institutional trading firms in the United
States, with over 20 branch offices. Generic Trading is a fully reporting member of the National
Association of Securities Dealers (“NASD”), is a licensed broker-dealer under Colorado law, and
is managed by seasoned professionals with over 60 years of collective experience in the
securities industry.
C. The Ahold Defendants
1. Royal Ahold N.V.
57. Although Ahold is domiciled in The Netherlands and incorporated under the laws
of The Netherlands. Ahold’s campaign of Class Period acquisitions converted it into a primarily
United States based company with 74% of its sales generated in the United States. Ahold began
as a small grocery concern in The Netherlands in 1887 owned and operated by Albert Heijn and
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his family. Ahold began its expans ion outside of The Netherlands in 1976, and entered the
United States markets in 1977 by purchasing BI-LO. Thereafter, Ahold acquired a multitude of
supermarket and foodservice concerns throughout the United States and the world. Based on
fiscal 2002 retail sales, Ahold was one of the largest food providers in the United States and the
largest food provider in The Netherlands. During fiscal 2002, Ahold provided food primarily
through retail trade outlets, along with complementary food service activities. As of fiscal year
end 2002, Ahold operated or serviced 5,606 stores, including 1,240 franchise and associated
stores, and employed, on a fulltime equivalent basis, approximately 278,486 people. The
Company’s chain stores include U.S. based Stop & Shop, Giant, Bruno’s, BI-LO, Tops Markets,
Netherlands based Albert Heijn, and Spain based Bompreço. Through its United States based
foodservice activities, primarily through defendant USF, Ahold also supplies food to restaurants,
hotels, healthcare institutions, government facilities, universities, stadiums, and caterers. Ahold
is also involved in several grocery chain joint ventures outside the United States. Ahold
common stock trades on the Euronext exchanges of Amsterdam, Paris, and Brussels (symbol:
AHLN), and Ahold has a secondary listing on the Swiss exchange in Zurich (symbol: AHO).
Ahold’s ADRs trade on the NYSE (symbol: AHO), where they were first listed in 1993.
58. Ahold is managed by two corporate boards, the Supervisory Board and the
Corporate Executive Board (“Executive Board”) (collectively, the “Board” or “Ahold Board”).
Pursuant to the Form 20-F filed for the fiscal year ended January 2, 2000, Ahold’s Supervisory
Board is an independent, self-electing entity. The Form 20-F for the fiscal year ended December
29, 2002 describes the Supervisory Board as an independent corporate body, its members being
appointed, suspended and dismissed by the general meeting of shareholders. Supervisory Board
members are elected for a term of four years, and may be re-elected thereafter. Persons
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employed by Ahold or a dependent company cannot be members of the Supervisory Board. The
Supervisory Board has the power to appoint and discharge members of Ahold’s Executive
Board, discussed below; the right to approve certain important management decisions; and the
power to adopt the annual financial accounts. In addition, the Supervisory Board supervises the
policies conducted by the Executive Board as well as Ahold’s general course of affairs and
business. In performing their duties, members of the Supervisory Board must consider the
interests of Ahold and its business.
59. Pursuant to the Form 20-F filed for the fiscal year ended January 2, 2000, the
Executive Board is responsible for the management of Ahold’s business and must consist of at
least three members. Members of the Executive Board are appointed and discharged by the
Supervisory Board. Pursuant to the Form 20-F for the fiscal year ended December 29, 2002, the
Executive Board must consist of at least three members or two members and a deputy member.
The general meeting of shareholders is entitled to appoint, suspend and dismiss members of the
Executive Board. The Supervisory Board may make a binding recommendation for candidates
to fill a vacancy on the Executive Board, such that for each appointment, a choice can be made
from at least two persons.
2. Ahold USA
60. Ahold USA, Inc. (“Ahold USA”), headquartered in Chantilly, VA, is Ahold’s
United States holding company. During the Class Period, Ahold USA and defendant Ahold
USA Holdings, Inc. (a subsidiary and/or affiliate of Ahold USA involved in retail operations
including the operation of Giant and Tops) coordinated the activities of Ahold’s United States
regional retail operating companies, including but not limited to: Tops Markets, headquartered
in Buffalo, NY; Giant-Carlisle, headquartered in Carlisle, PA; Giant-Landover, based in
Landover MD; the Stop & Shop Companies, Inc., headquartered in Boston, MA; BI-LO LLC,
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headquartered in Maudlin, SC; and Bruno’s, headquartered in Birmingham, AL. Among other
things, Ahold USA is responsible for improving the operational efficiency and common
functions of Ahold’s United States retail operating subsidiaries. Moreover, Ahold USA is
responsible for the overall management of Ahold’s U.S. retail operations, creating and
developing synergies and the benefits of economy of scale in areas such as sourcing, logistics
and IT. Ahold USA provides Ahold’s United States retail operating companies with a wide
array of services, including accounting and financial services.
61. Ahold USA provided its financial results to Ahold knowing that they would be
consolidated with Ahold’s and disseminated to the investing public with Ahold’s quarterly and
annual financial reports.
3. U.S. Foodservice, Inc.
62. Defendant USF is a wholly-owned subsidiary of Ahold and is based in Maryland
with its principal offices located at 9755 Patuxent Woods Drive, Columbia, Maryland 21046.
USF was a direct and substantial participant in the fraud described herein. Ahold acquired USF
for $3.6 billion during Ahold’s 2000 fiscal year. Ahold’s USF operations were the focal point of
Ahold’s admitted fraud that directly caused the members of the Class to suffer more than a 60%
loss in the value of its Ahold holdings. Dur ing the Class Period, USF’s revenues were
dramatically overstated based upon what Ahold has since repeatedly admitted was a deliberate
fraudulent scheme to artificially inflate revenues in connection with accounting for vendor
rebates and promotional allowances orchestrated by USF executives living and working in the
United States. These fraudulent overstatements were provided by USF to Ahold for
consolidation into Ahold’s consolidated financial results. USF knew that its financials were false
and misleading and that they would be disseminated to investors. Because of the fraudulently
inflated vendor rebates at USF during the Class Period, Ahold has restated downward its
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reported Class Period revenues by $110 million for 2000; by $260 million for 2001; and by $510
million for 2002. The fraudulent accounting activity at the USF unit is the subject of numerous
concurrent investigations being conducted by regulatory authorities, including the SEC and the
United States Department of Justice (“DOJ”) through the United States Attorney’s Office in
Manhattan.
63. USF provided its financial results to Ahold knowing that they would be
consolidated with Ahold’s and disseminated to the investing public with Ahold’s quarterly and
annual financial reports.
D. The Deloitte Defendants
1. Deloitte & Touche LLP
64. Defendant Deloitte U.S. is the national practice group of DTT in the United
States. Deloitte U.S. maintains its principal offices at 1633 Broadway, New York, New York
10019. During the Class Period, Deloitte U.S. coordinated all global Ahold work, specifically
through the efforts of James Copeland, the Deloitte Advisory Partner for the Ahold account as
described more fully herein. Deloitte U.S. was also directly responsible for all Ahold related
work in the United States including the Class Period audits of USF, Ahold USA and Ahold USA
Holdings.
2. Deloitte & Touche Accountants
65. Defendant Deloitte Netherlands is DTT’s Netherlands national practice group.
Deloitte Netherlands maintains its principal offices at Admiraliteitskade 50, Rotterdam 3063 ED,
The Netherlands. During the Class Period, Deloitte Netherlands, together with Deloitte US, was
responsible for auditing Ahold’s annual financial results. In addition, Deloitte Netherlands
performed audit work in The Netherlands and did certain administrative and consolidating work
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in connection with the quarterly and annual financials and performed other services for Ahold in
The Netherlands.
E. The Individual Defendants
66. Each of the Individual Defendants had the duty to exercise due care and diligence
and the duty of full and candid disclosure of all material facts relating to the financial reporting
and results of operations of Ahold. To discharge their duties, these Defendants were required to
exercise reasonable and prudent supervision over the dissemination of information concerning
the business, operations and financial reporting of Ahold. By virtue of such duties, these officers
and directors were required, inter alia, to:
(a) conduct and supervise the business of Ahold in accordance with federal laws;
(b) supervise the preparation of the Company’s SEC filings and to approve any reports concerning the financial reporting and results of Ahold;
(c) ensure that Ahold established and followed adequate internal controls;
(d) create, enforce and comply with a corporate policy prohibiting misuse of proprietary corporate information by corporate officers and directors by trading in Ahold stock based on material non-public information; and
(e) refrain from obtaining personal benefit, at the expense of the public purchasers of Ahold securities, by misusing proprietary non-public information.
67. As officers, directors and/or controlling persons of a publicly-held company
which is registered with the SEC under the federal securities laws and whose ADR securities are
traded on the NYSE, and governed by the provisions of the federal securities laws, the Individual
Defendants each had a duty to promptly disseminate accurate and truthful information with
respect to the financial reporting and the publicly reported quarterly and annual results of
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operations of Ahold, so that the market price of the Company’s publicly traded securities would
be based upon truthful, accurate and complete information.
68. Under the rules and regulations promulgated by the SEC under the Exchange Act,
specifically Item 303 of Regulation S-K, the Individual Defendants also had a duty to report all
trends, demands or uncertainties that were reasonably likely to impact Ahold’s (1) revenues; (2)
expenses; and (3) previously reported financial information such that it would not be indicative
of future operating results. As set forth more fully below, the representations of the Individual
Defendants during the Class Period violated these specific requirements and obligations as well
as their duties and obligations pursuant to the Securities Act and the Exchange Act.
69. By reason of their positions with the Company, the Individual Defendants
attended management and/or board of directors meetings and had access to internal Company
documents, reports and other information, including adverse non-public information concerning
the Company’s debt, services, financial condition, vendor rebate program, and future prospects.
As a result of the foregoing, the Individual Defendants were responsible for the truthfulness and
accuracy of the Company’s internal accounting, its public reports, SEC filings and press releases
described herein.
70. Each of the defendants knew or recklessly disregarded that the false and/or
misleading statements and omissions complained of herein would adversely affect the integrity
of the market for the Company’s stock and would cause the price of the Company’s common
stock to become artificially inflated. Each of the defendants acted knowingly or in such a
reckless manner as to constitute a fraud and deceit upon Lead Plaintiff and the other members of
the Class.
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1. Cees Van der Hoeven
71. Defendant Van der Hoeven served as Ahold’s Chief Executive Officer from 1993
until his resignation on February 24, 2003. Van der Hoeven’s compensation for years 2000,
2001 and 2002 was €1.969 million, €3.375 million, and €2.497 million, respectively. Van der
Hoeven received a €1.394 million bonus in 2002. Van der Hoeven joined Ahold in 1985 and
served on Ahold’s Executive Borad from 1985 until his departure. He served as liaison officer
for management development and organization, communications, legal affairs, global sourcing
and corporate secretariat. Van der Hoeven was also a member of the Supervisory Board of ABN
AMRO from May 7, 1997 until April 29, 2003.
72. Van der Hoeven was a direct and substantial participant in the fraud.
73. Van der Hoeven signed the following documents which the Company filed with
the SEC during the Class Period: the January 29, 1999 Form F-3 Registration Statement; the
April 12, 1999 Form 20-F; the May 4, 1999 Form 6-K; the May 20, 1999 Amendment No. 2 to
Schedule 14D-1 – Tender Offer for Supermarkets General Holdings Corp.; the June 8, 1999
Form F-3 & Form S-3; the April 12, 2000 Form 20-F; the September 13, 2000 Form 6-K; the
September 25, 2000 Form 6-K; the October 12, 2000 Form 6-K; the October 12, 2000 Form 6-K;
the October 12, 2000 Form 6-K; the December 4, 2000 Form 6-K; the December 4, 2000 Form
6-K; the December 14, 2000 Form 6-K; the December 14, 2000 Form 6-K; the December 14,
2000 Form 6-K; the December 14, 2000 Form 6-K; the December 14, 2000 Form 6-K; the
December 14, 2000 Form 6-K; the December 15, 2000 Form 6-K; the December 15, 2000 Form
6-K; the December 15, 2000 Form 6-K; the December 22, 2000 Form 6-K; the December 29,
2000 Form F-3 & Form S-3; the January 3, 2001 Form 6-K; the January 9, 2001 Form 6-K; the
January 9, 2001 Form 6-K; the January 9, 2001 Form 6-K; the January 29, 2001 Form 6-K; the
February 21, 2001 Form 6-K; the March 12, 2001 Form 6-K; the March 12, 2001 Form 6-K; the
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April 4, 2001 Form 6-K; the April 9, 2001 Form 6-K; the April 9, 2001 Form 6-K; the April 27,
2001 Form 6-K; the May 10, 2001 Form 6-K; the May 18, 2001 Form 6-K; the May 21, 2001
Form 6-K; the May 21, 2001 Form 6-K; the May 21, 2001 Form 6-K; the July 2, 2001 Form 6-K;
the July 5, 2001 Form 6-K; the July 5, 2001 Form 6-K; the July 5, 2001 Form 6-K; the July 5,
2001 Form 6-K; the July 5, 2001 Form 6-K; the August 17, 2001 Form F-4 & S-4; the August
29, 2001 Form 6-K; the August 29, 2001 Form 6-K; the September 4, 2001 Form 6-K; the
September 4, 2001 Form 6-K; the September 10, 2001 Form 6-K; the September 10, 2001 Form
6-K; the January 11, 2002 Form 6-K; the January 3, 2002 Form 6-K; the April 9, 2002 Form 20-
F; the May 30, 2002 Form 6-K; the August 23, 2002 Form 6-K; the January 7, 2003 Form 6-K;
and the February 10, 2003 Form 6-K.
2. Michiel Meurs
74. Defendant Meurs served as Ahold’s Executive Vice President and Chief Financial
Officer from 1997 until his resignation on February 24, 2003, the final day of the Class Period.
Meurs’ compensation for years 2000, 2001 and 2002 was €1.392 million, €2.3 million, and
€1.827 million, respectively. In addition, Meurs received a €1.032 bonus for 2002. Meurs
joined Ahold in 1992, and served on the Corporation Executive Board of Ahold from 1997 until
his resignation on the last day of the Class Period, February 24, 2003. He was responsible for
the administration, finance, internal audit and business development of Ahold. He also served as
liaison officer for administration, finance and tax, internal audit, IT, strategy and planning.
75. Meurs was a direct and substantial participant in the fraud.
76. During his tenure at Ahold, Meurs held positions as Senior Vice President
Finance, Senior Vice President of Business Development, and Chief Financial Officer. Prior to
joining Ahold, Meurs worked as the Senior Vice President for ABN AMRO Bank in Rotterdam.
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Meurs is also a member of the supervisory boards of Van der Hoop Effectenbank N.V. and a
member of the Supervisory Board of Schuitema, N.V.
77. Defendant Meurs signed the following documents which the Company filed with
the SEC during the Class Period: the June 29, 1998 Amendment No. 6 to Schedule 14D-1 –
Tender Offer Statement for Giant Food Inc.; the July 15, 1998 Amendment No. 7 to Schedule
14D-1 – Tender Offer Statement for Giant Food Inc.; the July 31, 1998 Amendment No. 8 to
Schedule 14D-1 – Tender Offer Statement for Giant Food Inc.; the August 14, 1998 Amendment
No. 9 to Schedule 14D-1 – Tender Offer Statement for Giant Food Inc.; the September 8, 1998
Amendment No. 10 to Schedule 14D-1 – Tender Offer Statement for Giant Food Inc.; the
September 11, 1998 Amendment No. 11 to Schedule 14D-1 – Tender Offer Statement for Giant
Food Inc.; the September 17, 1998 Amendment No. 12 to Schedule 14D-1 – Tender Offer
Statement for Giant Food Inc.; the October 2, 1998 Amendment No. 13 to Schedule 14D-1 –
Tender Offer Statement for Giant Food Inc.; the October 20, 1998 Amendment No. 14 to
Schedule 14D-1 – Tender Offer Statement for Giant Food Inc.; the October 23, 1998
Amendment No. 15 to Schedule 14D-1 – Tender Offer Statement for Giant Food Inc.; the
January 29, 1999 Form F-3 Registration Statement; the June 8, 1999 Form F-3 & Form S-3; the
October 31, 2000 Form 6-K.; the November 14, 2000 Form 6-K; the December 28, 2000 Form
6-K; the December 29, 2000 Form F-3 & Form S-3; the March 5, 2001 Amendment No. 4 to
Schedule 13D for PeaPod, Inc.; the April 3, 2001 Amendment No. 5 to Schedule 13D of PeaPod,
Inc.; the July 30, 2001 Form 6-K; the July 16, 2001 Form 6-K; the July 16, 2001 Amendment
No. 6 to Schedule 13D – Peapod, Inc.; the August 17, 2001 Form F-4 & S-4; the August 29,
2001 Form 6-K; the September 19, 2001 Form 6-K; the September 21, 2001 Form 6-K; the
January 14, 2002 Form 6-K; the January 14, 2002 Form 6-K; the May 8, 2002 Form 6-K; the
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August 12, 2002 Form 6-K; the November 19, 2002 Form 6-K; the November 19, 2002 Form 6-
K; and the November 22, 2002 Form 6-K.
3. Henny de Ruiter
78. Defendant de Ruiter was Chairman of Ahold’s Supervisory Board from 1994 until
2003. In addition, at all relevant times, de Ruiter served on the Audit and Remuneration
Committee of the Supervisory Board. He was first appointed Chairman in 1994. De Ruiter is a
former Managing Director and also a member of the Supervisory Board of N.V. Koninklijke
Nederlansche Petroleum Maatschappij. In addition, he is a member of the Supervisory Boards of
AEGON N.V., de Beers N.V., Heineken N.V., Corus Group PLC, Vopak N.V., and Wolters
Kluwer N.V. He is also a member of the Executive Board of Shell Petroleum N.V. in The Hague
and a Director of the Shell Petroleum Company Ltd. in London. On September 17, 2003, the
Supervisory Board announced de Ruiter’s intention to resign as Chairman after the General
Meeting of Shareholders on November 26, 2003. At the General Meeting of Shareholders, de
Ruiter officially resigned as Chairman of the Supervisory Board. He was replaced by Karel
Vuursteen who became a member of Ahold’s Supervisory Board in 2002.
79. De Ruiter was a direct and substantial participant in the fraud.
4. Cor Boonstra
80. Defendant Boonstra served as a member of Ahold’s Supervisory Board from 2000
until his resignation for insider trading on September 3, 2001. Boonstra is a former Board
member and President of Sara Lee/DE and Sara Lee Corporation in the United States. Boonstra
served as a senior executive of Sara Lee during the same time period that defendants James L.
Miller and Mark Kaiser worked together for foodservice unit of Sara Lee in the United States.
He was also President of Royal Phillips Electronics and a member of the supervisory board at the
Technical University Eindhoven, Amstelland N.V., Atos-Origin, Sara Lee/DE N.V. and Hunter
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Douglas International N.V. On September 3, 2001, the Company announced that Boonstra
resigned after information indicated that Boonstra sold $289,603 worth of Ahold shares shortly
before the Company issued its financial results for the second quarter of 2000. As a result,
Boonstra was fined $155,000 by Dutch prosecutors.
81. Boonstra was a direct and substantial participant in the fraud.
5. James L. Miller
82. Defendant Miller served as the CEO of USF from 1994 until the Company forced
his resignation on May 13, 2003. In 1999, Miller received from USF total compensation worth
approximately $4.21 million. In addition in 1999, Miller received 382,054 stock option grants
with exercise prices between $18.60 and $24.00 equal to the price of USF common stock at the
time of the grant. Miller’s compensation for years 2001 and 2002 was €269,000 and €6.429
million respectively Miller received a €1.516 million bonus for 2002. Miller founded USF in
1989 and joined Ahold’s Executive Board on or about September 1, 2001. Miller also served as
USF’s Chairman of the Board of Directors, President and Chief Executive Officer since 1997.
At Ahold, he reported to Robert Tobin until April 9, 2001, when he reported to William J. Grize.
83. Miller was a direct and substantial participant in the fraud.
84. During Miller’s tenure as CEO of USF, USF reported increased earnings during
every quarter from 1996 to 2000, when USF was sold to Ahold. At the time that USF was sold
to Ahold, Miller informed Ahold and DT-LLP that USF’s internal controls were completely
inadequate to track vendor rebates and promotional allowances.
85. Miller served as CEO of USF during the Class Period during which USF
fraudulently recorded the vendor rebates that precipitated the Company’s announced $880
million restatement of earnings and causing the members of the Class to suffer billions of dollars
in losses.
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86. Defendant Miller signed the following documents that USF filed with the SEC
during the Class Period: the March 10, 1998 Form S-8; the April 23, 1998 Form S-3; the May 8,
1998 Form S-3; the July 24, 1998 Form S-3; the July 31, 1998 Form S-3; the September 23,
1998 Form 10-K; the November 19, 1998 Form S-3; the May 11, 1999 Form S-8; the June 22,
1999 Form S-3; the July 8, 1999 Form S-3; the August 10, 1998 Form S-3; the August 16, 1999
Form S-3; the September 30, 1999 Form 10-K for fiscal year ended July 3, 1999; the December
22, 1999 Form S-3; the December 29, 1999 Form S-3; and the March 13, 2000 Form S-3.
87. Miller substantially participated in the preparation of Ahold’s false financial
results as a member of Ahold’s Executive Board, in providing USF’s financial results to Ahold
for consolidation with Ahold’s results and dissemination to the public, and by providing public
comments, contained in Ahold press releases, concerning among other things, synergies
associated with USF’s acquisition of Alliant and PYA/Monarch.
6. Mark Kaiser
88. Defendant Kaiser served as a USF marketing manager and operated as Miller’s
right-hand man during the Class Period. Kaiser was elected Executive Vice President-Sales,
Marketing and Procurement of USF in January 1998. Previously, since 1993, he served as
USF’s Senior Vice President-Sales, Marketing and Procurement. Kaiser served as USF’s Vice
President-Sales and Marketing from 1989 to 1991 and as operating executive vice president for
sales, marketing and procurement from 1991 to 1993. Kaiser previously held a number of
positions at PYA/Monarch, Inc., a broadline foodservice distributor, including Vice President-
Sales, from 1979 to 1989. In 1999, Kaiser received $2.364 million in total compensation from
USF. Also in 1999, Kaiser received 181,446 stock option grants with exercise prices between
$18.60 and $24.00, equal to the price of USF common stock at the time of the grant. Kaiser
resigned on May 9, 2003.
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89. Kaiser was a direct and substantial participant in the fraud.
90. Kaiser created false financial records which he knew would be reported to Ahold
for consolidation with Ahold’s financial results and disseminated to the investing public.
91. In connection with Kaiser’s resignation, Ahold and Eustace attributed
responsibility for the admitted deliberate fraudulent scheme to artificially inflate USF’s income
from vendor rebates and promotional allowances to Kaiser and to Lee. Kaiser played a central
role in the fraudulent scheme as detailed herein, including his authorship of at least two letters in
which Kaiser informed suppliers that they did not have to pay as much in rebates as they had
previously agreed, effectively creating two sets of books.
92. Defendant Kaiser signed the following USF documents filed with the SEC during
the Class Period; the March 10, 1998 Form S-8; the April 23, 1998 Form S-3; the May 8, 1998
Form S-3; the July 24, 1998 Form S-3; the July 31, 1998 Form S-3; the September 23, 1998
Form 10-K; the November 19, 1998 Form S-3; the May 11, 1999 Form S-8; the June 22, 1999
Form S-3; the July 8, 1999 Form S-3; the August 10, 1998 Form S-3; the August 16, 1999 Form
S-3; the September 30, 1999 Form 10-K for fiscal year ended July 3, 1999; the December 22,
1999 Form S-3; the December 29, 1999 Form S-3; and the March 13, 2000 Form S-3.
7. Michael Resnick
Defendant Resnick joined USF in October 2000, serving in several financial positions at
the firm. He was appointed CFO of USF in 2001. As CFO of USF, Resnick reviewed and
approved USF’s Class Period financial reporting and participated in the preparation of USF’s
and Ahold’s financial reports and statements. Ahold announced the resignation of Resnick on
May 14, 2003.
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8. Tim Lee
93. Defendant Lee served as a USF purchasing executive and Kaiser’s right-hand
man during the Class Period. Lee resigned from the Company on May 9, 2003. As part of the
announcement of Lee’s resignation, Ahold and the Company’s interim Chief Financial Officer,
Eustace, attributed responsibility for the admitted deliberate fraudulent scheme to artificially
inflate USF’s income from vendor rebates and promotional allowances to Lee and Kaiser. Ahold
implicated Lee in the fraud at USF, claiming that he acted in an effort to increase his annual
bonus.
94. Lee was a direct and substantial participant in the fraud.
9. Robert G. Tobin
95. Defendant Tobin joined Ahold when the Company acquired Stop & Shop, Inc. in
1996. Tobin was formerly the President and CEO of Stop & Shop, Inc. Tobin was subsequently
appointed to Ahold’s Executive Borad in 1998, during which time he was responsible for
Ahold’s United States operations. Tobin also served as President and CEO of Ahold USA
through September 1, 2001. On that date, Tobin resigned from Ahold’s Executive Borad, and
was appointed to Ahold’s Supervisory Board. In May 2003, Tobin was temporarily appointed at
interim Chief Executive Officer of USF. On November 1, 2003, Lawrence Benjamin was
appointed CEO of USF, replacing Tobin. Benjamin previously was CEO of NutraSweet Co.
96. As a member of Ahold’s Executive Borad between 1998 and 2001, Tobin
reported directly to Defendant Van der Hoeven. Defendant Miller reported directly to Tobin in
his capacity as the Supervisory Board Member responsible for United States operations. Tobin
was purportedly instrumental in the 1998 acquisition of Giant Foods, and under his leadership
Ahold USA grew from a supermarket group with $14.3 billion in sales, to a multi-channel food
provider with annual sales of over $30 billion. On February 16, 2004, the Company announced
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that Tobin would step down as a Supervisory Board Member in June of 2004, as he would not
meet the independence criteria of the Tabaksblat code due to his previous employment with
affiliates of Ahold.
97. Tobin signed the following documents filed with the SEC during the Class Period:
January 29, 1999 Form S-3; March 15, 1999 Form 14D-1; June 6, 1999 Form F-3; December 29,
2000 Form F-3 and S-3; and the August 17, 2001 Form F-4 and S-4.
10. William J. Grize
98. Defendant Grize was appointed to Ahold’s Executive Borad on September 1,
2001. Grize also served as President and CEO of Ahold USA beginning September 1, 2001. He
continues in that capacity today. In addition, Grize is a liaison officer for Ahold’s retail trade
operations in the United States. In 2002, Grize earned in total compensation € 3.94 million,
including a €2.359 million bonus.
99. As Executive Borad Member, all of Ahold USA retail operating companies and
support groups reported to Grize. In addition, Grize signed the following documents filed with
the SEC during the Class Period; the August 17, 2001 Form F-4 and S-4, and the Form S-8.
11. Roland Fahlin
100. Defendant Fahlin served from 2001 until the present as a member of the
Supervisory Board. Fahlin was former Chairman and President of ICA AB in Sweden. Fahlin
was a signatory to the May 2, 2000 and May 5, 2000 “Side Letters” concerning Ahold’s joint
venture with ICA.
101. Fahlin is also Chairman of the IFL/Swedish Institute of Management and
Chairman and owner of Roland Fahlin AB. In addition, he is a Board member of SJ AB
(Swedish State Railroad. Co.), a Board member of the Executive Board of Shell Petroleum N.V.
in The Hague and a Director of the Shell Petroleum Company Limited in London.
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102. On February 16, 2004, the Company announced that Fahlin would step down as a
Supervisory Board Member in June of 2004, as he would not meet the independence criteria of
the Tabaksblat code due to his previous employment with affiliates of Ahold.
103. In addition, Fahlin signed the December 29, 2000 Form F-3 and S-3.
12. Jan G. Andreae
104. Defendant Andreae joined Ahold in 1980, holding various positions at the
Company, including President of Albert Heijn. Andreae was from 1997 until the present, a
member of Ahold’s Executive Borad. As a Executive Borad Member, Andreae was responsible
for Ahold’s European operations. Andreae’s total compensation for years 2000 and 2001 was
€1.969 million and €3.374 million, respectively. In 2002, Andreae’s total compensation was
€1.858 million, including a €1.032 million bonus. Andreae was a signatory to the May 2, 2000
and May 5, 2000 “Side Letters” concerning Ahold’s joint venture with ICA. Andreae, in
addition to his duties as an Ahold Executive Borad member, was also Co-Vice Chairman of the
ICA joint venture. Also, Andreae signed the following documents filed with the SEC during the
Class Period: January 29, 1999 Form S-3; June 6, 1999 Form F-3; May 18, 2001 Form 6-K;
August 17, 2001 Form F-4 and S-4; and October 1, 2001 Form S-8.
105. Mr. Andreae is also the President of the Supervisory Board of SVM (foundation
for packaging and environment), Chairman of Raad NDH (Dutch Retail Council), President of
ERRT (European Retail Round Table), a member of the Supervisory Council of the Hogeschool
Amsterdam, and a board member of CIES and The Food Business Forum.
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F. THE UNDERWRITER DEFENDANTS
106. The Underwriter Defendants were closely involved with Ahold’s business,
activities as underwriters, commercial lenders, financial advisors, investment bankers, and
analysts. In this regard, the Underwriter Defendants were enriched by spectacular fees
(including the fees generated by underwriting services as reflected in the chart below).
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BanksShares/ Conv. Notes Amount Fee/ unit Underwriting Fees
Greenshoe Total
Pro-rata Greenshoe Breakout Greenshoe Fees Total Fees
ABN AMRO Incorporated 762,500.00$ Goldman Sachs International 75,956,313.69$
Merrill Lynch International 47,749,510.22$ ING Bank 9,448,354.06$
Kempen & Co. 8,770,607.45$ Rabo Securities 9,448,354.03$ JP Morgan 6,235,000.00$ Morgan Stanley Dean Witter 4,206,781.83$ Deutsche Bank AG London 2,437,510.83$ MeesPierson N.V. 1,863,000.00$ Salomon Brothers Int. Ltd. 2,437,510.83$ UBS AG 2,841,781.83$ Chase Securities 3,050,000.00$ 250,401,038.47$
1 The underwriting fees in this chart include only those fees applicable to the transactions shown. The chart does not include other fees that Ahold paid to the Underwriter Defendants for these and other transactions including, but not limited to: advisory fees, loan syndication fees, interest fees, discretionary underwriting fees, agency fees, administrative fees, cash management fees, etc.
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109. Defendant Van der Hoeven served as a member of the Supervisory Board of ABN
AMRO Bank N.V. and Ahold Supervisory Board member R.J. Nelissen served as a member of ABN
AMRO Holding’s management board and member of ABN AMRO Bank N.V. Supervisory Board.
110. During the Class Period, ABN AMRO acted as underwriter for offerings of Ahold
securities, including, but not limited to:
Date Type of Offering Total Underwritten by ABN AMRO
Estimated Underwriting Fees
3/31/1998 Common Shares or ADRs 13,800,000 $14,904,000 9/24/1998 Common Shares or ADRs 15,525,000 $12,128,130 9/24/1998 3% Conv. Sub. Notes NLG 448,500,000 $5,469,512 23-Apr-99 2009 Notes $50,000,000 $325,000
23-Apr-99 2029 Notes $50,000,000 $437,500 15-May-00 Common Shares or ADRs 32,085,000 $21,346,151
15-May-00 4% Conv. Sub. Notes Euro 276,000,000 $6,305,401
9/5/2001 Common Shares or ADRs 24,150,000 $15,040,620
Total $75,956,314
As an underwriter for the foregoing offerings, ABN AMRO was provided access to virtually all of
Ahold’s internal financial documents. ABN AMRO reaped more than $75 million in underwriting fees
in connection with underwriting Ahold securities.
2. Goldman Sachs Internationa l
111. Defendant Goldman Sachs Group, Inc., a Delaware corporation, is an integrated financial
services institution that, through its subsidiaries and divisions (such as Goldman, Sachs & Co. and
Goldman Sachs International (collectively, “Goldman” or “Goldman Sachs”)), provides commercial and
investment banking services and advisory services, including acting as underwriters in the sale of
corporate securities and it performed such services for Ahold as described in greater detail in this
Complaint. In return, Goldman Sachs received huge underwriting and consulting fees and other
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payments. For example, during the Class Period Goldman Sachs received more than $75 million in
underwriting fees alone.
112. During the Class Period, Goldman Sachs acted as an underwriter for offerings of Ahold
securities including, but not limited to:
Date Type of Offering Total Underwritten by Goldman
Estimated Underwriting Fees
3/31/98 Common Shares or ADRs 13,800,000 $14,904,000 9/24/98 Common Shares or ADRs 15,525,000 $12,128,130 9/24/98 3% Conv. Sub. Notes NLG 448,500,000 $5,469,512
4/23/99 2009 Notes $50,000,000 $325,000
4/23/99 2029 Notes $50,000,000 $437,500
5/15/00 Common Shares or ADRs 32,085,000 $21,346,151
5/15/00 4% Conv. Sub. Notes Euro 276,000,000 $6,305,401
9/5/01 Common Shares or ADRs 24,150,000 $15,040,620
Total $75,956,314
113. In addition to providing the foregoing services to Ahold during the Class Period,
Goldman Sachs also provided investment banking services to USF. Specifically, Goldman Sachs served
as an underwriter in connection with USF’s sale of 7,808,898 shares of common stock in March of 1999.
The total proceeds from that offering were $323,171,244.
114. In addition, Goldman Sachs served as financial advisor for USF in connection with its
purchase by Ahold in March of 2000. Goldman delivered an opinion to the Board of Directors of USF,
dated March 7, 2000, stating that the offering price to be received by holders of USF securities in
connection with the sale was fair from a financial point of view to such holders.
3. Merrill Lynch International
115. Defendant Merrill Lynch & Co., Inc., a Delaware corporation, is an integrated financial
services institution that, through its subsidiaries and divisions (such as Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Merrill Lynch International (collectively, “Merrill Lynch”)), provides
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commercial and investment banking services and advisory services, including acting as underwriters in
the sale of corporate securities and providing investment analysis and opinions on public companies.
During the Class Period, Merrill Lynch received more than $47 million in underwriting fees alone.
116. During the Class Period, Merrill Lynch acted as underwriter for the following offerings
of Ahold securities:
Date Type of Offering Total Underwritten by Merrill Lynch
Estimated Underwriting Fees
9/24/98 Common Shares or ADRs 4,140,000 $3,234,168 9/24/98 3% Conv. Sub. Notes NLG 149,500,000 $1,823,171
5/15/00 Common Shares or ADRs 32,085,000 $21,346,151
5/15/00 4% Conv. Sub. Notes Euro 276,000,000 $6,305,401
9/5/01 Common Shares or ADRs 24,150,000 $15,040,620
Total $47,749,510
4. ING Bank N.V.
117. Defendant ING Bank, is a wholly owned subsidiary of ING Groep N.V., which is an
integrated financial services institution that through its subsidiaries and divisions (such as ING Bank
N.V. and ING U.S. Financial Services), provides commercial and investment banking services and
advisory services, including acting as an underwriter in the sale of corporate securities and providing
investment analysis and opinions on public companies and it performs such services for Ahold as
described in greater detail in this Complaint. In return, ING received huge underwriting and consulting
fees and other payments. During the Class Period, ING received more than $9 million in underwriting
fees alone. In this regard, Karel Vuursteen, a member of ING Bank Groep’s Advisory Council and a
member of the ING’s Supervisory Board, and is the current Chairman of Ahold’s Supervisory Board.
Vuursteen became Cha irman of Ahold’s Supervisory Board on November 26, 2003. On February 16,
2004 in connection announcing its adoption of new corporate governance rules, Ahold announced that
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Vuursteen would resign some of his board memberships in other companies to comply with these new
rules.
118. During the Class Period, ING Bank acted as underwriter for offerings of Ahold securities
including, but not limited to:
Date Type of Offering Total Underwritten
by ING Estimated
Underwriting Fees 3/31/98 Common Shares or ADRs 1,725,000 $1,863,000 9/24/98 Common Shares or ADRs 2,587,500 $2,021,355 9/24/98 3% Conv. Sub. Notes NLG 67,275,000 $820,427
5/15/00 Common Shares or ADRs 3,565,000 $2,371,795
5/15/00 4% Conv. Sub. Notes Euro 30,666,667 $700,600
9/5/01 Common Shares or ADRs 2,683,330 $1,671,178
Total $9,448,354
5. Rabo Securities N.V.
119. Defendant Rabobank, is a part of Rabobank International which is a wholly owned
subsidiary of Rabobank Nederland. Rabobank Nederland, provides commercial and investment banking
services and advisory services, including acting as underwriters in the sale of corporate securities and
providing investment analysis and opinions on public companies and it performed such services for
Ahold. In return, during the Class Period Rabo Securities received more than $9 million in underwriting
fees alone.
120. During the Class Period, Rabo Securities acted as underwriter for offerings of Ahold
securities, including, but not limited to:
Date Type of Offering Total Offered by Rabobank
Estimated Underwriting Fees
3/31/98 Common Shares or ADRs 1,725,000 $1,863,000 9/24/98 Common Shares or ADRs 2,587,500 $2,021,355 9/24/98 3% Conv. Sub. Notes NLG 67,275,000 $820,427
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5/15/00 Common Shares or ADRs 3,565,000 $2,371,795
5/15/00 4% Conv. Sub. Notes Euro 30,666,666 $700,600
9/5/01 Common Shares or ADRs 2,683,330 $1,671,178
Total $9,448,354
121. In addition to participating as an underwriter in the offerings of Ahold securities,
discussed above, Rabo Securities also issued its own securities during the Class Period which were
convertible into Ahold common stock. Specifically, Rabobank issued the following convertible
securities:
Date Issuer Amount Type Coupon Maturity
1/11/00 Rabo Securities
EURO 50 million
Reverse Exchangeable into Ahold Common Shares
9.25% 1/24/02
3/6/01 Rabo Securities
EURO 25 million
Reverse Exchangeable into Ahold Common Shares
10% 3/12/03
3/8/02 Rabo Securities
EURO 25 million
Callable Reverse Exchangeable into Ahold Common Shares
1% 3/28/08
122. The value of each of these securities was dependent upon the market price of Ahold
common shares. To the extent the price of Ahold common shares decreased in value, the price of
Rabobank’s securities would also decrease in value
123. During the Class Period, Rabobank Nederland served as one of Ahold’s primary lenders,
and Robeco Group (another subsidiary of Rabobank Nederland) owned a interest in Ahold until at least
February 2003.
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6. Kempen & Co. N.V.
124. Defendant Kempen & Co. N.V., a leading Dutch Merchant Bank, is an integrated
financial services institution that, through its subsidiaries and divisions (such as Kempen & Co.
Corporate Finance and Kempen & Co Securities (collectively, “Kempen”)), provides commercial and
investment banking services and advisory services, including acting as underwriters in the sale of
corporate securities and providing investment analysis and opinions on public companies which services
it provided for Ahold as described in greater detail in this Complaint. In return, Kempen received huge
underwriting and consulting fees and other payments. For example, during the Class Period, Kempen
received almost $9 million in underwriting fees.
125. During the Class Period, Kempen acted as an underwriter for the following offerings of
Ahold securities:
Date Type of Offering Total Offered by
Kempen & Co Estimated
Underwriting Fees 3/31/1998 Common Shares or ADRs 1,725,000 $1,863,000 9/24/1998 Common Shares or ADRs 2,070,000 $1,617,084 9/24/1998 3% Conv. Sub. Notes NLG 44,850,000 $546,951
5/15/00 Common Shares or ADRs 3,565,000 $2,371,795
5/15/00 4% Conv. Sub. Notes Euro 30,666,667 $700,600
9/5/01 Common Shares or ADRs 2,683,330 $1,671,178
Total $8,770,607
IV. SUMMARY OF AHOLD’S BUSINESS AND GROWTH
126. From its modest beginning as the family-owned grocery store, Albert Heijn, in Zaandam,
The Netherlands in 1887, Ahold grew through an aggressive and reckless expansion program under the
direction of defendant Van der Hoeven, whose stated mission was for Ahold to become “the best and
most successful food provider in the world.” In fulfilling Van der Hoeven’s mission, Ahold expended
more than $19 billion on acquisitions between 1996 and 2003. The Company’s current Chief Executive
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Officer, Anders Moberg (“Moberg”), has since admitted, among other things, that Ahold’s demise was
the result of the fact that “[t]he company has grown too fast through acquisitions with insufficient
integration.”
127. Ahold had 931 million shares of common stock outstanding at the end of the Class
Period. Ahold common stock traded at all relevant times on the Euronext exchanges of Amsterdam,
Paris, and Brussels (symbol: AHLN), and Ahold has a secondary listing on the Swiss exchange in
Zurich (symbol: AHO). Ahold’s ADRs traded at all relevant times on the New York Stock Exchange
(symbol: AHO). Ahold’s operations are located primarily in the United States. In fiscal 2002, Ahold’s
net sales in the United States accounted for 74% of the Company’s total net sales, while net sales in
Europe accounted for 22% of the Company’s total net sales. Ahold’s operations in Latin America
accounted for 3% of total net sales in fiscal 2002, and operations in the Asia Pacific region accounted
for 1% of total net sales in the same year. Ahold’s food service activities accounted for 31% of the
Company’s total net sales for fiscal 2002.
128. Ahold’s principal business is retail trade, which accounted for 69% of the Company’s
total net sales in fiscal 2002. Retail trade includes sales to consumers at Ahold’s own stores, as well as
sales to the Company’s franchise and associated stores. Ahold has retail trade operations in the United
States, Europe, Latin America and Asia Pacific. The Company’s retail business consists of Ahold’s
retail chain sales, sales to franchise stores and sales to associated stores.
129. As a result of its massive expansion strategy at the end of fiscal 2002, Ahold owned the
following companies:
United States Operations • Stop & Shop Supermarket Company (Quincy, MA.) • Giant Food, Inc. (Landover, MD.) • Giant Food, Inc. (Carlisle, PA.) • Tops Markets, LLC (Buffalo, N.Y.)
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• Bi-Lo, LLC (Mauldin, S.C.) • Bruno’s Supermarkets, Inc. (Birmingham, AL.) • Peapod, Inc. (Chicago, IL.) • U.S. Foodservice (Washington, D.C. & Baltimore, MD.) • PYA/Monarch, LLC (Greenville, S.C.) • Alliant Exchange, Inc. • Allen Foods, Inc. • Ahold Real Properties, LLC • Ahold Real Estate Company • American Sales Co., Inc. • Ahold U.S.A. Holdings, Inc. (VA.) • Ahold U.S.A. LLC (DE.) • Ahold Finance Services, LLC (PA.) • Ahold Financial Services, LLC (PA.) • Ahold Information Services, Inc. (S.C.) • Croesus, Inc. (DE.) • Ahold U.S.A. Support Services, Inc. (VA.) European Operations • Albert Heijn B.V. (The Netherlands) • Schuitema (73.2%) (The Netherlands) • Specialty Stores (The Netherlands) • Deli XL (The Netherlands) • Ahold Czech Republic A.S. (99%) (Czech Republic) • Ahold Polska (Poland) • Ahold Slovakia (Slovak Republic) • Ahold Supermercados (Spain) • Bert Muller B.V. (The Netherlands) • Deli XL N.V./S.A. (Belgium) • Albert Heijn Franchising B.V. (The Netherlands) • Gall & Gall B.V. (The Netherlands) • Etos B.V. (The Netherlands) • Jamin Winkelbedrijf B.V. (The Netherlands) • De Tuinen B.V. (The Netherlands) • Eemburg C.V. (82%) (The Netherlands) • Euronova Holding A.S. (Czech Republic) • Ahold Retail Slovakia, k.s. (Slovak Republic) • Ahold Polska Sp.z.o.o. (Poland) • Ahold Coffee Company B.V. (The Netherlands) • Ahold European Sourcing B.V. (The Netherlands) • Ahold Begie N.V. (Belgium) • Ahold Finance S. A. (Switzerland) • Ahold Retail Services AG (Switzerland)
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• Ahold Global Commodity Trading AG (Switzerland) • Swallow Retail Operations (The Netherlands) • Jeronimo Martins Retail Services AG (Switzerland) • ICA Ahold AB (50%) (Sweden) • ICA Handlarnas AB (Sweden) • Hakon Gruppen AS (Norway) • ICA Baltic AB (Sweden) • ICA Danmark A/S (Denmark) • ICA Menyforetagen AB (Sweden) • Statoil Detaljhandel Skandinavia AS (50%) (Norway) • Accounting Plaza BV (40%) (The Netherlands) • Luis Paiz S.A. (50%) (Spain) • Bodegas Williams & Humbert S.L. (Spain) • Pingo Doce – Distribuicao a Retalho, SGPS S.A. (Portugal) • Feira Nova – Hipermerados, S.A. (Portugal) • Funchalgest, SGPS S.A. (50%) (Portugal) Latin America Operations • Bompreço G. Barbosa & Hipercard (Brazil) • Diso S.A. (Argentina) • Santa Isabel, S.A. (Chile, Peru and Paraguay) • Bompreço S.A. Supermercados do Nordeste (Brazil) • Bompreço Bahia S.A. (Brazil) • Hipercard Administradora de Cartao de Credito Ltda. (Brazil) • Disco Ahold International Holdings N.V. (Curacao) • Supermercado Santa Isabel S.A. (Peru) • Supermercado Stock S.A. (Paraguay) • Ahold Insurance N.V. (Curacao) • Ahold Investement N.V. (Curacao) • Ahold Finance Company, N.V. (Curacao) • JMR – Gestao de Empresas de retalho, SGPS S.A. (49%)
(Portugal) • Gestiretalho – Gestao e Consultoria para a Distribuicao a Retalho,
SGPS S.A. (Portugal) • Paiz Ahold N.V. (50%) (Curacao) • CARHCO N.V. (67%) (Curacao) • La Fragua S.A. (83%) (Guatamala) • Operado del Oriente S.A. de C.V. (Honduras) • Operado del Oriente S.A. de C.V. (El Salvador) • Corporacion de Supermercados Unidos, S.A. (Costa Rica) • Corporacion de Companias Agroindustriales (Costa Rica) • Comercial Sacuanjoche, S.A. (Nicaragua) • Comercial Brassavola, S.A. (Honduras)
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Asia Pacific Operations • Ahold Kuck (Malaysia) • CRC Ahold (Thailand) • PSP Group (Indonesia) • TOPS Retail (Malaysia) • PT Putra Serasi Pioneerindo (Indonesia)
130. A substantial portion of these companies were acquired during the Class Period, and as
illustrated by the following charts, a strong stock price was essential to Ahold’s growth strategy.
Date: April 10, 2000Company: USF Amount: $3.6 billion, including the assumption of approximately $925 in debt.Financial Advisor: Merrill Lynch & Co., which received a $10.5 million fee.Legal advisors: Fried Frank and White & Case Auditor: Deloitte & Touche. Seller's Financial Advisor: Goldman Sachs & CoSeller's Legal Advisor: Hogan & Hartson, Simpson Thacher & BartlettSeller's Account Advisor: KPMG Peat Marwick
Date: June 30, 2000Company: PeapodAmount: $73 millionLegal advisor: White & Case
Date: 12/27Company: SuperdiploAmount: € 1266Ahold Financial Advisor: JP Morgan & Co.Seller Financial Advisor: Banco Santander Central Hispano, and Morgan Stanley Dean Witter
Date: 12/5Company: PYA/MonarchAmount: $1.57 billion in cashAhold’s Legal Advisor: White & Case Auditors: Deloitte & oucheSeller's Financial Advisor: Goldman Sachs & CoSeller's Legal Advisor: Skadden Arps Slate Meagher & Flom, and Kirkland & Ellis
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Date: Nov 2001Company: Alliant ExchangeAmount: $1.5 billion in cash and $436 million of assumed debt and off balance sheet securitized receivables of $325 millionFinancial Advisor: Dresdner Kleinwort Wasserstein and Merrill Lynch & CoLegal Advisor: White & Case Auditor: Deloitte & ToucheSeller's Legal Advisor: Debevoise & Plimpton
Date: Dec 2001Company:Bompreço Amount: € 67
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A. United States Acquisitions
1. Retail Acquisitions
131. On October 28, 1998, Ahold acquired Giant Food (“Giant Landover”), based in
Landover, Maryland. Giant Landover operated a chain of 186 retail stores selling food, healthcare items
and general merchandise in Maryland, Virginia, Delaware, New Jersey and the District of Columbia.
Giant-Landover also operates four free-standing drugstores. It was acquired for $2.7 billion in cash.
Ahold’s financial advisor for the transaction was Merrill Lynch & Co.
132. On April 19, 2000, Ahold acquired Golden Gallon, which operated 134 convenience
stores and gas stations in Southeastern U.S. It was integrated into BI-LO, LLC.
133. On June 30, 2000, Ahold acquired convertible preferred stock of the Chicago, Illinois on-
line grocer, Peapod, Inc. for approximately $73 million tha t was convertible or exercisable into shares of
157. Ahold acquired the VIX Drug store chain on February 5, 1999 for $32.5 million.
158. On February 22, 1999, Ahold acquired Castillo de Bario (Malaga, Andalusia) and
Supermercados Guerrero S.A. (Granada, Andalusia) (Spanish Supermarkets) for $23.6 million.
159. On September 7, 1999, Ahold acquired two supermarket chains in southern Spain,
Mercasol (six supermarkets) and Las Postas (four supermarkets).
160. On November 1, 1999, Ahold acquired five food retail outlets in Granada, Spain.
161. On January 1, 2000, Ahold acquired Kampio Markio, S.L. in Spain (Catalonian
supermarket chain) for approximately €55 million. This Company was integrated into Ahold
Supermercados.
162. In December 2000, Ahold completed a public tender offer for 97.64% of the outstanding
shares of the Spanish food retailer, Superdiplo, S.A. As a result, on January 3, 2001, Ahold exchanged
36,849,875 newly issued Ahold common shares, with a value of €1,266,000 for 49,797,129 Superdiplo
shares, representing 97.64% of the outstanding share capital in Superdiplo. The value of the 36,849,875
Ahold common shares issued was €34.36 per share, based on the market price of Ahold’s common
shares on December 29, 2000. During fiscal 2001 and 2002 Ahold increased its shareholdings to
99.97% through the exercise of stock options rights and tender offers.
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C. Central American Acquisitions and Joint Ventures
163. In December 1999, Ahold established Paiz Ahold, a 50/50 partnership with a company
controlled by the Paiz family. Paiz Ahold controlled an 80.5% stake in La Fragua S.A., a supermarket
and hypermarket company in Guatemala with a presence in El Salvador and Honduras. In 2001, Paiz
Ahold entered into an agreement to establish CARHCO, a joint venture with CSU International
(“CSU”), a supermarket and hypermarket operator in Costa Rica, Nicaragua and Honduras. CARHCO
was established in January 2002.
D. South America Acquisitions and Joint Ventures
164. In December 1996, Ahold acquired 38.9% of the common shares (representing 50% of
voting shares) of Bompreço (Brazil) (a food retailer with 50 retail stores in Northeastern Brazil) for
approximately BRL 285 million (NLG 475 million) in cash.
165. In January 1998, Ahold established a 50/50 joint venture. Disco Ahold International
Holdings N.V. (“DAIH”) with Velox Retail Holdings (“VRH”), a subsidiary of the Velox Group. Ahold
acquired its 50% stake in DAIH for $368 million (€408 million). In July 2001, Ahold acquired
additional shares in DAIH from its joint venture partner VRH for approximately $75 million (€86
million), increasing its percentage in DAIH to 55.9%. At the end of fiscal 2002, DAIH operated over
350 supermarkets in four Latin American countries: Argentina, Chile, Peru and Paraguay. Until July
2002, VRH was the Company’s joint venture partner in DAIH. As a result of VRH’s default on certain
indebtedness, Ahold was required to repay certain debts of VRH and received during July and August
2002, substantially all of VRH’s shares in DAIH (44.1%) for a total cash consideration of approximately
$490 million (€453 million), thereby assuming full ownership of DAIH.
166. On May 1, 1999, Ahold acquired Petipreco Supermercados (Brazil).
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167. In May, 1999, DAIH acquired 75 stores from Supamer and Gonzalez (Argentinian
supermarkets).
168. In 1999, Ahold acquired the Americanes and Pinocchio Supermarket chains (Argentina).
169. On January 1, 2000, Disco acquired Supermercados Ekono, S.A. in Argentina (10 large
supermarkets in Buenos Aires) for $151.5 million (€145 million).
170. In June 2000, Ahold acquired the remaining voting rights from the other shareholders of
Bompreço in Brazil. Ahold paid approximately €492 million for the portion of Bompreço that it did not
already own as of the end of fiscal 1999. In December 2001, Ahold completed a public tender offer to
delist Bompreço and to acquire the preference shares which were still outstanding. Total consideration
paid for these preference shares amounted to €67 million.
171. In 2000, Ahold acquired Supermercados Agas S.A. in Chile. It was integrated into Santa
Isabel.
172. In July 2001, Ahold acquired five hypermarkets from Carrefour (Brazil).
173. In January 2002, Ahold, through its wholly-owned subsidiary BR Participacoes e
Empreendimontes SA, acquired 32 hypermarkets, supermarkets, and related assets in Brazil, from G.
Barbosa for €122 million in cash.
174. On October 4, 2002, Ahold, through its wholly-owned subsidiaries Gestion, Rentas e
Inversiones Apoquindo Limitada and DAIH, completed a tender offer for the outstanding shares of
common stock and American Depository Shares of Chilean supermarket company Santa Isabel S.A.
(“Santa Isabel”). In the cash tender offer, 190 Chilean Pesos was offered per Santa Isabel share for a
total amount of €41 million. Ahold’s ownership in Santa Isabel increased from 414,393,680 shares, or
approximately 70.2% of the total outstanding shares, to 572,525,100 shares, or approximately 97% of
the total outstanding shares.
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E. Asia Pacific Acquisitions
1. Malaysia
175. In 1996, Ahold Kuck Malaysia acquired a 60% interest in a partnership with Kuck
Group. In 1998, it acquired the Parks and Looking Good store chains and became 100% owner of
Ahold’s Malaysian operations in December 2000.
2. Thailand
176. In 1997, CRC Ahold Thailand entered into a partnership with Central Robinson Group in
which Ahold had a 49% interest. Ahold acquired 100% ownership of the partnership in 1998, subject to
repurchase options of up to 50% of the outstanding shares granted to the Central Robinson Group.
3. Indonesia
177. PT Putra Serasi Pioneerindo (Tops) was partially acquired through an agreement with
PSP Group in Indonesia in 1996. It was fully acquired in 2002.
178. Ahold acquired 70% of PSP Group (Indonesia) in July 1997 and the remaining shares in
September 2002 for €2 in cash.
F. Scandinavian Acquisitions and Joint Ventures
179. In April 2000, Royal Ahold acquired a 50% partnership interest in the ICA Group, the
largest Scandinavian food retailer, for approximately €1.8 billion in cash.
180. In August 2001, ICA entered into a 50/50 joint venture with Dansk Supermarked to
develop and operate discount stores and hypermarkets in Sweden and Norway.
181. To finance these acquisitions, it was necessary for Ahold to continuously access the
capital markets.
V. AHOLD’S FEBRUARY 24, 2003 ANNOUNCEMENT
182. On February 24, 2003, Ahold disclosed a shocking series of fraudulent accounting
irregularities, financial misstatements, and suspicious transactions that the Company then anticipated
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would require it to erase more than $500 million from its 2001 and 2002 earnings (the “February 24,
2003 Announcement”).
183. The Company announced that net earnings and earnings per share under Dutch GAAP
and U.S. GAAP would be significantly lower than previously indicated for the year ended December 31,
2002. At the end of trading on February 24, 2003, the price of Ahold common stock plummeted over
63% to close at 3.59 Euros per share, on extremely heavy trading volume. Similarly, Ahold ADRs lost a
staggering 61% of their value on February 24, 2003 to close at $4.16. As a result of Ahold’s fraudulent
scheme that resulted in the Company’s February 24, 2003 Announcement, the Class members have
suffered damages in the billions of dollars.
184. In pertinent part, the Company’s press release containing the February 24, 2003
Announcement informed investors:
Zaandam, The Netherlands, February 24 2003 –
Ahold announces that net earnings and earnings per share under Dutch GAAP and U.S. GAAP will be significantly lower than previously indicated for the year ended 29 December 2002. This is due primarily to overstatements of income related to promotional allowance programs at U.S. Foodservice which are still being investigated. Based on information obtained to date, the company believes that operating earnings for fiscal year 2001 and expected operating earnings for fiscal year 2002 have been overstated by an amount that the company believes may exceed US $ 500 mln, with the majority of such amount occurring in the expected operating earnings for fiscal year 2002. The overstatements of the income discovered to date will require the restatement of Ahold’s financial statements for fiscal year 2001 and the first three quarters of fiscal year 2002. In addition, the company announces that ICA Ahold, Jeronimo Martins Retail and Disco Ahold International Holdings will be proportionally consolidated under Dutch GAAP and U.S. GAAP, commencing with fiscal year 2002. The company will also restate its historical financial statements so as to proportionally consolidate under Dutch GAAP and U.S. GAAP ICA Ahold, Jeronimo Martins Retail, and Disco Ahold International Holdings. In addition, the historical financial statements will be restated to proportionally consolidate Bompreço and Paiz Ahold for the
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periods during which they were 50% owned by the company. The company also announces that it has been investigating, through forensic accountants, the legality of certain transactions and the accounting treatment thereof at its Argentine subsidiary Disco. Because the investigation is ongoing, Ahold cannot currently quantify the full financial impact of these matters. The Supervisory Board of Ahold announces that, in view of the above, Ahold President and Chief Executive Officer, Cees Van der Hoeven, and Chief Financial Officer, Michael Meurs, will resign. They will stay on for an appropriate period of time in order to effect an orderly transition of affairs. The Chairman of the Supervisory Board, Henny de Ruiter, has been designated to be responsible for the daily supervision of the conduct of the Executive Board and the business affairs of the company. Mr. De Ruiter currently is a member of the Supervisory Board of N.V. Koninklijke Nederlandsche Petroleum Maatschappij. In addition, he is a member of the Supervisory Boards of Aegon N.V., Beers N.V., Heineken N.V., Univar and Wolters Kluwer N.V. As a consequence of the matters referred to above and, in particular, the need to complete related investigations, the company has deferred the announcement of its full year results scheduled for 5th March. Ahold’s auditors have also informed Ahold that they are suspending the fiscal year 2002 audit pending completion of these investigations.
185. In its February 24, 2003 Announcement, Ahold informed investors that its USF division,
which supplies food to restaurants and hotels, drastically overstated income because of what the
Company then described as inappropriate accounting for discounts from suppliers. The subject discount
payments, as described above, are known as promotional allowances or vendor rebates, and are
payments made by manufacturers of brand name products to retailers. These payments are intended to
encourage such retailers to promote the subject products to their consumers, and they should be booked
at the end of a contract period or amortized over the length of a multi-year contract. Ahold said its USF
managers booked more money in promotional allowances than USF actually received.
186. Commenting on USF’s improper practice, Ronald Cotterill, Director of the Food
Marketing Policy Center at the University of Connecticut,
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“[t]here’s no way that a normally run trade promotion program at any retailer could ever make a reasonable mistake and come up with that kind of shortage. If there were any reasonable controls, they should have caught this long before that kind of money was booked.”
187. Regarding the accounting irregularities discovered at USF, the Company’s press release
containing the February 24, 2003 Announcement stated:
U.S. Foodservice overstatements Recently, during the fiscal year 2002 year-end audit for U.S. Foodservice, significant accounting irregularities were discovered in the recognition of income including prepayment amounts related to U.S. Foodservice’s promotional allowance programs. Based on information obtained to date, the company believes that operating earnings for 2001 and expected operating earnings for fiscal year 2002 have been overstated by an amount that the company believes may exceed US $ 500 mln, with the majority of such an amount occurring in the expected earnings for fiscal year 2002. Ahold’s operating earnings will be impacted by the same amount. The overstatements discovered to date will cause a restatement of the financial statements under Dutch GAAP and U.S. GAAP for fiscal year 2001 and for the first three quarters of fiscal year 2002. As a result of the complex nature of the promotional allowance programs, extensive work is continuing as part of the ongoing investigation to determine the exact amount of the overstatement for each accounting period. These irregularities do not affect net sales reported for U.S. Foodservice. As noted above, a complete investigation ordered by the Audit Committee of Ahold’s Supervisory Board is continuing by outside legal counsel and independent forensic accountants. Pending the conclusion of this investigation, certain senior executives of the U.S. Foodservice purchasing and marketing management team have been suspended.
188. Regarding the accounting irregularities discovered in connection with Ahold’s prior
accounting for the financial results of certain of the Company’s joint ventures, the Company’s press
release containing the February 24, 2003 Announcement stated:
Proportionate Consolidation Ahold has determined that ICA Ahold, Jeronimo Martins Retail and Disco Ahold International Holdings will be proportionally consolidated under Dutch GAAP and U.S. GAAP, commencing from fiscal year 2002. The
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company will also restate its historical financial statements so as to proportionally consolidate under Dutch GAAP and U.S. GAAP ICA Ahold, Jeronimo Martins Retail and Disco Ahold International Holdings. In addition, the historical financial statements will be restated to proportionally consolidate Bompreço and Paiz Ahold for the periods during which they were 50% owned by the company. Under proportional consolidation, Ahold will consolidate its proportional share of each entity in its financial statements. Previously, the full results of these entities had been consolidated in Ahold’s results with the minority share in earnings and equity then deducted, during the relevant periods. The decision to proportionally consolidate was made on the basis of information that had not previously been made available to the company’s auditors. There is no impact of these deconsolidations on Ahold’s net income, earnings per share and shareholders’ equity under Dutch GAAP. The impact under U.S. GAAP is currently being reviewed.
189. Ahold also stated that it had uncovered potentially illegal transactions at Disco.
Regarding the “suspicious transactions” discovered at Disco, the Company’s press release containing the
February 24, 2003 Announcement stated:
Disco Ahold further announced that it has been investigating, through forensic accountants, the legality of certain transactions and the accounting treatment thereof at its Argentine subsidiary Disco. The investigation to date has uncovered certain transactions that are questionable. Ahold is in the process of determining what actions it will take in response to these preliminary findings. Until the investigation is complete, the full financial impact of these findings cannot be determined. The company is reviewing the appropriate changes to be made at Disco including management changes but no final decisions have been made on those issues yet.
190. In connection with the Company’s February 24, 2003 Announcement, Ahold’s
Supervisory Board announced that defendant Van der Hoeven and defendant Meurs would resign.
Ahold announced that Van der Hoeven and Meurs would stay at the Company for an appropriate period
of time to affect an orderly transition of affairs. Defendant de Ruiter was assigned responsibility for the
daily supervision of the conduct of the Executive Board and the business affairs of the Company, and
served as temporary Chief Executive Officer until the new management team was appointed.
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191. Following the Company’s February 24, 2003 Announcement, the Standard & Poor’s
(“S&P”) rating agency cut the Company’s debt rating to junk status. S&P said in a statement that it had
downgraded Ahold’s long-term corporate credit rating by two notches, to BB+ (its highest “junk” grade)
from BBB, also placing the rating on CreditWatch with negative implications. S&P lowered the firm’s
short-term rating to B from A-2.
192. As a result of its February 24, 2003 Announcement, the Company deferred the
announcement of its full year results scheduled for March 5, 2003. Deloitte informed the Company that
it would suspend the fiscal year 2002 audit pending completion of certain investigations into the facts
and circumstances surrounding the February 24, 2003 Announcement.
193. On February 24, 2003, after Ahold disclosed that its financial results for fiscal years
2000, 2001 and the first three quarters of 2002 would have to be restated, Deutsche Bank Securities, Ltd.
issued a report, prepared by X. Botteri, which downgraded the firm’s forecasts for Ahold’s 2002
earnings. The downgrade reflected the $500million shortfall in the USF division as a result of
accounting irregularities.
194. On February 25, 2003, Societe General issued a report, which placed the firm’s
recommendation and target price under review. Under the “Valuation and Recommendation” section,
the report specifically stated:
[there was] a total lack of visibility. The 63% drop in the share price appears excessive but reflects investors’ disappointment and their total loss of confidence in the stock. There is too much uncertainty currently surrounding Ahold to determine the real value of its assets (Argentina, difficult-to-read financial accounts, risk of default and lack of clear company strategy). Whereas Ahold’s book value comes to Euro6 per share and gives some indication of the company’s worth, bear in mind that we are skeptical as to the validity of the financial accounts.
195. On February 25, 2003, similarly, Morgan Stanley issued an analyst report prepared by
Ben Britz, stating that the firm had cut its 2003 EPS forecast by 24% and had reduced its 2003 EBITA
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forecast for USF by 53% due to the overstatement and resignations and the fact “that this ha[d]
structurally reduced the profitability of the business.” The report also stated:
Secondly, we have proportionately consolidated the revenues, profits and interest of Jeronimo Martins (49% owned, Portugal) and ICA (50%-owned, Scandinavia.) This has a neutral effect on earnings, but does reduce our 2003 revenue forecast by 6%, from Euro70 billion to Euro65 billion.
196. Under the “What was announced” section, the report stated:
1. Ahold’s President and CEO Cees Van der Hoeven and CFO Michael Meurs will resign, and stay for an ‘appropriate’ transition period. 2. At the core of the profits warning, the operating income of US Foodservice (USFS) was overstated by an amount ‘in excess of’ US$500m cumulatively over 2001 and 2002. A ‘substantial portion’ of it relates to 2002. Apparently overstatements of income related to promotional allowance have been detected during the year-end closing procedure. Some members of the management team have been suspended, (but not CEO Jim Miller) and a Firm of forensic accountants appointed. 3. The company has determined that ICA Ahold, Jeronimo Martins Retail and Disco Ahold International Holdings will be proportionally consolidated under Dutch and U.S. GAAP from FY2002 onwards. Historical earnings will be restated to reflect this, and the proportional consolidation of Bompreço and Paiz Ahold (for the period during which they were owned at 50%).
197. Also on February 25, 2003, CDC IXIS Securities also issued a report that revealed the
firm’s disappointment in Ahold’s failure to identify problems earlier. Under the “Highlights” section,
the report stated:
One of the biggest management failings concerned the accounting irregularities found at US Food Service and Argentine subsidiary, Disco. Apparently, the Food Service’s EBIT was overstated over two financial years to the tune of more than $500m, equivalent to one third of the business’s earnings! No figures were mentioned related to Disco. Moreover, the years 2000, 2001 and H1 2002 will have to be restated, and some accounting methods changed to make data easier to read. This would include moving over from total to proportional consolidation for ICA Ahold, JMR and Disco Ahold.
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198. A February 26, 2003 Bear Stearns report regarding Ahold’s February 24, 2003
Announcement characterized it as an “accounting shock” that had “led to a dramatic sell-off in the
Company’s bonds reminiscent of a forthcoming default.”
199. In the days following Ahold’s shocking February 24, 2003 Announcement, details
concerning defendants’ fraud began to emerge. Commenting upon the resignation of defendant Van der
Hoeven, Merrill Lynch securities analyst, Andrew Fowler, stated that it was “shocking and disgraceful”
that management resignations had not come sooner. The same Financial Times story that quoted Mr.
Fowler stated that defendant Van der Hoeven revealed in November 2002 that he had attempted to
tender his resignation to the Ahold Supervisory Board during the spring of 2002, but the Supervisory
Board rejected defendant Van der Hoeven’s attempt to resign. Other news accounts that emerged at this
time reprinted the following statement that Van der Hoeven made in September 2002 in response to
questions concerning Ahold’s accounting for calculating organic growth and accounting for real estate
transactions: “There are no accounting issues in Ahold. We never booked anything wrong. We have
been in full compliance throughout the whole process.”
200. In connection with the Company’s February 24, 2003 Announcement, the Underwriter
Defendants moved swiftly to insure the value and collectibility of their prior investments in the
Company. In this regard, the Company’s press release containing the February 24, 2003
Announcement also disclosed that certain of the Underwriter Defendants (ABN AMRO, Goldman
Sachs, ING, J.P. Morgan, and Rabobank) had made a commitment to extend up to €3.1 billion in
financing to the Company (the “March 5, 2003 Credit Facility”):
Liquidity - Given the nature of the issues the company is announcing and the consequent potential future impact on compliance with certain financial covenants in existing credit facilities, Ahold has obtained EUR 3.1 billion commitments from a syndicate of banks, including a EUR 2.65 billion
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credit facility and a EUR 450 mln backup facility to support the securitization programs referred to below. The facility is designed to replace the existing $2 billion credit facility, under which US $550 mln has been drawn, as well as to provide Ahold additional lines of liquidity. The facility is comprised of secured and unsecured tranches. Ahold will pay a credit spread over EURIBOR that will depend on Ahold’s credit rating during the tenure of the facility. The facility will have a term of 364 days and will contain a financial covenant that the interest coverage ratio will not be lower than 2.5. The facility is subject to customary conditions precedent. For the unsecured tranche, certain additional conditions precedent will apply, including the delivery of audited 2002 financial statements of certain subsidiaries by May 31, 2003 and of Ahold by June 30, 2003. In addition, the banks under U.S. Foodservice’s and Alliant’s receivables securitization programs that were due to expire on February 27 and 28, 2003, have agreed to extend the programs for an additional 60 days. The backup facility and the credit facility will provide adequate funds for amounts coming due in 2003 under the securitization programs if they are not further extended.
201. On February 27, 2003, the Company announced that it had completed its investigation
into the suspicious transactions at Disco and that it had installed a new management team at Disco. In a
corresponding press release, the Company stated:
Zaandam, The Netherlands, February 27, 2003 –
Ahold announced on February 24 that it has been investigating, through forensic accountants, the legality of certain transactions at Ahold’s Argentine subsidiary, Disco, and the accounting treatment thereof. While Ahold believed that there was no material impact upon the company, it was unable to comment further until the investigation was complete. This work has now been concluded and the investigation shows that there will be no material impact on Ahold’s financial results. Ahold also announces that the Chief Executive Officer and the Chief Financial Officer along with two other directors have resigned. Two new directors have been appointed by Ahold to the Disco Board. Alfredo Garcia Pye, currently Country Manager of Ahold’s Santa Isabel operation in Peru, has been appointed Chief Executive Officer. Pieter de Nooij, currently member of Ahold’s Latin America Support Group, has
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been appointed Chief Financial Officer. Both appointments are effective immediately. An Ahold team from The Netherlands has been installed at Disco to offer active support to the company, enforce controls and ensure compliance with the Ahold Business Principles.
202. Despite the foregoing announcement regarding Disco, Ahold issued the following press
release on March 26, 2003, which indicated that the Company’s investigation into suspicious
transactions at Disco was, in fact, not complete:
Zaandam, The Netherlands, March 26, 2003 – In light of the ongoing investigations at Ahold, and in keeping with the company’s intent to cooperate with all regulatory authorities, Ahold has decided to undertake a further review of certain transactions and related matters at its Argentine subsidiary Disco. The decision is also intended to ensure that Disco’s books and records are in compliance with all applicable regulations. Disco has requested from the Buenos Aires Stock Exchange (Bolsa) and the Argent ine Securities Regulatory Authority (CNV) a further extension to May 12, 2003, of Disco’s 2002 financial statement filing deadline. As reported on February 27, 2003, the results of the initial investigation into transaction irregularities conducted by Aho ld showed that there was no material adverse impact on Ahold’s financial results. The company has no reason to believe at this time that this further review will alter this finding.
VI. AHOLD COMMENCES INTERNAL INVESTIGATIONS
203. Internal investigations into the accounting practices at USF and Disco were apparently
underway at the time of the Company’s February 24, 2003 Announcement.
204. According to Ahold’s 2002 Form 20-F, on or about February 12, 2003, Ahold authorized
White & Case LLP, assisted by forensic accountants at Protiviti, Inc., to investigate the circumstances
involving vendor rebate accounting at USF. Subsequently, the Audit Committee of Ahold’s Supervisory
Board authorized the law firm of Morvillo, Abramowitz, Grand, Iason & Silverberg (“Morvillo”) and
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forensic accountants at PwC to conduct a further investigation of USF’s accounting practices. The 2002
Form 20-F discloses the following regarding the commencement of the internal investigation conducted
at USF:
In conjunction with the fiscal 2002 audit of USF, our auditors, D&T, discovered in February 2003 through its confirmation process that certain accrued vendor allowance receivable balances purportedly due from vendors were overstated. Vendor allowances are payments or rebates from a vendor or supplier to a distributor, such as USF. On February 12, 2003, the Company authorized an investigation, which was also subsequently authorized by the Audit Committee of Ahold’s Supervisory Board, by the law firm of White & Case LLP, assisted by forensic accounting advisors from Protiviti, Inc. This investigation found that certain senior officers of USF and other employees had interfered with the vendor allowance confirmation process, uncovered additional confirmation discrepancies, as well as vendor prepayments and contracts with vendors covering vendor allowance arrangements, which prepayments and contracts had previously not been disclosed to D&T. Following this preliminary investigation, the Audit Committee of Ahold’s Supervisory Board requested that the Morvillo Firm, assisted by forensic accountants from PricewaterhouseCoopers (“PwC”), conduct a further investigation into the accounting irregularities and related matters at USF.
205. Moreover, the 2002 Form 20-F reveals that as early as July 2002, the Company had been
conducting an internal investigation into “suspicious transactions” at Disco. Eventually, the Company
enlisted forensic accountants at Deloitte and PwC and attorneys at Wilmer, Cutler & Pickering (“WCP”)
to assist in this investigation, which was completed in May 2003.
206. The 2002 Form 20-F discloses the following regarding the commencement of the internal
investigation conducted at Disco:
As a result of finding invoices for suspicious transactions at Disco in July 2002, our internal audit department conducted an investigation. This investigation, which was completed in early December 2002, identified additional suspicious transactions. We then instructed forensic accountants at D&T to conduct a further forensic investigation of Disco. During the course of the investigation, the law firm of Wilmer, Cutler & Pickering (“WCP”) was retained to assist with the investigation. On February 17, 2003, D&T reported their preliminary findings to Ahold.
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207. When Ahold announced its massive restatement on February 24, 2003, the Company also
informed investors that it had commenced investigations into the facts and circumstances surrounding
certain letters that were the basis for the historical consolidation of its ICA, DAIH, Bompreço, and Paiz
Ahold joint ventures, and that the Company was examining certain previously undisclosed related side
letters that resulted in the decision to deconsolidate those joint ventures.
208. According to the 2002 Form 20-F, on March 24, 2003, the Audit Committee of Ahold’s
Supervisory Board ordered the commencement of a series of additional investigations at Ahold and at
seventeen (17) Ahold operating companies and real estate companies to assess: (i) whether accounting
irregularities or errors existed; (ii) the integrity of management; and (iii) the adequacy of internal
controls. Attorneys at WCP and accountants at PwC conducted these investigations.
VII. GOVERNMENTAL AND REGULATORY INVESTIGATIONS COMMENCE
209. Regulatory authorities commenced immediate investigations into the fraud at USF and
other facets of Ahold’s business that precipitated this litigation. Consequently, Ahold, USF, and
Deloitte are all now the subjects of criminal and civil investigations in the United States and abroad.
A. The SEC Investigation
210. On February 26, 2003, just two days after Ahold’s shocking disclosure, the SEC launched
an investigation into the accounting irregularities at USF to determine whether Ahold and/or its current
and former officers, directors, and employees violated the federal securities laws. The SEC has
requested documents from Ahold, USF, and Deloitte. According to the 2002 Form 20-F, Ahold is fully
cooperating with the SEC investigation.
211. As of January 16, 2004, defendants represented that they had produced “over 230,000
pages of documents and hard drives containing many thousands of documents to the SEC.” Moreover,
at that time, defendants indicated that USF “is preparing to produce over 475,000 e-mails with over
225,000 attachments to the SEC in the next week.”
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212. A March 15, 2003 Washington Post article also reported that documents produced in
connection with the SEC and DOJ investigations indicated, as Ahold has now repeatedly admitted, that
the inflated vendor rebate income booked at USF was the product of a deliberately fraudulent scheme:
Federal investigators say they have found documents from Kaiser to suppliers assuring them they would not have to pay the full amounts of rebates they had pledged. Investigators say that the higher amounts were on the books. The internal investigators at Royal Ahold NV found and turned over to U.S. authorities at least two letters to vendors signed by Kaiser that indicated deliberate inflation of rebate totals, three sources familiar with the findings said.
B. The Department of Justice Investigation
213. According to news reports issued at or about the time of Ahold’s February 24, 2003
announcement, Ahold’s lawyers approached prosecutors at the U.S. Attorney’s office for the Southern
District of New York the week before the Company publicly disclosed its account ing debacle.
Apparently, Ahold’s attorneys presented prosecutors with evidence gleaned from the internal
investigation of accounting irregularities at USF. According to this report, the Federal Bureau of
Investigation and federal prosecutors in Maryland also began to gather information at this time. The
U.S. Attorney’s Office for the Southern District of New York launched an immediate criminal
investigation on behalf of the DOJ.
214. The Company’s 2002 Form 20-F indicates that a federal grand jury in the United States
District Court for the Southern District of New York issued grand jury subpoenas on February 24, 2003
and on May 19, 2003 to certain of Ahold’s current and former officers, directors, and employees. The
grand jury subpoenas request documents going back to January 1, 1999 that relate to promotional
allowances at USF, financial statements, audits, financial projections and budgeting, board meetings,
personnel issues, the resignations of defendants Van der Hoeven and Meurs, and Ahold joint ventures --
ICA, JMR, and DAIH. (2002 Form 20-F, at 183).
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C. The NYSE and NASD Investigations
215. The NYSE and the NASD have each commenced their own investigations into Ahold’s
accounting irregularities. The NYSE has asked Ahold to provide it with information concerning its
employees and advisors who were aware of the events and circumstances behind its restatement(s). The
NASD requested that Ahold provide it with any materials regarding specific employees and advisors
identified in materials produced in response to the NYSE’s inquiry.
D. The Department of Labor Investigation
216. The Benefits Security Administration of the United States Department of Labor is
investigating whether the Ahold Trust USA unit violated ERISA regulations by, among other things,
breaching fiduciary duties to plan participants.
E. The Office of the Dutch Public Prosecutor’s Investigation
217. The Dutch Public Prosecutor is investigating Ahold and its current and former officers,
directors, and employees for alleged criminal conduct, including forgery, intentional misstatements of
annual accounts, and violations of Dutch securities regulations in connection with Ahold’s foreign joint
ventures. In particular, the Public Prosecutor is investigating allegations that Ahold executives falsified
documents and deliberately published incorrect information in the Company’s annual reports.
Moreover, this investigation will examine the “side letters” and related documentation that led to
Ahold’s improper consolidation of the financial results of certain of the Company’s joint ventures.
Ahold produced documents, including copies of the “side letters” that indicated that it was improper for
Ahold to consolidate the financial results of the joint ventures in question, to the Dutch Public
Prosecutor’s office on April 8, 2003. Approximately one week later, a spokesperson for the Dutch
Public Prosecutor’s office informed BBC News that the Dutch Prosecutor would decide shortly whether
to proceed with a complete investigation.
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218. Dutch authorities raided Ahold’s Netherlands headquarters and the Amsterdam,
Eindhoven, and Rotterdam, Netherlands offices of Deloitte on July 5, 2003. Audit personnel in each of
the foregoing Deloitte offices in The Netherlands provided auditing services to Ahold during the Class
Period. At the time of the raid, reports emerged stating that the representatives of the Dutch Public
Prosecutor’s office removed several boxes of documents from Ahold’s Zandaam headquarters and that
numerous documents were also removed from three of Deloitte’s offices in The Netherlands.
219. On July 7, 2003, the Company issued a press release concerning the Dutch Public
Prosecutor’s investigation. In this regard, Ahold stated:
Zaandam, The Netherlands, July 7, 2003 –
Ahold announced today that the Public Prosecutor in Amsterdam is conducting a criminal investigation regarding Ahold. In the course of this investigation, a search has been conducted in Ahold’s corporate headquarters in Zaandam on July 5, 2003. Ahold has given its full cooperation to this investigation and is cooperating fully with the Dutch Public Prosecutor, as it has been doing and will continue to do with the US Securities and Exchange Commission and the US Department of Justice in connection with their ongoing investigations. Ahold deems it inappropriate to give any further information concerning these investigations while their outcomes are pending.
F. The Euronext Investigation
220. The Euronext Amsterdam Exchange is investigating whether Ahold violated that
Exchange’s listing rules by inappropriately delaying the release of information regarding the events that
led to Ahold’s February 24, 2003 Announcement. The Euronext reportedly claims that Ahold failed to
inform Euronext Amsterdam authorities of the Company’s accounting problems at the same time that it
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informed other regulators. Ahold reports that it has “submitted information to the Euronext Amsterdam
in response to its requests.”
G. The Dutch Authority For Financial Markets’ Investigation
221. The Authority for Financial Markets (“AFM”) is conducting an investigation into
possible insider trading of Ahold common stock. Arthur Docters van Leeuwan, the AFM’s Chairman,
stated that defendant Van der Hoeven informed the AFM of the accounting problems at USF four days
before anyone informed the Company’s investors. The AFM is also reportedly investigating alleged
bribes at Disco and clandestine bonuses that may have been paid to executives at USF. Eustace,
subsequently confirmed that USF executives made illegal profits: “Bonuses were paid that would not
have been under normal circumstances. It was fraud.” At least one Ahold Board Member, defendant
Cor Boonstra, was convicted of insider trading related to his Class Period transactions.
H. Investigation Relating To Illegal Payments in Argentina
222. On the heels of the Company’s February 24, 2003 Announcement, Dutch authorities
began an investigation into Ahold’s relationship with its DAIH joint venture partner, VRH.
223. The Dutch Foundation for the Investigation of Corporate Information, or “SOBI,”
announced that the $492 million paid by Ahold to buy-out VRH in July 2002 never reached the rightful
owners of the money, which was being used to secure Velox’s debt burden. SOBI also alleged that this
money was being illegally transferred, and possibly embezzled. SOBI stated that the $492 million
should have gone to Uruguay’s Banco Montevideo and not VRH.
224. In February 2003, SOBI filed a complaint with the Amsterdam public prosecutors office
against defendant Van der Hoeven, alleging that he may have been an accomplice to embezzlement as
related to Ahold’s dealings with VRH. At the center of the allegations is the link between defendant
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Van der Hoeven and members of the Periano family, who own VRH’s parent company, the Velox
Group.
225. In March 2003, Uruguayan Judge Pablo Eguren issued a summons via Interpol to
defendants Van der Hoeven and Meurs to bring them to Uruguay to answer questions related to Ahold’s
relationship with VRH.
226. In July 2003, an Argentine court seized more than $16 million in shares of Disco, on
behalf of the investors of Banco Montevideo who filed a lawsuit to recoup the money wrongfully given
to VRH instead of Banco Montevideo. In response, Ahold filed an objection to the attachment of the
Company’s shares in Disco.
227. In August 2003, Ahold was informed by its attorneys in Uruguay that the Company’s
objection to the attachment was denied.
228. In November 2003, the Argentinean court rejected Ahold and DAIH’s request for
reconsideration on the attachment, but granted Ahold and DAIH the right to appeal the attachment.
VIII. FURTHER DETAILS OF AHOLD’S FRAUD EMERGE
A. USF’s Chief Financial Officer “Blew The Whistle” In 2000 After Ahold Acquired USF, But Defendants Ignored His Concerns
229. On March 10, 2003, The Financial Times ran a story entitled, “Ahold Knew in 2001 of
U.S. Problem, Says Insider.” Among other things, this story reported that:
A senior finance officer at US Foodservice alerted the Netherlands headquarters of Ahold, the grocery retailer and distributor, about potential problems in the US food distributor’s accounts as early as 2001, according to a former executive at Ahold. The former executive, who asked not to be identified, said Ernie Smith, a respected veteran of Ahold USA, left the company three months after being appointed chief financial officer of US Foodservice, a Maryland-based division of the Dutch grocery conglomerate, because he was allegedly uncomfortable with US Foodservice’s accounting standards.
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The former insider says senior Ahold finance officials were alerted to questionable accounting at US Foodservice two years ago by Mr. Smith. Those concerns were not properly addressed, the person added. Mr. Smith declined to comment.
The incident was not the first time Ahold was made aware of potential problems at US Foodservice which was built by Jim Miller, chief executive officer. A former Ahold executive said internal Ahold auditors were puzzled by US Foodservice’s accounts before the Dollars 3.6bn takeover in 2000.
230. On March 15, 2003, The Washington Post ran an article entitled, “US Foodservice
Leaders Kept Power Concentrated; Employees Cite Close, Secretive Top Executives.” This article not
only discussed the close relationship between defendants Miller and Kaiser, but also set forth additional
details concerning the defendants’ prior knowledge that USF’s accounting practices were suspect and
unreliable. Among other things, the March 15, 2003 Washington Post article reported:
Since the Rykoff-Sexton acquisition, U.S. Foodservice has gone through four chief financial officers in five years, with at least one of them citing concerns upon departure.
Ernie Smith, U.S. Foodservice’s chief financial officer until March 2001 and a former executive at parent company Ahold, said he could not comment about his departure, citing a nondisclosure agreement. But a person familiar with his departure said Smith left after he raised questions about the way the company accounted for marketing dollars it received from manufacturers.
Smith “called me two days before and said, I’m not going to make it there,” the person said. “He said it had to do with the reporting. It wasn’t right and he wasn’t going to do it.”
Before Smith left, he called both the chief executive and the CFO of Royal Ahold NV about his concerns, according to the source. “He was really disappointed when they didn’t take action.” A spokeswoman for Ahold said the company is aware of these allegations but declines to comment.
One former finance manager who worked at U.S. Foodservice after it acquired Alliant Foodservice in 2000 said the company seemed more focused on raising money from food manufacturer rebates than from selling food and other products to restaurants, which puzzled him.
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B. USF Improperly Booked Vendor Rebate Income Since At Least 1997
231. The next day, The Baltimore Sun published an article entitled, “Foodservice Bookkeeping
Doubted in ‘97; Ex-CFO Says He Quit After Warning Was Rejected; Values Overstated ‘By an Awful
Lot’; McAnally Tells of Scenario Before JP Foodservice Deal.” The foregoing article revealed further
details of Ahold’s willingness to publicly report knowingly unreliable financial results, and stated:
A former executive with a predecessor of U.S. Foodservice, the embattled Columbia food distributor whose accounting practices are under federal investigation, said yesterday that the company was using controversial bookkeeping methods at least six years ago - three years earlier than previously disclosed - and perhaps since the company was founded in 1989.
David F. McAnally, the former chief financial officer of Rykoff-Sexton Inc., said he alerted his board of directors to the “smoke and mirrors approach” when his company proposed to merge with JP Foodservice Inc. in 1997, a deal that would later create the modern U.S. Foodservice. He said he resigned when the board rejected his concerns and followed through with the merger, siding with James Miller, the JP executive who is now chief executive officer of U.S. Foodservice.
“It was my belief, as CFO, that their approach to booking income was overstating their values by an awful lot of money,” said McAnally, who now runs a small energy company in Pennsylvania. He could not recall a dollar figure, but said he believed that the company’s books were “off by hundreds of millions of dollars of value” at the time.
***
McAnally said he encountered similar accounting tactics when Rykoff-Sexton Inc. was considering its merger with JP Foodservice, a Columbia-based company that Miller founded in 1989. The two companies merged in 1997 to create the nation’s second-largest food distributor and later took on the name U.S. Foodservice, which had been a Rykoff-Sexton subsidiary.
According to McAnally, JP Foodservice had long been recording some promotional discounts before it sold the related products, and proposed to continue that practice after the merger. McAnally said he objected and recommended that his board of directors reject the deal.
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“I believed very strongly that if you were going to realize income you needed to sell the product first,” McAnally said. “Jim Miller’s approach was to book it based on a history of being able to push those volumes through the distribution cycle. It was an approach that, in my opinion, was destined for failure.”
“I was not at all surprised when I saw that it had all come back to haunt them,” he said.
C. Federal Regulators Launch Probe Of USF’s Vendors
232. On March 28, 2003, reports emerged that investigators reviewing Ahold’s accounting
practices received information indicating that food suppliers, Sara Lee and ConAgra colluded with USF
executives to inflate supplier rebates by preparing false confirmations that substantiated the amounts of
promotional allowances that USF had listed on its books. Investigators stated that those supplying the
false confirmations knew that such confirmations did not reflect the true amounts of actual rebate
payments.
233. In response to these reports, ConAgra claimed that its accounting department alerted both
USF and Deloitte U.S. in January and February 2003 as soon as it was discovered that its own
employees had signed inaccurate documents regarding rebate payments. On March 28, 2003, ConAgra
issued the following press release:
OMAHA, Neb., March 28, 2003 - ConAgra Foods, Inc. (NYSE: CAG) announced today that it is aware of the Royal Ahold NV investigation, based on news reports regarding Royal Ahold and public statements issued by Royal Ahold. ConAgra Foods is a supplier to Royal Ahold and, like all suppliers, in the ordinary course of business, received requests from Royal Ahold’s outside auditors to confirm amounts payable by ConAgra Foods to Royal Ahold. ConAgra Foods systematically refused to verify confirmation requests that were inaccurate. Recent news accounts to the contrary with respect to ConAgra Foods’ relationship with Royal Ahold are misleading. ConAgra Foods’ sales to Royal Ahold reflect ordinary and appropriate business practices in the foodservice industry, and ConAgra Foods is not aware of any financial impact to ConAgra Foods because of the Royal Ahold investigation.
234. On the same day, Sara Lee issued a press release stating:
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Sara Lee has reported that three of its employees verified false promotional and rebate amounts due for distributing Sara Lee products after USF executives requested that such amounts be verified.
235. Also on March 28, 2003, Tyson Foods (“Tyson”) confirmed that federal regulators had
contacted Tyson concerning certain of Tyson’s transactions with USF.
236. On April 4, 2003, major food producers, General Mills, H.J. Heinz, and Kraft Foods
confirmed that the SEC had requested that each company furnish investigators with documents
concerning their transactions with USF.
D. The Internal Investigation Reveals Further Fraud At USF And Ahold Implicates Lee and Kaiser
237. On May 7, 2003, news emerged that Ahold’s forthcoming report of its internal
investigation, spearheaded by its attorneys at White & Case and forensic accountants at PwC, would
blame defendants Lee and Kaiser for the accounting problems at USF stemming from the unit’s inflation
of supplier rebates. Ahold also announced that it had fired Lee and Kaiser.
238. On May 8, 2003, the Company issued a press release announcing that the internal
forensic accounting investigation that PwC had been performing at USF was substantially complete.
Among other things, this press release stated that Ahold was increasing its anticipated negative
restatement attributable to USF from the $500 million amount announced on February 24, 2003 to a
staggering $880 million. In sum, the Company’s May 8, 2003 press release stated:
Zaandam, The Netherlands, May 8, 2003 –
Ahold, the international food retailer and foodservice operator, announced today that the forensic accounting work being performed by PricewaterhouseCoopers (PwC) as part of Ahold’s internal investigation of its subsidiary U.S. Foodservice is now substantially complete. The results were reported to Ahold’s Audit Committee on May 7, 2003. Completion of the U.S. Foodservice forensic accounting work is a required step to recommence audit work at U.S. Foodservice to enable the completion of the Ahold 2002 audit by June 30, 2003.
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For the period April 1, 2000 (the effective date of Ahold’s acquisition of U.S. Foodservice) to December 28, 2002 (the end of Ahold’s 2002 fiscal year), PwC has identified total overstatements of pre-tax earnings of approximately USD 880 million. Of this amount, approximately USD 110 million relates to fiscal year 2000, approximately USD 260 million relates to fiscal year 2001 and approximately USD 510 million relates to fiscal year 2002. In addition, PwC identified approximately USD 90 million of adjustments required to be made to the opening balances for U.S. Foodservice at the date of its acquisition. This consists of a reclassification of such amount from current assets to goodwill primarily as a result of required write-offs of vendor receivables. In connection with the earnings and opening balances adjustments discussed above, corresponding adjustments to the balance sheet of U.S. Foodservice at December 28, 2002 also will be required. These adjustments will consist of approximately USD 700 million of write-offs of accrued vendor receivables, an approximately USD 210 million increase in deferred contract revenue liabilities and an approximately USD 80 million increase in trade payables, as well as a USD 25 million increase in inventory. Any other adjustments required with respect to U.S. Foodservice, including possible impairment of goodwill or other long-lived assets, will be determined by the company.
239. In announcing the increased restatement, the Company continued to blame defendants
Lee and Kaiser for Ahold’s accounting problems. In response to the foregoing accusations, Kaiser’s
attorney, Richard J. Morvillo, stated “[w]hen all of the facts are known . . . [they] will demonstrate that
to the extent there was any wrongdoing, it was the product of the actions of others, not Mr. Kaiser.
When the facts are fully aired, the facts will speak volumes as to the objectivity and fairness of the
investigative process and Ahold’s interest in protecting others.”
240. On May 9, 2003, The Washington Post reported on Ahold’s announcement of further
details of the fraud perpetrated at USF. This story indicated that the internal investigation found that
defendants Lee and Kaiser were the primary orchestrators of the fraud and that Lee and Kaiser
knowingly exploited Ahold’s lack of even remotely adequate internal controls:
An internal investigation at U.S. Foodservice found that the alleged fraud was the work of Mark P. Kaiser, chief marketing officer, and Timothy
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Lee, executive vice president for purchasing, according to Ahold’s interim chief financial officer, Dudley Eustace. Eustace said in a telephone interview the two men colluded to inflate U.S. Foodservice’s earnings to increase their own bonuses. Kaiser and Lee were fired last week. U.S. Foodservice’s chief executive, James L. Miller, remains in his job.
*** Eustace confirmed earlier accounts of how the alleged fraud worked. He said Kaiser and Lee created false figures for promotional allowances -- rebates or discounts granted by suppliers to U.S. Foodservice when it made large-volume purchases. The inflated rebates “were then supported by false confirmations from people working within the suppliers’ companies,” Eustace said. US Foodservice Treasurer Robert Gillison said the company had long been worried about the way it tracked promotional rebates. The company repeatedly changed its methods of tracking rebates and adopted several different computer systems as it purchased new subsidiaries. “It was known to be an area of risk,” Gillison said. “We had been actively working on improving things, but we were in a state of flux and you had two guys who were determined to take advantage of it.
241. The New York Times ran a similar story on May 9, 2003, which contained the following
description of Lee and Kaiser’s motive for purportedly engineering the fraud at USF:
Both Mr. Gillison and Mr. Eustace confirmed today that some executives of the U.S. Foodservice unit might have personally profited as a result of the accounting irregularities. “Bonuses were paid that would not have been under normal circumstances,” Mr. Eustace said. “It was fraud.” “There was a great culture at Ahold to keep improving profits year after year,” Mr. Eustace said. “One can find oneself in a position where the growth objective is difficult to obtain. Perhaps, in this case, the gentlemen found a way of satisfying this objective by fraudulently creating these promotional allowances.”
242. On May 9, 2003, Ahold issued a press release purporting to clarify certain statements
made in the Company’s May 8, 2003 press release. Specifically, the Company informed the public that
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Ahold’s earlier attempts to blame Kaiser and Lee for the massive fraud at USF were misguided and that
additional individuals were also responsible for the fraud. According to the Company:
Zaandam, The Netherlands, May 9, 2003 – Ahold wishes to make clear that the internal legal investigation into accounting irregularities at U.S. Foodservice, as stated in its announcement of May 8, 2003, is continuing in close co-operation with PricewaterhouseCoopers´ forensic accounting work. Statements that the investigation has concluded and that only two executives of U.S. Foodservice were responsible for these accounting irregularities are inaccurate. The investigation continues to probe the possible involvement by U.S. Foodservice personnel other than the two individuals identified so far.
E. Ahold Terminates Defendants Miller and Resnick
243. During a May 13, 2003 meeting of the Company’s Supervisory Board conducted at The
Hague, Ahold decided to fire USF Chief Executive Officer, defendant Miller.
244. On May 13, 2003, Ahold announced the “resignation” of defendant Miller as USF Chief
Executive Officer. Indicating that defendant Miller was directly responsible, at least in part, for the
fraud at USF, the Company’s press release announcing Miller’s resignation and replacement by
defendant Tobin as interim USF Chief Executive Officer stated:
Zaandam, The Netherlands, May 13, 2003 – The Supervisory Board of Ahold today announced that it has accepted the resignation of Jim Miller, President and Chief Executive Officer of U.S. Foodservice and a member of the Corporate Executive Board of Ahold. The Supervisory Board has taken this decision in light of the results of the forensic accounting work conducted by PricewaterhouseCoopers, announced by Ahold on May 8, 2003, which had identified total overstatements of pre-tax earnings of approximately USD 880 million for the period April 1, 2000 (the date of the acquisition of U.S. Foodservice) to December 28, 2002 (the end of Ahold’s 2002 fiscal year). The internal legal investigation into accounting irregularities at U.S. Foodservice and the possible involvement of U.S. Foodservice personnel continues in close cooperation with the PricewaterhouseCoopers’ forensic accounting work. .
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245. Also on May 13, 2003, Ahold convened a General Meeting of Shareholders at The
Hague. During this meeting, defendant de Ruiter addressed Ahold shareholders regarding the
developments at the Company since the February 24, 2003 Announcement and stated in pertinent part as
follows:
Let me run you through the chain of events since Monday, February 24, 2003: On February 24, we announced that Ahold’s net earnings and earnings per share would be significantly lower than previously indicated. This was due primarily to overstatements of income related to promotional allowance programs at U.S. Foodservice. In addition, we announced that a number of joint ventures will no longer be fully consolidated, commencing with fiscal year 2002, and that we had been investigating, through forensic accountants, our Argentine subsidiary Disco. In view of these developments, Messrs. Van der Hoeven and Meurs tendered their resignations and Ahold’s auditors decided to suspend the fiscal year audit pending completion of the investigations. Lastly, we announced that we had obtained a commitment for a new credit facility, totaling EUR 3.1 billion. On February 27, we announced that the investigation at Disco had been completed and had shown there will be no material impact on Ahold’s financial results. On March 5, the Supervisory Board announced that we entered into the new credit facility, provided by ABN AMRO, Goldman Sachs, ING, JP Morgan and Rabobank. This was an important step in stabilizing our financial position. The facility provides for aggregate borrowings of EUR 2.65 billion, of which USD 1.285 billion and EUR 600 million were available immediately. In addition, banks remain committed to providing an additional EUR 450 million backup facility to support existing USD 850 million securitization programs. On March 11, we announced we had appointed Dudley Eustace to the Corporate Executive Board as interim Chief Financial Officer, effective immediately. On March 26, we announced that, in light of the ongoing investigations at Ahold and in keeping with our intent to cooperate with all regulatory authorities, Ahold had decided to undertake a further review of certain
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transactions and related matters at Disco. The decision was also intended to ensure that Disco’s books and records were in compliance with all applicable regulations. On April 3, we announced our intention to divest our operations in four South American countries – Brazil, Argentina, Peru and Paraguay – in order to concentrate on our mature and most stable markets and to generate funds to pay down debt. As earlier announced on February 5, the company is in current negotiations to divest its holdings in Chile.
*** The last item of the announcement confirmed that our auditors Deloitte & Touche had resumed their audit at Albert Heijn and Stop & Shop. The delivery of audited 2002 financial statements for Albert Heijn and Stop & Shop by May 31, 2003 is a condition precedent governing the availability of the second, unsecured tranche of USD 915 million of the Euro 3.1 billion credit facility previously announced by Ahold. May 2 was a busy day, because we were delighted to announce our proposal to nominate Anders Moberg as President & Chief Executive Officer of the company. Mr. Moberg assumed the position of Acting CEO on May 5. His appointment to the Corporate Executive Board will be proposed at the Annual General Meeting of Shareholders, which will be held later this year. On May 8, we were able to announce that the forensic accounting work being performed by PricewaterhouseCoopers (PwC) as part of our internal investigation of subsidiary U.S. Foodservice is now substantially complete. For the period April 1, 2000 to December 28, 2002, we were confronted with total overstatements of pre-tax earnings of approximately USD 880 million. Although the forensic accounting work at U.S. Foodservice is substantially complete, a legal internal investigation is continuing. And finally, in the last few minutes, we have announced that the Supervisory Board has accepted the resignation of Jim Miller, President and Chief Executive Officer of U.S. Foodservice and a member of the Corporate Executive Board of Ahold. Mr. Miller has served as President and CEO of U.S. Foodservice since 1997, and was appointed to the Ahold Corporate Executive Board in 2001. Until a new CEO for U.S. Foodservice is named, Robert G. Tobin will
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serve as interim Chief Executive Officer. Mr. Tobin is a member of the Ahold Supervisory Board since 2001. He is the former Cha irman and CEO of Stop & Shop, which he joined in 1960. In 1998 he was appointed President and CEO of Ahold USA as well as to the Ahold Corporate Executive Board from which he retired in 2001. Mr. Miller has agreed to assist Mr. Tobin in the transition. The Supervisory Board has taken this decision in light of the results of the forensic accounting work conducted by PricewaterhouseCoopers, announced by Ahold on May 8, 2003, which had identified total overstatements of pre-tax earnings of approximately USD 880 million for the period April 1, 2000 (the date of the acquisition of U.S. Foodservice) to December 28, 2002 (the end of Ahold’s 2002 fiscal year). The internal legal investigation into accounting irregularities at U.S. Foodservice and the possible involvement of U.S. Foodservice personnel continues in close cooperation with the PricewaterhouseCoopers’ forensic accounting work.
246. Following the General Meeting of Shareholders, defendant de Ruiter was asked how the
Company failed to detect $880 million in earnings overstatements over a three-year period. In response
to the foregoing question, defendant de Ruiter, unavailingly attempting to absolve himself of
responsibility, stated: “The explanation lies in the word ‘fraud.’”
247. On May 14, 2003, Ahold announced the resignation of USF Chief Financial Officer,
defendant Resnick, and the resignation of USF General Counsel, David Abramson. Ahold did not name
successors to either of these critical positions at the time of the announcement.
F. Ahold Disclses $24.8 Billion In Improper Revenues From The Company’s Joint Ventures
248. On May 16, 2003, in connection with reporting the Company’s sales for the first quarter
of 2003, Ahold announced that it was reducing its revenue figures for the last two years by an incredible
22 billion euros (U.S. $24.8 billion) as part of a purported “change” in accounting methods applicable
to certain of the Company’s joint ventures. These revisions, pursuant to which the Company quantified
the adjustments to revenues from the intended deconsolidation of joint ventures referenced in the
Company’s February 24, 2003 Announcement, involved the ICA, JMR, DAIH, Bompreço, and Paiz
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Ahold joint ventures in Scandinavia, Portugal, South America, and Central America for which Ahold
booked all of the revenue from such companies even though the Company did not control them. At this
time, the Company stated that it would revise its accounting for these joint ventures to comply with
accounting standards in the United States, booking only its proportionate share of the revenues.
249. Regarding the false and misleading accounting applicable to certain joint ventures during
the Class Period, Ahold’s May 16, 2003 press release stated:
Accounting for joint ventures - All current and previous joint ventures will be accounted for using equity accounting instead of proportionate consolidation as announced in February of this year. As a consequence, the income from these joint ventures will be accounted for as income from unconsolidated subsidiaries. Previously, these joint ventures were fully consolidated in Ahold’s financial statements with the minority share in earnings and equity then deducted. The main reason for the change from proportionate consolidation to equity accounting is to be better aligned with especially U.S. GAAP and to a lesser extent International Accounting Standards. This accounting change applies to ICA Ahold in Scandinavia and Jerónimo Martins in Portugal in the 2003 and 2002 first quarters and Disco Ahold International Holdings (which became 100% owned by Ahold in July 2002) in the 2002 first quarter. Historical financial statements also will be restated to reflect this accounting change for these three joint ventures, as well as for Bompreço in Brazil and Paiz Ahold in Central America for the periods in which they were 50% owned by Ahold.
G. Ahold Discloses Fraud At Its United States Retail Operations
250. On May 26, 2003, the Company issued a press release indicating that it expected to
complete its Company-wide internal accounting investigations within two weeks. At this time, the
Company announced that its Internal Investigation of certain of its operating companies led to the
discovery of $29 million in “intentional accounting irregularities involving earnings management and
misapplications of generally accepted accounting principles” at its Tops Markets U.S. subsidiary. This
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press release also informed investors that in connection with the €2.65 billion credit facility that Ahold
announced on March 5, 2003, the Underwriter Defendants granted the Company an extension to file
audited financial statements pertaining to certain units of Ahold’s business. The Company’s May 26,
2003 press release stated in pertinent part:
Zaandam, The Netherlands, May 26, 2003 – Ahold today announced that its synd icate of banks has agreed to extend the deadlines for the provision of audited 2002 financial statements for Stop & Shop from May 31, 2003 to June 30, 2003 and audited 2002 consolidated financial statements for Ahold from June 30, 2003 to August 15, 2003. The Albert Heijn audited 2002 financial statements are to be provided no later than June 2, 2003. The USD 915 million unsecured tranche of the Euro 2.65 billion credit facility announced on March 5, 2003, will remain available subject to the satisfaction of various conditions, including delivery of the 2002 audited financial statements on or before the new dates specified. In any event, based on the company’s current cashflow projections, Ahold does not foresee the need for any drawings on the unsecured tranche prior to August 15, 2003. The deadline extensions under the facility confirm the company’s continued access to sufficient liquidity notwithstanding the later than anticipated delivery of accounts. The audit of Stop & Shop’s 2002 financial statements is far along, but delays have occurred in particular with regard to accounting implications of treating Stop & Shop on a standalone basis. As a result, more time is required to complete the audit.
***
Ahold also today announced that internal forensic accounting investigations at 14 of its operating and joint venture companies were substantially complete and expected the investigations at the remaining three entities to be completed within the next two weeks. Based on the information received to date, intentional accounting irregularities involving earnings management and misapplications of generally accepted accounting principles were found, principally at the Tops Markets U.S. subsidiary. The amount of these accounting irregularities is approximately USD 29 million, which will require adjustments to reduce Ahold’s pre-tax earnings. The investigations completed thus far have also preliminarily identified
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or confirmed various accounting issues and internal control weaknesses. Management is studying the findings to assess whether additional adjustments may be required to correct any accounting errors that may affect results of operations and to identify needed improvements in controls and procedures at the relevant companies. The adjustments referred to above exclude those required by the overstatement of pre-tax earnings at U.S. Foodservice as announced on May 8, 2003, adjustments that may be required at Disco with respect to the investigation underway there, and adjustments due to Ahold’s decision to consolidate its joint ventures on the equity method. The separate internal investigation at Disco in Argentina is expected to be completed shortly. Ahold is currently discussing with its local auditor, Ernst & Young, issues with respect to the resumption of the audit at Disco. Once all the investigations are completed, the company intends to review all findings with the audit committee to determine the necessary accounting adjustments. Ahold will also determine what steps must be taken to strengthen internal controls, to eliminate any improper accounting practices and to take whatever remedial actions are deemed necessary.
251. The Company’s May 26, 2003 disclosure of $29 million in “intentional accounting
irregularities involving earnings management and misapplications of generally accepted accounting
principles” at its Tops Markets U.S. subsidiary, which at the time operated approximately 370
supermarkets and convenience stores in New York, Pennsylvania, and Ohio, increased the amount of
Ahold’s earnings restatement directly attributable to the Company’s United States operations to $909
million over the last three years.
252. On May 27, 2003, The Financial Times published an article based, in part, upon an
interview with Ahold’s interim Chief Financial Officer, Dud ley Eustace. Commenting upon the recently
disclosed fraud at Tops Markets in the United States, Eustace stated that the promotional allowance
transactions that necessitated the Tops restatement “tends toward fraudulent transactions.”
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253. On June 25, 2003 defendant William Grize, President and Chief Executive Officer of
defendant Ahold USA, announced the resignation of Tops Markets President and CEO, Frank Curci.
Ahold’s press release announcing Mr. Curci’s departure stated in pertinent part:
Zaandam, The Netherlands, June 25, 2003 –
William Grize, president and CEO of Ahold USA, announced today that he has accepted the resignation of Frank Curci, effective immediately. Curci, who served as president and CEO of Tops Markets, LLC since 2000, was transitioning to a new role as chief operating officer at Giant Food of Landover, Maryland. In May, Ahold announced that through an internal audit, accounting irregularities for the year 2002 were discovered at Tops. In Curci’s role as CEO he held responsibility for oversight and control of the business. As such, Curci and Grize determined it was not appropriate for him to assume his new role at Giant-Landover and therefore Curci tendered his resignation. Curci had been with Ahold serving in a variety of positions for eight years.
254. As of the time that the Company announced Mr. Curci’s departure, he was the twelfth
senior executive to leave Ahold since the Company announced its accounting scandal on February 24,
2003.
H. Ahold Admits That It Falsely Reported $26 Billion In Class Period Financial Results
255. On July 1, 2003, Ahold announced that it had completed its internal forensic accounting
investigation of the Company and its subsidiarie s, which revealed an additional €73 million ($84.5
million) in “intentional account ing irregularities related to improper purchase accounting.” The
foregoing amount is separate from the Company’s previously announced restatement of approximately
$909 million in earnings (which the Company reduced to a total of $885 million) attributable to its
United States operations, and, together with restated financial results attributable to the Disco unit in
Argentina, brought the total earnings restatement as of that time to $1.12 billion (which does not include
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the $24.8 billion in revenue restatements attributable to Ahold’s foreign joint ventures). The
investigation also reportedly uncovered serious internal control infirmities at the Dutch corporate parent.
256. The Company’s July 1, 2003 press release announcing the completion of all internal
forensic accounting investigations stated:
Zaandam, The Netherlands, July 1, 2003 – Ahold announced today that all internal forensic accounting investigations at Ahold, its subsidiaries and its joint ventures have been completed. The forensic accountants have identified, for review by Ahold management and the Audit Committee of the Supervisory Board, an approximately additional Euro 73 million of intentional accounting irregularities related to improper purchase accounting. Ahold may be required to reduce pre-tax earnings by this additional amount. The Euro 73 million excludes the pre-tax earnings reductions of an expected USD 856 million (compared to approximately USD 880 million previously announced) related to U.S. Foodservice and approximately USD 29 million principally related to Tops Markets in the U.S., also previously announced. This amount also excludes a reduction of pre-tax earnings of approximately Euro 8 million related to Disco S.A. The investigation at Disco has identified questionable transactions, including inaccurate documentation, and control weaknesses. The investigations confirmed or identified for management review various other accounting issues and internal control weaknesses. Ahold management and the Audit Committee are studying the findings to assess whether additional adjustments may be required to correct any accounting errors, and to identify needed improvements in controls and procedures at relevant companies. In total, all of the forensic accounting investigations found approximately Euro 970 million of accounting irregularities that may require adjustments in the year 2002 and restatements in one or more prior years. A task force reporting to the Audit Committee has been created consisting of members of Ahold management and outside advisors. Ahold’s Internal Audit function, reporting directly to the CEO as well as to the Audit Committee, will play a central role in this task force.
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257. As of the Company’s July 1, 2003 announcement, Ahold would not disclose where the
€73 million in “intentional accounting irregularities related to improper purchase accounting” occurred.
“We are not going into details about the 73 million euros,” said Carina Hamaker, an Ahold
spokeswoman at the time. Hamaker, however, assured the public that “No more bodies will come out of
the closet. Everything has been looked at and the investigation concluded.”
258. On August 8, 2003, Ahold issued a press release setting forth the Company’s second
quarter sales results and a separate press release announcing that the Underwriter Defendants had agreed
to extend the operative deadline for completing Ahold’s audited consolidated fiscal year 2002 financial
statements from August 15, 2003 until September 30, 2003.
259. In connection with the August 8, 2003 press releases, Ahold convened a conference call
to field investor and analyst questions (“August 8, 2003 Conference Call”).
260. During the August 8, 2003 Conference Call, Eustace made the following representation
concerning Ahold’s internal investigations:
QUESTIONER: Morning. I have got a couple of questions as well. Your comments about the extension of the deadline, it suggests that the scope of accounting restatements is going to be wider and deeper. I don’t know if you can just perhaps give us an idea where the hot spots are and where you believe there will be some significant restatements of what we have heard already in terms of policy. The second question is on capex. If your cash flow is exceeding plan, can you let us know what is spent on capex on the first half of this year and what you expect this year and whether it’s going to affect the sales growth. It has to be a concern. MR. EUSTACE: Well, it’s not wider and deeper. The forensic accountants performed the full scale of the review. The initial plan was as you may recall just to review U.S. Food because that is where the fraud arose. And then recognizing in due course the SEC may want to extend its investigation to the whole group we put forward the idea, the suggestion,
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the proposal that we extend that investigation to a larger part of the group which was done, which of course was therefore in large part responsible for the original deferred date of reporting the 2002 accounts. So it has not changed since then, but it is extensive and the result of processing these many hundreds of observations and as I think I said, a number of them are internal control issues which don’t result in any change to the numbers, but have to be implemented in due course as compared with the observations on accounting issues which have to be addressed and corrected or processed in order to close the 2002 accounts.
I. Van der Hoeven and Meurs Agree To Return Millions of Dollars of Improper Bonus
Payments
261. On January 15, 2004, news emerged that certain Ahold executives had agreed to repay
bonus compensation that they received in 2000, 2001, and 2002. Ahold’s bonus program for senior
executives was directly tied to the Company’s stock price performance and profits per share. According
to Peter Wakkie, Ahold’s recently appointed Director responsible for Corporate Governance, Ahold
intends to “Claim back bonuses that were too high on a mathematical basis,” such that certain
compensation amounts were “unjustly received” based upon the Company’s fraudulent overstatement of
profits.
262. On January 16, 2004, The Associated Press reported that defendants Van der Hoeven and
Meurs had agreed to pay back certain amounts of their respective 2000 and 2001 bonuses that were
improperly earned as they were based upon Ahold’s fraudulently overstated financial results for those
fiscal years. According to Ahold spokesperson, Fritz Schmuhl, Van der Hoven and Meurs agreed that it
would be proper to return the “excess” portions of their bonuses because they were never properly
entitled to such payment. Van der Hoeven and Meurs received aggregate bonus compensation of €9.4
million in 2001 and €7.6 million in 2000.
263. Prior to Van der Hoeven and Meurs’ election to return improperly received bonus
compensation to the Company, Ahold required four other Company executives to return the improper
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bonus compensation that they received based upon the Company’s fraudulently overstated 2001 and
2002 financial performance.
J. Ahold Reports That It Is Removing Defendants Fahlin and Tobin From The Supervisory Board
264. On or about February 15, 2004, Ahold released further information from its internal
investigation into the ICA joint venture. The information released makes it clear that Deloitte was
intimately involved in approving the full consolidation of ICA’s financial results -- even to the extent of
endorsing a “side letter” that failed to indicate that Ahold controlled ICA. In connection with this
scheme, Andreae and Fahlin simultaneously executed two contradictory side letters (at least one of
which was drafted by Meurs). Ahold’s lawyers investigating this matter recommended that both Fahlin
(who supervised Andreae) and Andreae should be removed from their executive positions with Ahold.
265. On February 16, 2004 Ahold issued a press release entitled, “Ahold set to implement
Tabaksblat corporate governance recommendations.” In connection with announcing its proposed
changes of Ahold’s Articles of Association, the rules for the Supervisory Board and its committees
(audit committee, remuneration committee and selection and appointment committee) and the rules for
the Executive Board as well as the proposed general remuneration policy, Ahold announced that
defendants Tobin and Fahlin “will retire from the Supervisory Board. Neither Bob Tobin nor Roland
Fahlin would meet the independence criteria of the Tabaksblat code because of their previous
employment with affiliates of Ahold.”
IX. POST-CLASS PERIOD ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES
266. On March 11, 2003, the Company announced that it had appointed Eustace as Ahold’s
interim Chief Financial Officer. At the time of his appointment, Eustace served on the Supervisory
Boards of KLM, Aegon, and telecommunications company, KPN.
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A. Eustace Discloses Details Of Defendants’ Massive Fraud
267. On May 8, 2003, Ahold conducted two conference calls to update analysts and investors
concerning the results of the Company’s internal forensic accounting investigations. The first
conference call was conducted at 11:30 a.m. (CET) (the “First May 8, 2003 Confe rence Call”), and the
second conference call was conducted at 4:00 p.m. (CET) (the “Second May 8, 2003 Conference Call”).
268. During the First May 8, 2003 Conference Call, Eustace made brief introductory remarks,
which included the following statements:
This morning we have announced the interim investigation on U.S. Food Service is substantially completed and as you know completion of this forensic work is an important and necessary step to complete the Ahold 2002 accounts audit. Back in February, the 24th we had indicated we believe the over statement of promotional allowances markets might exceed $500 million U.S. dollars. As we know today it’s rather worse than that. It’s U.S. dollars $880 million. We can’t yet elaborate on all the possible consequences of the findings, but we find it absolutely important to inform the markets of this outcome as soon as possible and just to give you a little bit of background for that.
***
Clearly we are somewhat disappointed with the findings, but I would say having discovered this final amount and it is the final amount, we don’t expect to have any further adjustments to these findings.
***
1. Eustace Admits That Executive Bonuses Were An Incentive For The Fraud At USF
269. When asked about the motivation behind the fraud at USF, Eustace provided the
following guidance, which demonstrates that the USF fraud was preconceived, deliberate, and
knowingly intended to mislead investors:
QUESTIONER: Yes, good morning. Most of the issues have been addressed. I just want to go back to the issue of the fraud.
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What precisely was the motivation of these two gentlemen in conducting the fraud. How were they remunerated, for example. Who else in the organization was a major beneficiary of this fraud and do you anticipate any of the changes as result of the management changes or is that it, everybody is in the clear, so to speak.
MR. EUSTACE: Well, the motivation of these two gentlemen I can only believe was twofold. One, loyalty to the company and their boss with respect to meeting targets and, secondly, to the extent that targets were met bonuses were paid. That scheme of bonuses and I don’t have the details, would have benefited quite a large number of people at the top of the company, including the whole management Board, of course.
So it wasn’t only self-serving, if you like. I haven’t talked to these two gentlemen and I am unlikely to talk to them, but those are the only reasons that anybody can really think of.
Who else is involved in terms of the fraud. Nobody that we know of and nobody has been turned up as a result of forensic work.
What actions may be taken with respect to the management of the company. This is an issue which will be discussed, I recognize, next week when the whole forensic results are discussed with all of the supervisory Board. 2. Eustace States That Deloitte And Ahold’s Failure To Detect The Fraud At
USF Is “Inconceivable”
270. Regarding the financial impact of the fraudulent booking of vendor rebates and
promotional allowances at USF, Eustace further stated:
QUESTIONER: Good morning.
To what extent is the cash or the net debt position at Ahold different because of the (unintelligible), everything that is taking place, that cash left the business.
MR. EUSTACE: Good question. But, in fact, in this particular case cash has not left the business. What we had was a false receivable. So what it means is that cash that we expected to collect is not coming in.
So the balance that was on the books on December, ‘02 of 880 million is not receivable.
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271. Asked to elaborate on how it was possible that Ahold, USF, and Deloitte failed to detect
or correct the fraud at USF for such a long period of time, Eustace made the following statements:
QUESTIONER: Okay. Thank you. The second point is one of more of curiosity really. If as we understand the fraud is linked to two specific individuals and goes no further, doesn’t it slightly concern you that the senior management’s control was such that they knew that they did not realize that two-thirds of the business profitability didn’t exist.
MR. EUSTACE: Certainly I have the same sort of concerns as you reflect. I find it inconceivable that such a fraud can remain undetected for so long. But I can only also speculate as to what the atmosphere was within a tight-knit group of people that have been working together for years, where loyalties and confidences are taken as red and suspicions are not raised.
But it does seem to me also quite extraordinary that a business can go on so long with the creation of fraudulent receivables and they are not picked up, either, by the way, by management or by the auditors.
3. Eustace Discloses That Ahold Knew Of The Woefully Inadequate Internal
Controls At USF Since 2000 And Failed To Take Corrective Measures
272. When asked about the complete failure of the Company’s internal controls, Eustace
offered the following guidance, which conclusively indicates that Ahold, Deloitte and USF were, at best,
severely reckless during the Class Period:
MR. EUSTACE: Let me just talk about the controls, if I may. I think it’s terribly important.
When we bought U.S. Foods effective April 1, 2000 the management, Jim Miller said you have to know my control systems on PA’s are not good at all.
So the company took that on board and looked at improving the control systems and they spent some time working on that and then bought a company called PYA Monarch. This is a company which has better systems than we got so let’s try to migrate those systems to U.S. Food.
So they started working on that and then they bought Alliant which was last 2001 in the autumn I think, December, 2001, and they found that Alliant had a far better system than any they had seen before called SIS. So they said this is the system we are going to use for the whole of U.S. Food.
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That is the program which they are now installing where they expect the first stage to be live in July and the whole thing to be finished by December of this year.
What it’s meant of course is that essentially the company has been flying blind with very, very inadequate control systems on what is the most important part of its income and if you have got a system which is inadequate and, B, collusion to create fraud, then you have a recipe for disaster and that is actually what happened.
273. Elaborating on certain of the details of the rampant fraud conducted at USF, Eustace
stated:
QUESTIONER: Okay. Can you also elaborate a little bit on this 210 million obligation you had, what does that exactly mean. MR. EUSTACE: The 210 contract revenue? QUESTIONER: Yes. MR. EUSTACE: What it means is that the company, U.S. Foods, in its search to bring cash in early got cash in ahead of it being earned. So cash came in 2002 or before where the revenues would only be earned in 2003 or beyond. Like a prepayment, if you like. QUESTIONER: Okay. Thank you for that. MR. EUSTACE: You can’t get the cash twice. That is the real point.
274. During the Second May 8, 2003 Conference Call, Eustace was again asked questions
concerning the inadequate financial controls at USF. In this regard, Eustace stated:
QUESTIONER: Lastly, what type of remedial action will you be taking at U.S. Foodservice to not let this type of thing happen again?
MR. EUSTACE: Well, the basic problem has been poor systems, poor systems that came to us with U.S. Food Service, which Jim Miller pointed out to the company and said, look, you have to realize my systems controlling my PA is not good and needed attention.
Attention was given to improving those systems and kept changing as the year went by or as the years went by. When we bought PYN Monarch they thought well maybe the PYN Monarch systems are better than the
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ones that U.S. Food had and then we bought Alliant and it was felt this had the best systems in the business, a system called SIS.
So the company now is implementing the IT system from Alliant and they expect the first section will be fully implemented by July and fully implemented by the end of the year. But the fraud was perpetrated in part because -- was facilitated I should say, I should say, because the systems were not good enough to track the PA’s. 4. Eustace Admits That Deloitte Ignored “Red Flags”
275. During the First May 8, 2003 Conference Call, Eustace informed investors that the
defendants, including Deloitte, were undeniably aware of the Company’s inadequate accounting
controls and simply chose to ignore these “red flags”:
QUESTIONER: Why was -- if there was an issue on the control system with the Foodservice business, why wasn’t that flagged to the auditors by senior management?
MR. EUSTACE: Well, the auditors actually -- the auditors raised it in every report.
276. Eustace’s unequivocal admission that the Company utterly failed, having sufficient
despite forewarning, to have adequate internal controls in place to account for vendor rebates and
promotional allowances is a shocking concession of defendants’ scienter. The Company’s decision to
“fly[ ] blind” despite defendant Miller’s warning concerning the lack of internal controls at USF
constitutes a knowing election to avoid examining ways to help ensure that the Company reported
accurate financial results during the Class Period.
277. The following day, The Wall Street Journal published a story that contained excerpts of
an interview with Eustace. According to The Wall Street Journal:
In an interview, Ahold’s interim chief financial officer, Dudley Eustace, said the scheme to inflate vendor rebates was largely the work of Mark Kaiser, a marketing manager, and Tim Lee, a purchasing executive, both of whom were suspended earlier and have resigned. He said poor technology systems at U.S. Foodservice delayed the detection of the alleged fraud.
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278. Also on May 9, 2003, The New York Times published an article discussing the recently
increased restatement amount at USF. The foregoing article contained, among others, the following
comments from Eustace regarding the motivation for the fraud at USF:
Eustace confirmed that some executives of the U.S. Foodservice unit might have profited personally as a result of the accounting irregularities. “Bonuses were paid that would not have been under normal circumstances,” Eustace said. “It was fraud.”
B. Ahold Admits Deliberate Fraud In Its United States Retail Operations
279. On May 27, 2003, Ahold conducted a conference call with securities analysts to discuss
the Company’s May 26, 2003 disclosure of, among other things, the fraud conducted at Tops Markets
(the “May 27, 2003 Conference Call”). During this conference call, for which Dudley Eustace was
unavailable, Ahold Investor Relations Officer, Henk Jan ten Brink, began the call by informing analysts
and investors:
As a result of these investigations so far we found accounting irregularities to an amount of 29 million U.S. dollars. This amount is 29 million U.S. dollars was principally at Top Markets in the U.S, but to a far lesser extent also in some of our U.S. retail companies. It all adds up to this 29 million.
These irregularities were mainly in respect to promotional allowances, but remember the size of it of course is not at all comparable to irregularit ies concerning promotional allowances with U.S. Food Services. It’s in the same corner, but from a completely different magnitude.
280. When asked for more specifics concerning the $29 million in fraudulent transactions
committed at Tops Markets and at other Ahold units, Mr. ten Brink stated:
QUESTIONER: Okay. Second question. With respect to the (unintelligible) fraud, can you just comment on the specific nature of the fraud and how confident are you that it was localized within the Tops Division versus being spread throughout the U.S. retail operation and Stop & Shop and what percentage of the what is 29 million was Tops versus other operations.
MR. BRINK: Well, it’s a handful of questions. If I forget one please remind me.
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We said early on and I would like to repeat it it’s principally so far by far the biggest chunk of this 29 million is at Tops, but to a far lesser extent also a few other U.S. retail companies were involved, so to say, or things were found that would classify as accounting irregularities.
The area of these irregularities is mainly promotional allowances. Well, I think most of you out there are pretty much aware at least by now of U.S. Foodservice what this is about, so this is based on efforts we do or quantities we buy with the suppliers and what we learned is that it was mainly promotional allowances or PA that were involved here.
281. Mr. ten Brink offered the following explanation of the intentional fraud committed at
Tops Markets:
QUESTIONER: I have been asked, but I didn’t want to follow-up on one. The one thing that is most disturbing in the press release was the comment that the errors were intentional. You used the words intentional accounting irregularities.
MR. BRINK: Yes. QUESTIONER: Can you give us an idea at which levels, where did it stop. You know, how far down and how far up was this known and so on and so forth. Frankly, from our standpoint when something is intentional, if it’s in one small area, well, then it’s likely to be in more than one small area. MR. BRINK: Yes. We really to make any sort of reasonable assessment, we really need to hear more color, more detail of this. I understand your point. When we mentioned intentional irregularities it’s -- I think it is called (unintelligible). It’s a bit double because I believe irregularity in itself, is (unintelligible) intentional, but none the less we want to make clear and leave no misunderstanding out in the market, yes, this is intentional and let’s speak the big word. This tends to fraud, make no mistake about that.
282. Erasing all possible doubt that the newly disclosed $29 million in accounting
irregularities at Tops Markets were due to something other than deliberate fraud, Mr. ten Brink stated:
QUESTIONER: Just for the purpose of clarity, when we using numbers like $29 million here, do I take it that is just the sum of fraud that has been found under the forensic accounting investigation and when Ahold’s Audit
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Committee sits down in two months time or whenever to discuss the situation other numbers could come into play, not fraud, but I don’t know how you would describe it, unintentional accounting irregularities where you modify the business taking a rather optimistic view of itself and its own reported earnings. Am I right in thinking there are almost two parallel processes going on here. This is just the fraud numbers we are talking about.
MR. BRINK: Well, Andrew, you are absolutely right. This 29 million is just a fraud number. The reason for bringing it out I think we mentioned.
C. de Ruiter Admits To 300 Internal Control Weakness At Ahold During The Class Period
283. On September 4, 2003, Ahold convened a General Meeting of Shareholders at The
Hague. Commenting upon the Company’s internal forensic accounting investigations, particularly as
related to USF, defendant de Ruiter informed the Company’s shareholders that, among other things,
USF’s massive overstatement of revenues was attributable to an absence of internal controls:
The investigations identified approximately 750 items for review. Ahold is following up on each of these. The nature of these items is very diverse. They vary from simple documentation issues to clear accounting irregularities. Of these 750 items, almost 300 have to do with administrative procedures and internal control weaknesses. These items will be followed up on, although not necessarily all in the process of finalizing the 2002 accounts. Currently a special Task Force is in the process of following up on all of the findings of the investigations. As far as the irregularities are concerned, let me give an example. After the announcement of the irregularities at U.S. Foodservice, it was of the greatest importance for Ahold to determine precisely what had occurred there. Specifically, at issue was gaining a true insight into so-called “promotional allowances.” I would like to explain this term briefly. “Promotional allowances” are rebates that companies receive from vendors. These promotional allowances form a large part of U.S. Foodservice’s earnings – which is also the case with comparable companies.
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These promotional allowances had to be checked and that means that in very many cases it had to be verified what the conditions were U.S. Foodservice had to comply with in order to receive certain rebates. In addition, all those cases had to be examined to ascertain to what extent the rebates had been received on the basis of underlying agreements. Finally, in each of these cases, it was verified if and when the rebate was received. And all that over a three-year period. This meant reviewing thousands of book entries and other data, requiring the cooperation of hundreds of suppliers. I would like to point out, but most of you know this already, that U.S. Foodservice is a very large company with billions of dollars in sales, about three times the size of Albert Heijn. In order to examine the Ahold group more fully, forensic investigations at 18 other Ahold operating units and at corporate headquarters were conducted. We have issued press releases with respect to price sensitive issues discovered during the forensic investigations. As a result of the accounting irregularities at U.S. Foodservice and certain other operating companies, we could no longer rely on some of our accounting records and we had to reconstruct or validate part of our bookkeeping. This is very time-consuming work and made more difficult because a number of executives and accounting personnel who were probably directly involved in the irregularities are no longer with the company. In addition to the findings of accounting irregularities, the forensic accountants also identified a large number of accounting issues and questions. A large number of issues have also come up during the ongoing audit by the company’s auditors Deloitte & Touche, some of which as a result of the investigations.
D. Moberg Admits That Ahold Utterly Failed To Properly Integrate Acquired Companies
284. The Company’s new CEO, Anders Moberg, also gave a presentation at the September 4,
2003 General Meeting of Shareholders. Mr. Moberg specifically stated “I will not be commenting on
the accounting irregularities of the past six months.” Consistent with defendant de Ruiter’s remarks to
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the Company’s shareholders, Moberg did, however, attribute the USF accounting debacle to inadequate
internal controls and fraud:
We are out of focus. We have tried to be everything to everybody. That’s expensive! For example: we are in hypermarkets, compact hypers, supermarkets, convenience stores and even in discount. In addition, we run production facilities and own specialty stores and pharmacies. This lack of focus has a drastic impact on our cost base. For instance: our logistical infrastructure needs to be able to deliver large quantities in the cheapest possible way and, at the same time, service smaller and more frequent deliveries. Our supply chain needs to accommodate highly perishable products, as well as white and brown goods. This means that we’re into areas that require the handling of after-sales support and the handling of guarantees. Our structure is too complex. For example: I saw too many overlapping initiatives at different levels and unclear responsibilities. Different operating companies, with different business models, and different business processes create a structure that is too complex. This makes it very difficult to have efficient controls. We have too many under performing assets. There are some loss making businesses that have no prospect of becoming profitable within a reasonable time frame. This can’t go on. And believe me: there are no sacred cows! The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls. As a result of this global ambition, the debt level also increased. The result is a sub investment grade rating which constrains our flexibility and our ability to deliver growth today. However, the past is the past. Solving these problems is an urgent priority, but will take time. It’s a matter of refocusing and revitalizing every aspect of the company, and then demanding much sharper execution from our wholly-owned companies, as well as our joint ventures. Pre-requisites In order to make this happen, I’m convinced that we have to adopt a wholesale change in the mindset of our organization, if we are to deliver value to our customers, our associates and our shareholders. This
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entails creating a common culture and reducing the complexity of our organizational structures. In short, we will have to scale back our global ambitions; create a new culture and esprit de corps, and drive for synergies and organic growth.
285. Regarding the meltdown at USF, the damage that it caused the Company’s investors, and
the Company’s plans for correcting its lack of adequate internal controls, Moberg informed the
Company’s shareholders:
Our plans to integrate our U.S. Foodservice business, after a series of acquisitions, was badly de-railed by the fraud discovered in 2003. And at this stage, we don’t know the true underlying strategic value of our asset which is, nevertheless, a major player in what still amounts to a highly fragmented, but still very important, growth industry. So, therefore to sell it off today would create a massive destruction of shareholder value!
***
Getting U.S. Foodservice on track So, what are we going to do over the next 18 to 24 months? U.S. Foodservice will be managed as a single business operating separately from food retail, and will receive the full attention of Ahold’s Executive Board. We will further establish an Advisory Board, which will include some external members, to support U.S. Foodservice. We are in the process of installing a new management team whose assignment is to get the company on track. During this period, we foresee limited investment. The company has grown too fast through acquisitions with insufficient integration. We believe that the ingredients are all there. We will have to put them together. As a result of our investigations, we will put in the necessary disciplines and strict internal controls to establish good governance and restore the business to health. Please rest assured that we, as the Executive Board, will keep a very close eye on this process. We will keep you informed of our progress on a quarterly basis.
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E. Ahold’s Restated Financial Results Demonstrate That Defendants Knowingly And/Or Recklessly Made False And Misleading Statements Throughout The Class Period
286. On October 2, 2003, after delaying its release of the Company’s audited consolidated
2002 financial statements numerous times based upon the continuing internal accounting and legal
investigations, Ahold finally presented the investing public with this information as well as certain of the
details regarding its restatement of financial results. In pertinent part, the Company’s October 2, 2003
Zaandam, The Netherlands, October 2, 2003 – Ahold today published its audited consolidated 2002 financial statements. Commenting on the announcement, Ahold President & CEO Anders Moberg said: “The publication of these results is a major milestone that draws a line under recent events and enables us to move forward.” Ahold also announced that the audited 2002 financial statements were delivered to its syndicate of banks as required under its Euro 2.65 billion credit facility negotiated in March 2003. As a result, Ahold has access to the unsecured tranche of USD 915 million. “Based on our current cashflow projections, we believe that we will not need access to the unsecured tranche,” Hannu Ryöppönen, Chief Financial Officer said. The findings of forensic and other internal investigations initiated by the company in 2003 required Ahold to restate its consolidated financial statements for 2001 and 2000. These restatements of prior years arose primarily from overstatements of vendor allowance income at U.S. Foodservice and the deconsolidation of joint ventures. The 2002 financial statements reflect all material correcting adjustments that have been identified as a follow-up to the various investigations and the audit by independent auditors Deloitte & Touche. Net income for 2001 and 2000 has been restated resulting in a reduction in the amount of Euro 363 million and Euro 196 million, respectively, of which 59% and 53%, respectively, related to improper accounting for vendor allowances. Correcting adjustments have also been made in the 2002 financial statements. A summary of accounting issues under Dutch GAAP is outlined later on in this release. Net sales were reduced by Euro 12,380 million and Euro 10,709 million
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for 2001 and 2000, respectively, mainly as a result of the deconsolidation of joint ventures and some other smaller adjustments.
***
Highlights of the 2002 results Set forth below are highlights of the results for 2002, 2001 and 2000. The results for 2001 and 2000 have been restated to reflect the correction of accounting irregularities and errors announced on February 24, 2003 and those found through the subsequent forensic investigations and external and internal audits. The increase in net sales in 2002 was largely attributable to acquisitions, primarily those of Alliant, acquired in November 2001, and Bruno’s, acquired in December 2001. In addition, the results of Ahold’s subsidiaries Disco and Santa Isabel in South America were consolidated in the course of 2002. The increase in net sales excluding currency impact was 20.8%. Operating income in 2002 amounted to Euro 239 million, a decrease of 87.5% compared to 2001. The decrease was primarily caused by Euro 1,287 million of impairment of goodwill and intangible assets, including Euro 898 million related to Ahold’s operations in Spain, Euro 199 million related to the Argentine and Chilean operations, Euro 129 million related to Bruno’s in the U.S. and Euro 54 million related to the Brazilian operations. The decrease was also caused by a Euro 372 million exceptional loss on related party default guarantee recorded in 2002 with respect to debt defaults by Velox Retail Holding, Ahold’s joint venture partner in Disco Ahold International Holdings N.V. Operating income in 2002 also was adversely affected by a lower U.S. Dollar/Euro exchange rate. Operating income before impairment and amortization of goodwill and exceptional loss in 2002 amounted to Euro 2,145 million, an increase of 4.0% compared to 2001. See table below and the supplemental disclosures to the statements of operations for a reconciliation of this non-GAAP measure.
*** U.S. GAAP reconciliation The Annual Report on Form 20-F that will be filed with the U.S. Securities and Exchange Commission will contain a U.S. GAAP reconciliation of net income and shareholders’ equity which is in the
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process of being audited. The current unavailability of U.S. GAAP figures has no impact on Ahold’s credit agreement which required that it delivers audited consolidated financial statements under Dutch GAAP. Under U.S. GAAP, the net loss for 2002 will be significantly higher. In particular, goodwill impairment charges related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) on December 31, 2001, will contribute to a higher net loss under U.S. GAAP. This primarily will be caused by an additional goodwill impairment charge of approximately Euro 3.2 billion (unaudited), of which Euro 2.7 billion relates to U.S. Foodservice.
*** Summary of restatements of and reclassifications to the consolidated financial position and results for 2001 and 2000 under Dutch GAAP -- The internal investigations resulted in significant restatements of the 2001 and 2000 comparable financial information. These investigations also revealed the necessity to strengthen Ahold’s internal controls, resulting in a company-wide process being led by a special task force. Among other changes introduced, Ahold’s Internal Audit function will now report directly to the CEO and the Audit Committee. The effect of the restatements on net income for 2001 and 2000 is set forth in the table below. Restatements of Euro 45 million relating to periods prior to 2000 were recorded in opening retained earnings as of January 1, 2000. Vendor allowances: The internal investigations uncovered significant accounting irregularities and errors in relation to vendor allowances over the past three years, mainly at U.S. Foodservice. The correcting adjustments had a negative effect on Ahold´s net income of Euro 215 million for 2001 and Euro 103 million for 2000. Deconsolidation of joint ventures: Ahold has deconsolidated joint ventures where it concluded the company did not have effective control, being ICA, Jerónimo Martins Retail, DAIH, Paiz Ahold and Bompreço. Ahold has changed to the equity method for these ventures for the relevant periods using the equity method. This change reduced consolidated net sales by Euro 12.2 billion for 2001 and Euro 10.6 billion for 2000. Restatements of restructuring provisions of deconsolidated joint ventures had a negative effect on net income of Euro 5 million for 2001 and Euro 10 million for 2000.
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Acquisition accounting: Ahold has made downward fair value adjustments to real estate acquired in connection with the acquisition of its 50% interest in ICA in April 2000 and of Superdiplo in December 2000. This produced corresponding effects on goodwill, amortization and gains on asset sales and resulted in a negative effect on net income of Euro 36 million for 2001 and Euro 8 million for 2000. Reserves, allowances and provisions: Ahold made changes where entries were inadequately documented, producing a negative impact on net income of Euro 33 million in 2001 and Euro 38 million in 2000. Real estate transactions: Ahold has corrected the accounting treatment on 46 leveraged lease transactions that took place in 2001. The net gain from 39 transactions now has been recognized in income at the transaction date instead of being deferred over the remaining lease terms ranging from 20-25 years, while seven lease transactions have been reclassified from operational to financial leases that must be capitalized. These changes have a positive effect on net income for 2001 of Euro 2 million and a negative effect of Euro 26 million for 2000. Other accounting issues in 2002 Put option: Put options held by ICA’s joint venture partners are disclosed in Ahold’s 2002 financial statements as a contingent liability under Dutch GAAP. In the event that these options are exercised, Ahold expects that it would have to pay at least an amount of Euro 1.3 billion for all of the ICA shares held by the ICA partners. Impairment of goodwill and tangible fixed assets: Mainly as a result of the deteriorating economic conditions in Spain, Argentina and the Southeastern United States, goodwill impairment charges of in total Euro 1,281 million were recorded in 2002. Furthermore, tangible fixed asset impairment of Euro 137 million was recorded in 2002. Vendor invoices: Various matters raised by the U.S. Foodservice (“USF”) investigation were further reviewed to determine their impact, if any, on Ahold’s financial statements. One such matter relates to certain USF vendor invoicing practices. These practices resulted in overbillings by various USF local branches to various vendors with respect to vendor allowances of approximately USD 5 million in 2002, USD 7 million in 2001, USD 6 million in 2000 and USD 13 million in 1999 and prior periods. Ahold has recorded an accrual to cover any refunds that Ahold or USF expects to be required to pay to vendors for these overbillings, and has restated its financial statements for 2001 and 2000 with respect to these overbillings. Other billing practices also were identified at USF that
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could result in other potential overbilling claims by vendors in an amount totaling approximately USD 60 million. Ahold believes that USF may have defenses to this category of claims. Accordingly, no liability has been accrued for this amount. Ahold is implementing measures designed to prevent improper and questionable vendor invoicing practices. Additionally, a further review will be done to determine other appropriate actions to be taken, including personnel changes. Certain employees at various USF branches have been suspended and final decisions regarding their employment status will be made once the investigation is completed.
287. On October 17, 2003, Ahold at last filed with the SEC the Company’s Annual Report for
2002 on 2002 Form 20-F. On the same day, Ahold issued a press release purporting to summarize the
2002 Form 20-F. Ahold’s October 17, 2003 press release stated:
Zaandam, The Netherlands, October 17, 2003 – Ahold today confirmed that it has submitted its Annual Report 2002 on Form 20-F on October 16, 2003, to the United States Securities and Exchange Commission (“SEC”). The document will be posted on the SEC website later today. In addition to the audited consolidated financial statements for 2002 as presented on October 2, 2003, Form 20-F contains information on the operational performance of Ahold’s operating companies, an outlook for 2003, which is summarized below, and information with regard to legal and corporate governance issues. The company also has made editorial improvements to and corrected inadvertent mistakes in the notes to its financial statements contained in Item 18 of the Form 20-F, published by the company on October 2, 2003. These changes have no impact on the reported results and financial position. During the presentation of the company’s 2002 annual results under Dutch GAAP on October 2, 2003, Ahold indicated that it expected a significantly higher net loss under U.S. GAAP for 2002. The net loss under U.S. GAAP was Euro 4,328 million (Euro 1,208 million Dutch GAAP). The higher net loss under U.S. GAAP was primarily a result of additional goodwill impairments of Euro 3,485 million, of which Euro 2,632 million was related to U.S. Foodservice. Taking into account the impairment charges, shareholders’ equity under U.S. GAAP as of year-end 2002 was Euro 8,541 million (Dutch GAAP Euro 2,609 million). A description of the principal differences between U.S. GAAP and Dutch GAAP relevant to Ahold is found in Note 32 in Item 18 of the Form 20-F. Ahold also provided additional information on the terms and conditions of
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the ICA AB (formerly ICA Ahold AB) put option, which clarifies information publicly provided on October 2, 2003. Ahold owns a 50% interest in ICA AB, with Canica AS (20%) and ICA Forbundet AB (30%). Under the shareholders’ agreement of ICA AB, Ahold will be able to nominate a majority of the members of the ICA AB board of directors, only if Ahold acquires more than 70% of the shares and voting rights of ICA. If Ahold is unable to nominate a majority of the ICA AB board of directors, Ahold may not have control over ICA AB. As disclosed on October 2, 2003, the company indicated that it would have to pay at least Euro 1.3 billion for all of the shares held by the ICA partners. Subsequent to that, new information was provided to Ahold and the ICA partners that enables Ahold to be more precise in its current estimate of what it would have to pay for all of the remaining shares of the ICA partners. As a result, Ahold currently estimates that the amount that it would have to pay under the existing option would be approximately Euro 1.8 billion. The company points out that this current estimate is by no means definitive as the valuation procedure for the ICA shares is not likely to be completed before the second quarter of 2004. The outcome, therefore, depends on future market conditions and presently unknown parameters to be applied in the valuation.
F. Ahold’s “Road To Recovery Program” Acknowledges The Company’s Utter Lack Of Internal Controls During The Class Period
288. On November 7, 2003, Ahold announced its three year “Road to Recovery Program,” and
issued a press release, among other things:
Recovering U.S. Foodservice “U.S. Foodservice is an under-managed business, but it has a great market position and great potential to improve its financial performance,” said Anders Moberg. “The company holds the number two position in the growing USD 180 billion wholesale foodservice market. However, U.S. Foodservice´s integration process was never properly executed. Larry Benjamin, the new CEO, is implementing a three-step plan for recovering the value of U.S. Foodservice. Although 2003 is clearly a lost year, we have significant opportunities to restore margins and raise them towards those of our competitors.” The accounting fraud that was detected at the beginning of the year was a symptom of a structurally weak organization.
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289. Concerning the Company’s inadequate Class Period internal financial controls, Ahold’s
November 7, 2003 press release stated:
The first step in the program to recover the value of U.S. Foodservice is already underway - to put in place a rigorous control environment and a strong financial organization. This includes the enhancement of the Sales Information System to track each product, customer, delivery and transaction at the corporate level and provide full transparency to the branches.
*** Reinforcing accountability, controls and corporate governance Ahold is replacing a decentralized system of internal controls that had many weaknesses with a one-company system with central reporting lines. As already announced, internal audit will not only report to the CEO, but also to the Audit Committee of the Supervisory Board.
X. ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES IN AHOLD’S 2002 FORM 20-F
290. After months of conducting its internal investigations, Ahold published its long-awaited
restated financial results in the 2002 Form 20-F that the Company filed with the SEC on October 17,
2003, as amended on October 31, 2003. The 2002 Form 20-F is replete with admissions that the
accounting irregularities that led to the Company’s February 24, 2003 Announcement and caused the
Class to lose billions of dollars were the result of fraud and woefully inadequate internal controls during
the Class Period.
291. The 2002 Form 20-F restates Ahold’s previously reported financial results that the
Company issued during the Class Period, clearly indicating that such results were materially false and
misleading when originally reported. The Company prefaced its 2002 Form 20-F as follows:
In this annual report on Form 20-F for the fiscal year ended December 29, 2002, we are restating our consolidated financial statements for fiscal 2001 and fiscal 2000 to reflect certain accounting adjustments. We have also recorded correcting accounting adjustments that are reflected in our fiscal 2002 consolidated financial statements. Although these accounting adjustments primarily relate to fiscal 2002, fiscal 2001 and fiscal 2000, certain adjustments relate back to fiscal 1999, fiscal 1998 and prior
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periods. As a result, the figures for fiscal 1999 and fiscal 1998 included in the five-year summary data contained herein have been restated to reflect the applicable adjustments discussed herein. These accounting adjustments were primarily made to address accounting irregularities and other accounting errors made by us and our subsidiaries in the application of accounting principles generally accepted in The Netherlands (“Dutch GAAP”) and accounting principles generally accepted in the United States (“U.S. GAAP”) and to address other issues identified or confirmed through investigations performed by outside law firms and forensic accountants and during the fiscal 2002 year-end audit of our financial statements. Upon review of the aggregate impact of all of these adjustments, we concluded that restating our consolidated financial statements for fiscal 2001 and fiscal 2000 were required. (2002 Form 20-F, at 1) .
292. As reflected in the above-referenced portion of the Company’s 2002 Form 20-F, as well
as in the balance of this critical filing with the SEC, the conclusions from the Internal Investigations
served as the primary basis for Ahold’s restated financial results.
293. The 2002 Form 20-F also informed the SEC and the Company’s investors of the various
conclusions reached by each of the Internal Investigations. Each of the Internal Investigations either
directly concluded that the Company engaged in “fraud” under the supposed oversight of Deloitte U.S.
and Deloitte Netherlands that caused the financial statements that Ahold issued during the Class Period
to be materially false and misleading, or intimated that the accounting irregularities and errors that
necessitated the restatements were the result of intentional and/or reckless conduct by Ahold and
Deloitte U.S. and Deloitte Netherlands.
A. Ahold Admits Fraud At USF
294. Summarizing the findings of the Internal Investigation conducted at USF, Ahold admits
in its 2002 Form 20-F:
The USF investigation identified accounting fraud relating to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold. The investigation found that certain senior officers of USF and other employees were involved in the fraud. It was also found that
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inappropriate vendor allowance accounting had existed at the date of the acquisition of USF. The investigation also identified or confirmed numerous material weaknesses in internal controls. (2002 Form 20-F, at 66) (emphasis added).
295. Moreover, the 2002 Form 20-F sets forth additional details concerning the Internal
Investigation into the admitted fraud at USF that caused the Company to issue total overstatements of
pre-tax earnings of approximately $880 million, of which, approximately $110 million relates to fiscal
year 2000, approximately $260 million relates to fiscal year 2001 and approximately $510 million
relates to fiscal year 2002. As indicated by the enormous drop in the trading price of Ahold common
stock and ADRs upon the Company’s February 24, 2003 Announcement, the fraud committed at USF
directly caused the staggering losses that Class members have suffered. In this regard, the 2002 Form
20-F reported:
On April 25, 2003, the Morvillo Firm reported its interim findings on the accounting irregularities and related matters at USF. On June 25, 2003, PwC reported further detailed findings. The PwC investigation identified accounting fraud related to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated. The PwC investigation found that certain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP. As part of the fraud, certain members of USF management and other employees interfered with the audit confirmation process for vendor allowance receivables from vendors, concealed vendor contracts and their true terms, made misrepresentations regarding the absence of prepayments from vendors, and caused the creation of certain inaccurate accounting records. The PwC investigation further identified numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates. The Morvillo Firm, assisted by
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forensic accountants from PwC, also continued to investigate the roles of certain USF employees and reported its findings and conclusions to the Audit Committee. Various matters raised by the USF investigation were further reviewed and followed up by Ahold, D&T, and various outside Ahold legal counsel, and, where appropriate, by PwC, to determine their impact, if any, on Ahold and its financial statements, including certain USF vendor invoicing practices. As a result of this further review, it was determined that these practices result ed in overbillings by various USF local branches of various vendors with respect to vendor allowances. Ahold has recorded an accrual to cover any refunds that USF expects to be required to pay to vendors for these overbillings, and has restated its consolidated financial statements for fiscal 2001 and fiscal 2000 with respect to these overbillings. (2002 Form 20-F, at 69) (emphasis added).
B. Ahold Admits Fraud At United States Retail Operations -- Including Ahold USA’s Tops and Giant-Carlisle Retail Chains
296. The 2002 Form 20-F further reports that following the Company’s February 24, 2003
Announcement, the Audit Committee of Ahold’s Supervisory Board authorized investigations into a
broad segment of the Company’s operations to determine whether additional accounting issues existed.
Specifically, the Audit Committee ordered an investigation at seventeen (17) Ahold operating
companies and real estate companies to assess: (i) whether accounting irregularities or errors existed;
(ii) the integrity of management; and (iii) the adequacy of internal controls. Attorneys at WCP and
accountants at PwC conducted these investigations. Among other things, these investigations led to the
Company’s discovery and disclosure of the $29 million in accounting irregularities at Tops that Ahold
announced on May 26, 2003.
297. Concerning the discovery of fraud in connection with the Internal Investigation into the
Class Period accounting practices at Tops, Giant-Carlisle, and other Ahold operating companies, the
2002 Form 20-F states:
On March 24, 2003, the Audit Committee ordered the commencement of a series of additional internal investigations to assess whether accounting irregularities, errors and/or issues existed, the integrity of management,
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and the adequacy of internal controls. These investigations were conducted by WCP, assisted by forensic accountants from PwC, at 17 Ahold operating companies and real estate companies and at the Ahold parent company. The forensic investigations found accounting irregularities at Tops and at Giant-Carlisle (although involving relatively small amounts). The investigations also concluded that certain accounting irregularities had occurred at the Ahold parent company. At Tops, these accounting irregularities consisted of intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management. At Giant-Carlisle, the accounting irregularities consisted of pervasive earnings management, including the intentional deferral of earned vendor allowance receivables and vendor allowance accrued reserves, as well as the improper holding of company funds at vendors. According to the investigatory findings, accounting irregularities also occurred at the Ahold parent company involving the misapplication of purchase accounting in respect of the acquisitions of ICA and Superdiplo. The investigations also resulted in findings of varying degrees of earnings management and/or other accounting errors or issues at the Ahold parent company and at the other operating and real estate companies reviewed. These errors or issues most frequently involved improper accounting for reserves through excess provisioning or inappropriate release and the unnecessary deferral or premature recognition of income from vendor allowances. The investigations also found a number of internal control weaknesses, especially relating to accounting and monitoring for vendor allowances and contracts, deviations from Dutch GAAP and U.S. GAAP, and a general lack of sufficient technical knowledge of Dutch GAAP and U.S. GAAP at many of the companies reviewed. (2002 Form 20-F, at 70) (emphasis added).
298. In Note 3 to its 2002 Form 20-F, Ahold further admits the following concerning its
fraudulent accounting for vendor allowance income at USF and Tops:
As a result of the findings of the investigations at USF and Tops, the Company determined that its income from vendor allowances for fiscal 2001 and 2000 was overstated due to the intentional and unintentional misapplication of Dutch GAAP and U.S. GAAP and the intentional inappropriate accounting for and mischaracterization of cash receipts which led to the recognition of vendor allowances before it was appropriate to do so under Dutch GAAP and U.S. GAAP. Furthermore, certain vendor allowances were misclassified as revenue instead of as a
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reduction of cost of sales or selling expense, general and administrative expenses, as required under Dutch GAAP and U.S. GAAP.
The restated consolidated financial position and results reflect adjustments to correct overstated vendor allowance income, to correct for the timing of the recognition of vendor allowances, and to reclassify certain vendor allowances from net sales to cost of sales.
The Company determined that net receivables from vendors at the date of the USF acquisition in fiscal 2000 did not exist at the time. In addition, the Company determined that, at the date of acquisition, a liability for deferred revenue related to vendor allowances, that were not yet earned, were not recorded. Furthermore, the Company determined that a liability should have been recognized at the date of acquisition for amounts that had been overbilled to vendors for vendor allowances. The total amount of these adjustments led to an overstatement of net assets acquired by EUR 70 [million].
299. Regarding the misstatements attributable to the Company’s improper accounting for
vendor allowances during the early part of the Class Period, Note 3 of the 2002 Form 20-F states:
The Company discovered various other misstatements relating to vendor allowance transactions prior to fiscal 2000 resulting of an overstatement of opening shareholders equity as of January 2, 2000 by EUR 30 [million].
C. Ahold Admits Fraud At Disco
300. In connection with its February 24, 2003 Announcement, Ahold informed investors that it
had “been investigating, through forensic accountants, the legality of certain transactions and the
accounting treatment thereof at its Argentine subsidiary Disco.”
301. With respect to the Internal Investigation conducted at Disco, which the Company
intends to divest as soon as possible, Ahold admits in its 2002 Form 20-F:
The Disco investigation found a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.
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302. In its 2002 Form 20-F further admitted that it was aware of circumstances indicating that
there was fraud at Disco well in advance of Ahold’s February 24, 2003 Announcement. According to
the 2002 Form 20-F:
As a result of finding invoices for suspicious transactions at Disco in July 2002, our internal audit department conducted an investigation. This investigation, which was completed in early December 2002, identified additional suspicious transactions. We then instructed forensic accountants at D&T to conduct a further forensic investigation of Disco. During the course of the investigation, the law firm of Wilmer, Cutler & Pickering (“WCP”) was retained to assist with the investigation. On February 17, 2003, D&T reported their preliminary findings to Ahold.
In late March 2003, we determined that a further investigation at Disco was warranted, which was undertaken by WCP and a forensic accounting team from PwC. The investigation was completed in May 2003. The investigation found a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. The investigation further noted that these payments had been improperly capitalized with respect to certain of these transactions that should have been expensed. The investigation also identified significant internal control weaknesses.
D. Ahold Admits Fraud In Connection With Accounting For Joint Ventures
303. Ahold’s 2002 Form 20-F also describes how the Internal Investigations led the Company
to conclude that it had been improperly accounting for certain joint ventures.
304. As early as October 2002, the Company’s Audit Committee became aware of a “side
letter” indicating that Ahold should not have been fully consolidating the financial results of its 50%
owned joint venture in Scandinavia, ICA. According to the Company, this side letter contradicted an
earlier letter pursuant to which Deloitte had been consolidating ICA into Ahold’s financial statements.
The 2002 Form 20-F contends that when Deloitte became aware of the “side letter” relating to ICA, the
Company’s Audit Committee authorized that component of the Internal Investigations to examine the
basis for the ICA “side letter” and the circumstances behind its alleged concealment from Deloitte. The
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Internal Investigation revealed that because Ahold never had control over ICA, there was no basis for
the Company to consolidate ICA’s financial results under either U.S. GAAP or Dutch GAAP.
305. Concerning the results of the Internal Investigation into Aho ld’s joint ventures, which
caused Ahold to subtract a massive €23.089 billion in revenues for 2001 and 2000, the 2002 Form 20-F
states:
On February 22, 2003, it was discovered that letters similar to the ICA Side Letter also existed in respect of control letters given in connection with other Ahold joint ventures and that these letters also had not been provided to D&T. The joint ventures were: (1) Bompreço, which was formed in December 1996 with Ahold having a 50% interest until July 2000 when Ahold acquired 100% of the joint venture, (2) DAIH, which was formed in January 1998 with Ahold having a 50% interest which interest was increased to more than 66 2/3 % in July 2002 and 100% in August 2002, and (3) Paiz Ahold, which was formed in December 1999 with Ahold having a 50% interest until January 2002 when Paiz Ahold became party to a joint venture with another party and Ahold’s indirect interest in the new joint venture was reduced to 33 1/3%. All of these joint ventures had been fully consolidated in our financial statements since the respective dates of formation, except Paiz Ahold which ceased to be consolidated on January 1, 2002, when our indirect interest in the new joint venture was reduced to 33 1/3%, at which time we began to account for our interest in the joint venture on an equity basis.
***
In light of the various side letters referred to above and on the basis of the available facts and circumstances, we decided in February 2003 that we should restate our historical financial statements so as to proportionally consolidate ICA and the other joint ventures for which there were side letters for the periods they were 50% owned by us, as well as our joint venture in Portugal, JMR. We have held a 49% interest in JMR since its formation in 1992 and, although no side letters existed regarding our control of JMR, we had been fully consolidating JMR in our financial statements since the formation of the joint venture, as we believed that we had control over JMR. In light of the evaluation of the accounting for the other joint ventures, we reconsidered our accounting for JMR and concluded that we had significant influence, but not control over JMR. In May 2003, we concluded that we would account for the above referenced joint ventures for the period in which we could exercise significant influence without having control by using the equity method,
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rather than proportionally consolidate the joint ventures, so as to better align our accounting with U.S. GAAP and, to a lesser extent, IAS.
306. Moreover, Note 3 to the 2002 Form 20-F contains the following explanation for Ahold’s
decision to deconsolidate the financial results of certain of its joint ventures and the accompanying
necessary restatement of its previously issued financial results:
Prior to fiscal 2002, the Company consolidated its joint venture interests in ICA, DAIH, Bompreço and Paiz Ahold based upon the Control Letters among the shareholders that seemingly gave control over the joint ventures to Ahold. The Company subsequently determined that Side Letters had been executed by the relevant shareholders that nullified the effects of the Control Letters. As a result, management concluded that the Company did not control these joint ventures. Additionally, prior to 2002, the Company had consolidated JMR. In light of the evaluation of the accounting for the other joint ventures, the Company reconsidered its accounting for JMR and concluded that it had significant influence, but not control over JMR. The Company concluded that consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.
The restated financial position as of December 30, 2001 and results for fiscal 2001 and 2000 reflect adjustments to deconsolidate the aforementioned joint ventures and account for them using the equity method of accounting, with the exception of Bompreço, which has been consolidated since July 2000, when Ahold acquired the remaining voting shares, obtaining majority voting control over Bompreço. DAIH has been consolidated since July 2002, when Ahold obtained control of DAIH through the acquisition of additional DAIH shares that it did not already own.
E. Ahold Admits Issuing Materially False And Misleading Statements During The Class Period
307. Lest there be any doubt that the false and misleading statements that Ahold issued during
the Class Period concerning its financial results and the adequacy of its internal controls were material,
the Company’s 2002 Form 20-F unequivocally admits that such misstatements were material . In this
regard, the 2002 Form 20-F admits:
Fiscal 2001 and Fiscal 2000 Restatements and Fiscal 2002 Adjustments
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In connection with the findings of the investigations referred to above, and the consequent remedial accounting actions taken by Ahold management, we have restated our consolidated financial statements for fiscal 2001 and fiscal 2000 under both Dutch GAAP and U.S. GAAP. The adjustments are material, both quantitatively and qualitatively, to our fiscal 2000 opening retained earnings and our financial position and results of operations for fiscal 2001 and fiscal 2000.
In addition, our consolidated financial statements for fiscal 2002 reflect correcting adjustments, of which some are related to the findings of the investigations referred to above.
308. The Company’s 2002 Form 20-F sets forth a summary of the adjustments that Ahold was
required to make to its previously issued financial statements after the conclusion of the Internal
Investigations, which reportedly reviewed “470 separately identified items.” (2002 Form 20-F, at 66).
Specifically, the 2002 Form 20-F identifies the following practices as requiring Ahold to correct
accounting irregularities and other accounting errors that made the Company’s previously issued
financial statements materially false and misleading:
The restatements of the fiscal 2001 and fiscal 2000 consolidated financial statements and the correcting adjustments reflected in the fiscal 2002 consolidated financial statements reflect adjustments that correct accounting irregularities and other errors previously made in the application of Dutch GAAP and U.S. GAAP. These adjustments relate to:
(1) the deconsolidation of the joint venture companies not controlled by Ahold;
(2) improper or premature recognition of vendor allowances;
(3) misapplication of accounting principles and misuse of facts
relating to acquisition accounting;
(4) improper accounting for certain reserves, allowances and provisions;
(5) improper accounting for certain real estate transactions; and
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(6) certain other accounting issues and items arising as a result of the misapplication of or errors in the application of Dutch GAAP and U.S. GAAP.
F. Ahold Admits To Material Internal Control Weakness During The Class Period
309. Ahold’s 2002 Form 20-F discussed the steps that the Company is currently taking in an
attempt to assure that future fraud and other injurious accounting transgressions do not occur. In
describing the actions that the Company intends to take, Ahold admits that its internal controls, as well
as the internal controls ostensibly in place at USF during the Class Period were materially inadequate.
Specifically, Ahold’s 2002 Form 20-F admits:
As discussed above, as a result of the events leading up to and following Ahold’s February 24, 2003 announcement, the Audit Committee ordered numerous, extensive internal investigations by various outside legal counsel and forensic accounting experts. In total, 19 operating and real estate companies (including USF and Disco) were reviewed, in addition to the Ahold parent company. In addition, investigations were undertaken with respect to the issues surrounding the deconsolidation of certain joint ventures. In response to the findings of the internal investigations, the Audit Committee requested in June 2003 that Ahold management take prompt and effective remedial actions to correct any identified accounting irregularities and errors, and strengthen internal controls to prevent any reoccurrence of the items found.
Ahold management and the Audit Committee have reviewed all of the accounting issues identified in the internal investigations and in the course of the audit of Ahold’s fiscal 2002 financial statements, including the 470 separate items identified by PwC. Ahold management has researched and analyzed all of these issues. Management and the Audit Committee determined, in consultation with D&T and PwC, Ahold’s positions with respect to all of these issues and the adjustments required to be made to our financial statements as a result thereof. Items relating to operating companies were addressed by management at the respective operating companies, under the overall direction and supervision of Ahold’s senior financial management team. We believe that all such required financ ial statement adjustments have been made.
Ahold is in the process of taking steps to address the significant internal control weaknesses raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified. A special task force reporting to the Audit Committee has been formed,
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now chaired by our current Chief Financial Officer, and composed of our senior finance, legal and internal audit executives and supplemented by external advisors, to address the accounting issues and the internal control weaknesses that were identified.
The task force will oversee the development and implementation of modifications, improvements and other required changes to address weaknesses identified and to strengthen our internal controls. Certain regional task forces have also been formed that have been and will be assisting in this process. We intend to implement many of the required changes to our internal controls that we believe are critical by the end of fiscal 2003 and to implement remaining changes in fiscal 2004.
In addition, the reporting line for Ahold’s internal audit department has been changed. The internal audit department now reports directly to Ahold’s Chief Executive Officer and to the Audit Committee, instead of solely to Ahold’s Chief Executive Officer, as previously was the case. We also intend to implement a plan to redesign the function of the internal audit throughout the group of operating and real estate companies to centralize it within the Ahold parent company.
XI. ADMISSIONS OF FRAUD AND MATERIAL INTERNAL CONTROL WEAKNESSES
IN AHOLD’S 2002 ANNUAL REPORT
310. On October 31, 2002, Ahold issued a press release announcing that the Company had
released an English version of its 2002 Annual Report (“2002 Annual Report”) and that it was posting a
copy of this report on the Company’s website, www.ahold.com. The foregoing press release further
indicated that the Company would publish a Dutch language version of its 2002 Annual Report on
November 7, 2003.
A. Moberg’s Letter To Shareholders Admits That Ahold Lacked Adequate Internal Controls
311. The 2002 Annual Report contained a letter to the Company’s shareholders from Moberg.
Among other things, Moberg apologized to shareholders for the “drastic erosion in the company’s value
and reputation” that Ahold’s admitted fraud and utter failure of internal accounting controls caused the
Company’s shareholders to suffer. In an attempt to regain shareholder trust, Moberg wrote, among other
things:
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Creating trust and confidence: transparency, governance and leadership We recognize that we must ensure that our company is never again confronted with a similar crisis of controls and governance. To this end, we aim to implement the highest possible standards of compliance, disclosure and professional conduct throughout the business. The fact that these very standards may not have been the highest priority in the past has strengthened our resolve to renew these principles, build a committed culture across the entire enterprise and develop a changed leadership style. Our company culture must be truly open and honest. Our behavior across all our professional, business and stakeholder relationships must comply with the highest standards of transparency and integrity. This is not negotiable.
B. Ahold’s Supervisory Board Admits That Ahold Lacked Adequate Internal Controls
312. The Company’s 2002 Annual Report also contained a “Report From the Supervisory
Board” dated October 14, 2003. Conceding that the Company’s Class Period false and misleading
statements and inadequate internal controls caused Ahold shareholders to incur devastating losses, the
Company’s Supervisory Board began its Report as follows:
2003 has been the most difficult year in the company’s history. Ahold underwent a crisis of extreme proportions. We announced accounting irregularities, errors, and other issues as several of our companies, as well as significant internal control weaknesses that extend not only to 2002, the year on which this annual report is intended to focus, but also to prior years. We wish to add our sincere apologies to all stakeholders of Ahold, including shareholders, customers and associates, who have experienced a great deal of disappointment and concern throughout this period.
C. The Supervisory Board Summarizes Ahold’s Class Period Fraud
313. In what is perhaps the most succinct summary of the Company’s Class Period fraud and
internal control weaknesses uncovered during the Internal Investigations, the Supervisory Board’s report
to shareholders states:
The U.S. Foodservice investigation identified accounting fraud relating to fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement
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of cost of goods sold. The investigation found that certain senior officers of U.S. Foodservice and other employees were involved in the fraud. It was also found that inappropriate vendor allowance accounting had existed at the date of the acquisition of U.S. Foodservice. The Disco investigation found a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. The investigation into the joint venture letters found that there had been concealment of side letters from Ahold’s Supervisory Board, Audit Committee and our auditors, Deloitte & Touche and that the consolidation of these joint ventures into Ahold’s financial statements had been in error. The additional internal investigations found accounting irregularities at Tops, consisting of intentional improper recognition of vendor allowances and pervasive earnings management, and at Giant-Carlisle, consisting of pervasive earnings management, although involving relatively small amounts. The investigations also concluded that certain accounting irregularities had occurred at the Ahold parent company. In addition, these investigations found varying degrees of earnings management and/or other accounting errors or issues at the Ahold parent company and at the other operating and real estate companies reviewed. In addition, significant internal control weaknesses were raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified. A special task force reporting to the Audit Committee has been formed, now chaired by our current Chief Financial Officer, and composed of our senior finance, legal and internal audit executives and supplemented by external advisors, to address the accounting issues and the internal control weaknesses that were identified.
314. In the 2002 Annual Report, Ahold’s Supervisory Board concedes that the Company’s
fraud and complete absence of internal controls warrant continued investor and regulatory attention, like
the present litigation, for which the Company must be prepared to answer:
We understand that the company will remain under intense scrutiny for sometime to come, and justifiably so. Ahold continues to await the results of governmental and regulatory investigations and is cooperating with external investigators. We have a long way to go before the
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company’s reputation is restored and trust in our controls and governance rebuilt.
315. The 2002 Annual Report repeats, in many instances verbatim, the description of the
conduct and findings of the Internal Investigations set forth in the Supervisory Board Report and in
Ahold’s 2002 Form 20-F. For example, the Company again admitted that fraud was committed at USF
and that the Internal Investigation conducted at USF “identified or confirmed numerous material
weaknesses in internal controls.”
316. Like the 2002 Form 20-F, the 2002 Annual Report informs the Company’s shareholders
that: “Ahold is in the process of taking steps to address the significant internal control weaknesses
raised or confirmed in the internal investigations. Over 275 items relating to internal control
weaknesses were identified.”
317. Moreover, conceding that Ahold and USF’s Class Period internal controls lacked the
cohesiveness necessary to generate even remotely reliable information or to monitor the Company’s
accounting for vendor allowances, which Eustace, admitted was the “most important part” of USF’s
Class Period income, Ahold states in its 2002 Annual Report:
We have also been focusing on improving the tracking of vendor allowances, especially at USF. We are continuing our efforts to implement the Supplier Incentive System (“SIS”), a vendor allowance tracking system used by Alliant when it was acquired by USF in November 2001, for vendor allowance tracking for all of USF. USF is in the process of building the appropriate links among its computer systems required to track rebate-related activities across all company operating systems. In order to achieve this goal all vendor information, corporate vendor allowance program details, customer details and all product reference codes needed to be documented and cross-referenced and related computer programming needed to be completed. This effort was sufficiently completed for the largest USF operating system in July 2003 to allow testing of the system. This testing is expected to be completed by the end of fisca12003. In fiscal 2004, additional SIS enhancements are expected to include computer links among the approximately 15 USF locations operating on independent computer systems and USF intends to continue efforts to track additional vendor
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program types, to enhance vendor and customer information and to improve customer and product tracking systems. In addition, while the SIS vendor allowance tracking system is under development and testing, USF has initiated a manual vendor allowance tracking system. This manual system aggregates information including a detailed review of vendor purchasing contracts, reporting provided by vendors on purchases made, information developed within USF on purchasing activities, cash collections of purchase allowances, and regular reconciliations of the information with vendors. USF’s purchasing department, accounting department and its senior management regularly review this information.
318. Remarkably, only after causing investors to lose billions of dollars is Ahold attempting to
implement the Supplier Incentive System, which had been in place at Alliant “when it was acquired by
USF in November 2001.” Clearly, Ahold, USF, and Deloitte were aware of the Supplier Incentive
System when they began to conduct due diligence in connection with the $1.5 billion Alliant
acquisition. Defendants’ failure to implement the Supplier Incentive System to track vendor
allowance income can only be attributed to, at best, severe recklessness, and confirms Ahold interim
CFO, Dudley Eustace’s admission that “the company has been flying blind with very inadequate
control systems on the most important part of its income.”
319. Like the Company’s 2002 Form 20-F, Ahold’s 2002 Annual Report admits that the false
and misleading statements that Ahold issued during the Class Period concerning its financial results and
the adequacy of its internal controls were material. In this regard, the 2002 Annual Report further
stated:
In connection with the findings of the investigations referred to above, and the consequent remedial accounting actions taken by Ahold management, we have restated our financial position as per December 30, 2001 and results for fiscal 2001 and 2000 under both Dutch GAAP and U.S. GAAP. The adjustments are material, both quantitatively and qualitatively, to our fiscal 2000 opening retained earnings and our financial position and results of operations for fiscal 2001 and fiscal 2000.
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XII. THE TRUTH ABOUT THE JOINT VENTURES IS REVEALED
A. Jerónimo Martins Retail
320. In August 1992, Ahold notified the Commission of the European Economic Community
that it intended to enter into a joint venture agreement with Estabelecimentos Jerónimo Martins & Filho
Administração e Participações S.A. (“Jerónimo Martins”). The proposed Joint Venture would be known
as Jerónimo Martins Retail (“JMR”). The Soares dos Santos family is the major shareholder of
Jerónimo Martins.
321. Under the agreement, Jerónimo Martins, which was active in the Portuguese food retail
and wholesale market, would transfer its 41 retail stores (Pingo Doce and Supergarb) to JMR in
exchange for a 51 percent stake in the joint venture. Ahold would only acquire the remaining 49
percent.
322. Rather than granting control of the joint venture to Ahold, Article Five of the
shareholders’ agreement provided for joint control of JMR by Ahold and Jerónimo Martins.
Specifically, it was governed by a Board of Directors consisting at the outset of seven members, four
being appointed by Jerónimo Martins and three by Ahold, and decisions of the Board would be taken
unanimously. Ahold, though, did not control the Board of the joint venture.
323. A depiction of the ownership interests in JMR appears below:
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324. On January 13, 2000, Jeronimo Martins and Royal Ahold announced that they were in
discussions to significantly extend and enlarge their current joint venture operations. The Boards of
Jeronimo Martins and Royal Ahold said they intended to establish a new 50/50 joint venture that would
include the current operations of JMR in Portugal: Pingo Doce supermarkets, Feira Nova hypermarkets
and JMR’s interest in Madeira. JMR’s food distribution activities, Recheio in Portugal, and Madeira in
Poland, and its Se Supermarkets in Brazil as well as Ahold’s operations in the Czech Republic, Poland
and Spain, were to be included.
325. On April 10, 2000, defendant Meurs reportedly commented in connection with the talks
of expanding the joint venture that “more than two partners makes [sic] a joint venture too complicated.
Ideally, Ahold looks for 50-50 joint ventures, with Ahold bringing the technical support and the other
partner providing local know-how.” Within the week, Ahold announced that they agreed to take a six
month “breathing period” from the talks of expanding JMR. In fall of 2000 those talks had resumed, but
were ultimately shelved. Accordingly, the governing structure remained as it was, with Ahold only
holding a minority interest and only having joint control.
49 % 51 %
JERÓNIMO MARTINS
AHOLD
JMR
August 1992
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326. No “side letter” existed for the JMR joint venture. As a result, it was readily apparent to
those knowledgeable about the terms of the joint venture, and the requirements for consolidation, that
consolidation of JMR’s financial results since 1992 was improper.
B. ICA
327. The joint venture agreement governing ICA was far different. As announced by Ahold
on December 9, 1999, in addition to not acquiring a majority interest in the joint venture, it was
reportedly going to be governed as follows: Roland Fahlin, the Chairman and CEO of the ICA Group
would be Chairman of the Board of the Joint Venture and Stein Erik Hagen, another ICA Group
designee would be Co-Vice Chairman with an Ahold designee. In total, ICA Group and Ahold would
each have four designees on the Board. Accordingly, based upon Ahold’s own characterization of the
transaction, it would not control this joint venture either.
328. On March 3, 2000, the European Commission received a notification of a proposed joint
venture by which Ahold would acquire joint control over the Swedish group ICA AB (“ICA”) together
with ICA Förbundet AB and Canica. Canica was an investment company owned by retailer Stein Erik
Hagen and his family.
329. At the time of the transaction in the Spring of 2000, ICA was under sole control of ICA
Förbundet, a Swedish non-profit organization of more than 2000 small and medium-sized ICA retailers.
ICA Förbundet, through its subsidiary ICA Förbundet AB (“IFAB”) owned 38 percent of the shares
representing a majority of the voting rights (55%) in ICA. Canica, Hagen’s Norwegian Limited
Company, had a minority (26%) stake in ICA. The remaining shares were held by the individual ICA
retailers.
330. IFAB and Canica had executed the partnership agreement regulating their joint
shareholding in ICA on February 24, 2000.
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331. The transaction was accomplished in several conditional steps. Ahold would acquire a
certain number of shares from the independent ICA retailers by way of a tender offer. Ahold would
further acquire a certain number of shares from each of the partners by execution of share transfer
agreements, which were signed on February 24, 2000. All remaining shares would be acquired by
Ahold via a new issue of shares to be approved at the ICA Annual General Meeting held on April 12,
2000.
332. On March 24, 2000, Ahold announced that “the public offer by the 50/50 joint venture
ICA Ahold Holding AB for the shares in leading Scandinavian food retailer ICA AB [was] successfully
concluded.”
333. Once completed, Ahold held a 50 percent interest in ICA Ahold Holding AB, in which all
activities of the ICA Group were brought together. The other 50 percent of ICA Ahold Holding AB was
split between 20 percent to Canica, the investment company of the Norwegian Hagen family, and 30
percent to ICA Forbundet, the association of ICA retailers.
334. Below is a graphic depiction of the ownership interests in ICA during the Class Period.
50 % 30 % 20 %
IFAB CANICA AHOLD
ICA
April 12, 2000
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335. The European Commission approved the structure depicted immediately above on April
6, 2000.
336. Deloitte advised Ahold on the formation of the ICA joint venture. According to an article
appearing in NRC Handelsbldad (a Dutch newspaper) on February 14, 2004, and backup information
provided on its website, on January 11, 2000, shortly after the ICA transaction was publicly announced,
Deloitte warned Marjanne van Itterson (Ahold’s European accounting expert), that Ahold’s 50 percent
interest in the ICA joint venture could not be consolidated. The following day, Ms. Itterson advised her
superior, Bert Verhelst, in writing, of Deloitte’s warning and stated that “the only possibility is perhaps a
side letter, but I even doubt that.” She further indicated in her memorandum that the issue of
consolidating the ICA joint venture was raised with the general counsel of Ahold, Ton van Tielraden,
who indicated that the decision rested with defendant Meurs.
337. Shortly after the announcement of European Commission (“EC”) approval of the joint
venture agreement on April 7, 2000, Deloitte raised the issue of the public reporting of the financial
results of the ICA joint venture with Ahold’s Executive Board, by letter dated April 13, 2000. Deloitte
expressed reservations regarding consolidation unless Ahold had sufficient proof of control.
338. Building upon the opinions of Deloitte and Itterson, Ahold determined, with the approval
of Defendant Meurs, to attempt to justify control by means of a side letter. This was the only possibility
left open by the Deloitte and Itterson opinions given the underlying ICA joint venture documents which
specifically did not vest control in Ahold. Defendant Meurs proceeded to draft the two
contemporaneous conflicting side letters for the signature of Defendant Andreae -- the Executive Board
member responsible for Ahold’s European operations. At least one of the side letters specifically refers
to Ahold’s accountants requirements. The first letter was dated May 2, 2000, and was executed on May
5, 2000 by Defendant Andreae (for Ahold). The side letter offered a highly unlikely interpretation of the
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joint venture agreement. Mr. Hagen (for Canica). The letter stated that although the ICA joint venture
was a partnership, in the event of a dispute, Ahold’s view would govern. This interpretation was
directly at odds with the agreement presented to and approved by the EC.
339. The first side letter was executed by Fahlin (for IFAB) on May 5, 2000 -- the same day
that Fahlin and Hagen sent the contradictory second side letter. This second side letter countersigned by
Defendant Andreae, confirmed that ICA and Canica did not agree that Ahold had the right to impose its
views in the event of a disagreement over the operations of the ICA joint venture, as one would expect
in a partnership -- effectively neutralizing the initial side letter.
340. Public announcements by Ahold also demonstrated that Ahold was not in control of the
ICA joint venture. As demonstrated by Ahold’s November 28, 2000 and March 6, 2001 press releases,
Roland Fahlin, was acting as ICA AB President as well as ICA Ahold AB Chairman.
341. Nevertheless, contrary to its own warning and the foregoing, Deloitte approved full
consolidation of the financial results of the ICA joint venture with Ahold’s financial results for fiscal
2000 and fiscal 2001. In recounting the history of the joint venture in an article appearing in The Grocer
on April 21, 2001, Roland Fahlin clearly described the relationship as a “partnership.”
342. The questionable nature of this “side letter” purporting to grant control to Ahold as well
as the necessity of “side letters” for four separate joint venture agreements were clear red flags as to the
legitimacy of all of the “side letters” purportedly granting control over the joint ventures discussed
herein with the exception of JMR.
C. Paiz Ahold
343. Similarly, contrary to any “side letter,” the Paiz Ahold joint venture was also operated as
a partnership. On or around December 22, 1999, Ahold publicly announced that it reached agreement
with the principal shareholders of Guatemala’s La Fragua S.A. (“La Fragua”) to set up a 50/50 joint
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venture to expand La Fragua’s supermarket and hypermarket retail operations in Guatemala, El Salvador
and Honduras. La Fragua, a privately held company, was founded in 1928 and opened the first Central
American supermarket in 1959. At the time of the announcement, the family of Carlos B. Paiz (the
“Paiz Family”) held an 80.4% interest in La Fragua, with the remaining owned by the employees and
third parties close to the Paiz Family.
344. Carlos M. Paiz, then Chairman of La Fragua, publicly referred to the joint venture as a
“partnership.” Specifically, he stated:
The partnership will clearly reinforce our growth strategy for the region. It will also provide additional financial strength combined with international know-how covering all aspects of the food retail business. We have forged a mutual understanding of how to take La Fragua to a faster growth rate and are happy to be associated with a partner that shares our business philosophy and has considerable experience as a prominent global food retailer and on this continent in particular. We look forward to working with Ahold’s Latin American Support Unit, capitalizing on the many opportunities offered by these markets and passing them on to our customers and associates alike.
345. On November 2, 2001, Paiz Ahold signed an agreement with Costa Rican supermarket
and hypermarket company CSU International to form a new joint venture. The new joint venture was
intended to bring together operations in the Central American region. Each of the partner companies --
Ahold, Paiz and CSU -- was to have a one-third stake in the new venture. Paiz Ahold held a 66 2/3%
stake and CSU International held a 33 1/3% stake.
346. All three companies, CSU, La Fragua and Ahold, obtained seats on the Board of Paiz
Ahold reflecting their share of ownership. The first chairman was Carlos Paiz of La Fragua.
347. The new joint venture was named CARHCO, for Central American Retail Holding
Company.
348. CSU Chairman Rodrigo Uribe and Carlos Paiz, Chairman of La Fragua, said in a joint
statement on November 2, 2001 that “Our new partnership will allow us to expand and improve
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services, and Ahold’s international expertise contributes to this in important ways. In combination with
our local know-how and experience we expect to contribute to the economic growth of the countries we
operate in and significantly improve our customers’ food shopping experience.”
349. Allan Noddle, a member of Ahold’s then Executive Borad responsible among others for
Latin American operations, said in a comment:
The new joint venture in Central America is fully in line with Ahold’s international strategy. We started serving Central America at the end of 1999 when we partnered with the Paiz family of La Fragua. Both La Fragua and our new partner CSU have excellent management teams and a loyal customer base. Working together in CARHCO provides an outstanding base for future growth throughout the region.
350. Carlos Paiz, Chairman of La Fragua, said:
CSU and La Fragua are excellent companies with a similar culture. We are both heavily involved in the local communities and appreciated by consumers for the ways we contribute to society. The partnership of two regional market leaders with an international food retailer makes a winning team, set to boost food retail in the region and service the consumer in the best way possible. We’re excited and ready to make all our stakeholders in the region benefit.
351. Rodrigo Uribe, Chairman of CSU, said:
The know-how and experience of our new partners enable us to introduce new services and products to our customers. We expect the new joint venture to also significantly benefit the economies of the countries we operate in as we see new opportunities for export of local products to the regional and international store network of our partners. We’re eager to team up with La Fragua and Ahold as they share the same philosophy and have the same goals. This joint venture is set to become very successful.
352. A depiction of Ahold’s interest in the Paiz Ahold entity is depicted below:
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353. CARHCO became effective on January 1, 2002. As a result of the CARHCO transaction,
Ahold converted its 50% interest in Paiz Ahold into a 33 1/3% interest in the new joint venture
CARHCO.
354. The Paiz Ahold joint venture had been fully consolidated in Ahold’s financial statements
since the date of its formation until it ceased to be consolidated on January 1, 2002, when Ahold’s
indirect interest in the new joint venture was reduced to 33 1/3%, at which time Ahold began to account
for its interest in the joint venture on an equity basis.
33 1/3 %
33 1/3 %
33 1/3 %
50% 50%
12/22/99
33 1/3 %
66 2/3 %
CSU PAIZ AHOLD
11/2/01
CARHCO
AHOLD PAIZ FAMILY CSU
CARHCO
January 1, 2002
AHOLD LA FRAGUA
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D. Bompreço
355. Ahold began operating in Latin America shortly after November 4, 1996, when Ahold
announced that it agreed to take a 50% interest in Bombreço S.A. Supermercados Nordeste
(“Bompreço”), the retailing and consumer credit subsidiary of Bompreço S.A., headquartered in Recife
Pernambuco, Brazil. Bompreço was a strategic alliance to develop food retail operations in North and
North East Brazil.
356. Under the agreement, Ahold indirectly acquired 50% of the voting shares and 50.1% of
the total capital of Bompreço S.A. Joao Carlos Paes Mendonca, the company’s chairman, and his family
(known as the Paes Mendoca family), owned the other interest in the joint venture.
357. Despite lacking control, Ahold included Bompreço in its consolidated balance sheet as of
December 29, 1996; sales and results were consolidated at the beginning of 1997.
358. On May 24, 2000, Ahold announced that it would acquire total control of Bompreço,
which had grown to become one of Brazil’s largest supermarket groups. Ahold agreed to acquire the
interest of Joao Carlos Paes Mendonca, Bompreço’s chairman, and his family. The transaction was
executed when Ahold became owner of all voting shares in Bompreço, in June 2000.
359. Ahold consolidated 100% of Bompreço’s financial results, even though it did not have
control of this joint venture until July 2000, when Ahold acquired the remaining 50% of the voting
shares and an additional 10.9% of the non-voting shares of Bompreço, obtaining majority voting control
over it. In October 2001, Ahold acquired the remaining non-voting shares.
360. A depiction of the evolution of Ahold’s ownership interest in Bompreço appears below:
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E. Disco Ahold International Holdings N.V.
361. Disco S.A. (“Disco”) was one of Argentina’s leading food retailers, operating at the time
107 supermarkets and convenience stores. On January 14, 1998, Ahold announced that it had become
joint owner with Velox Retail Holdings, of significant equity stakes in Disco and Chilean supermarket
company Santa Isabel S.A. with operations in Chile, Peru, Paraguay and Ecuador. Specifically, Ahold
and Velox had established the 50-50 joint venture, DAIH, into which Velox contributed its equity
interests in both Disco (50.35%) and Santa Isabel (36.96%).
362. A depiction of DAIH appears below:
100% Non - Voting Shares October 2001
50 % Voting Shares 51% Non - Voting Shares December 1996
100% Voting Shares Plus 61.9% Non -Voting Shares June 2000
AHOLD
BOMPREÇO
50 % Voting Shares 49% Total Capital December 1996
PAES MENDOCA
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363. The management structure of DAIH belied Ahold’s control. Juan Peirano, Chairman and
CEO of Velox, was also Chairman of the Supervisory Board of the newly established 50-50 joint
venture Disco-Ahold International Holdings (“DAIH”). Fritz Ahlqvist, then Member of Ahold’s
Executive Borad, was Vice Chairman. Eduardo R. Orteu, CEO of Disco S.A., also served as CEO of
DAIH. Ahold and Velox each had 4 seats on the 8-member Supervisory Board.
364. Juan Peirano, Chairman and CEO of Velox, said he was:
delighted to be joining forces with Ahold. DAIH would be a growth vehicle for both Ahold and Velox in the Spanish-speaking South American countries. The partnership will clearly reinforce our growth strategy for Disco and Santa Isabel, providing additional financial strength combined with international know-how covering all aspects of the food retail business. These important contributions will enable us to capitalize on the considerable opportunities offered by South American markets. The partnership will strengthen Disco’s and Santa Isabel’s competitiveness and provide us with the means to meet the needs of our current and new customers in the best possible way. We will be a very strong team together and are enthusiastic about joining forces with Ahold. We are excited about the future.
365. On August 9, 2002, Ahold announced that it assumed full control of DAIH. Ahold was
required to purchase substantially all of the VRH shares in DAIH for approximately $490 million after
VRH defaulted on its debts.
Obligated to increased to 100% on 8/9/02 DAIH
January 12, 1998
50 % 1/14/98
Increase to 75 % on 6/21/02
50 % 1/14/98
AHOLD VELOX
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366. In February 2003, Ahold determined that it had improperly consolidated DAIH.
Management determined that Ahold only acquired control over the entity beginning in the third quarter
of fiscal 2002.
XIII. CLASS PERIOD EVENTS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS
A. March 1998 - December 1998 Events and False and Misleading Statements
367. During the time period from March 1998 through December 1998, the defendants made
and/or caused to be issued numerous materially false and misleading statements and/or omissions of
material facts, some of which were made in connection with the events depicted on the following graph:
1. Ahold Issues Its 1997 Annual Report
368. On or about March 10, 1998, Ahold issued its Annual Report to investors (the “1997
Annual Report”). Ahold’s 1997 Annua l Report made, among others, the following materially false and
March 10, 1998 - Ahold announces that its net earnings sharply rose by 48% to NLG 933.8 million.
March 10, 1998 - Ahold announces its global offering 30 million common shares.
March 26, 1998 - Ahold announces that net sales in 1997 rose by 38.4% or NLG 50.5 million
May 12, 1998 - Ahold announces 1998 first quarter sales increase of 14.6% to NLG 16.1 billion.
May 19, 1998 - Ahold announces its intent to acquire Giant Food, Inc.
May 13, 1998 - Ahold announces that its joint venture in Malaysia has agreed to acquire seven supermarkets from Yahona Corporation.
June 11, 1998 - Ahold announces that its first quarter 1998 net earnings rose 25.2% to NLG 293.4 million.
Sept. 3, 1998 - Ahold announces that its second quarter 1998 net earnings rose 30.7% to NLG 271.0 million.
Oct. 2, 1998 - Ahold announces its intent to acquire full ownership of its joint venture in Poland, Ahold & Allkauf Polska Sp.z.o.o
Oct. 28, 1998 Ahold closes purchase of Giant Food.
Nov. 13, 1998 - Ahold announces that it intends to purchase 48% of Disco, along with its joint venture partner Velox Retail Holdings.
Dec. 18, 1998 - Ahold announces that, along with Velox, it has successfully completed DAIH's tender offer for the shares of Disco that DAIH did not already own, which constituted 90.3% of Disco's outstanding total shares. Ahold intends to acquire 100% of Disco's outstanding shares.
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misleading representations concerning the Company’s overall sales figures in Europe outside The
Netherlands. In this regard, the Company stated:
In Europe outside The Netherlands, Ahold is building a solid platform for its food retailing activities in southern and central Europe through operations in Portugal, Spain, the Czech Republic and Poland. Substantial earnings increases in Portugal compensated for start-up losses in Spain and Poland. 1997 sales grew by 26.1% to NLG 3.2 billion, while operating results increased by 8.2% to NLG 179 million. The major part of the growth can be attributed to Ahold’s Portuguese activities together with Jeronimo Martins. This joint venture again showed excellent growth and exemplified how partners can work together profitably over the years to mutual benefit. Ahold is an active member of the Associated Marketing Services organization, a group of 11 leading European food retailers.
369. Ahold’s 1997 Annual Report made, among others, the following materially false and
misleading representations concerning the Company’s overall sales figures in Latin America:
Ahold first set foot in Latin America at the end of 1996, when it took a 50% interest in the voting share capital of Bompreço, the leading food retailer in northeast Brazil. Six months later, Bompreço’s acquisition of SuperMar in the adjacent province of Bahi de Salvador added another dimension to the joint venture: it turned Ahold into the co-owner of 93 stores including 14 hypermarkets and 58 supermarkets in Brazil. 1997 results were very satisfactory, taking into account substantial one-time charges following the acquisition of SuperMar. Full-year sales in Brazil amounted to NLG 2.6 billion and operating results totaled NLG 81 million. In the first two months of 1998, Ahold extended its presence in Latin America by becoming joint owner of two additional supermarket chains, Disco in Argentina and Santa Isabel in Chile, Peru, Paraguay and Ecuador.
370. Ahold’s 1997 Annual Report made, among others, the following false and misleading
representations concerning operations in Portugal:
Ahold’s successful joint venture with Jerónimo Martins in Portugal continued to bear fruit in 1997. The joint venture, in which Ahold has held a 49% interest since 1992, operates both supermarket and hypermarket formats across the country and retained its leading position in Portuguese food retailing with a strong and defensible market position. Sales grew by 13.4% in the year under review, totaling NLG 2.4 billion, and contributions to Ahold’s corporate earnings are significant. The joint
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venture is well positioned to continue this pattern of consistent growth, backed by the logistical and financial support of its parent groups. The joint venture established a new operational headquarters to facilitate synergy among its food retail activities.
371. On March 10, 1998, the Company issued a press release (“March 10, 1998 Press
Release”) entitled, “Ahold 1997 net earnings rise sharply by 48% to NLG 933.8 million.” In the March
10, 1998 Press Release, the Company made the following materially false and misleading statements
and/or omissions:
1997 sales up 38% to NLG 50.6 billion Consolidated sales in guilders amounted to NLG 50.6 billion (1996: NLG 36.5 billion), an increase of 38%.
*** In Other European Countries (Portugal, Spain, the Czech Republic and Poland), sales amounted to NLG 3.2 billion (1996: NLG 2.5 billion), 26% rise. Pingo Doce in Portugal, Euronova in the Czech Republic and Ahold’s Polish activities contributed to sales growth. In Latin America (Brazil), Bompreço achieved sales of NLG 2.6 billion.
*** In Portugal, significant growth in operating results was achieved due to higher sales and effective margin and cost control. Operating results in Czech Republic, although positive, were lower than last year, mainly attributable to the summer floods. Start-up losses in Poland and Spain were charged to the operating results of Other European Countries.
372. On March 13, 1998, the Company filed a Form 6-K (the “March 13, 1998 Form 6-K”),
which attached as an exhibit the March 10, 1998 Press Release. Defendant Van der Hoeven signed the
March 13, 1998 Form 6-K.
373. On March 26, 1998, the Company filed its Form 20-F for fiscal 1997, signed by Van der
Hoeven with the SEC entitled, “Annual Report on Form 20-F” (“1997 Form 20-F”). In the 1997 Form
20-F, the Company made the following materially false and misleading statements:
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Net Sales in 1997 rose by 38.4% or NLG 14,030 million to NLG 50,568 million from NLG 36,538 million in 1996. At constant exchange rates, consolidated sales growth was 28.0% in 1997 compared to 1996. Net sales in 1996 increased NLG 6,921 million, or 23.4%, to NLG 36,538 million from NLG 29,617 million in 1995. At constant exchange rates, consolidated sales growth was 20.0% in 1996 compared to 1995.
* * * Operating results in 1997 were NLG 1,837 million, up 47.8% from 1996. In 1996, operating results amounted to NLG 1,243 million, an increase of 35.8% from 1995 operating results of NLG 915 million. Operating results have increased in all food retailing regions except for Asia Pacific which, as expected, incurred a loss due to start up operations. Wholesaling and real estate activities also had an increasing effect on the operating results in 1997 and 1996. The effect of exchange rates, particularly the Dollar, in relation to the Guilder had a positive effect of NLG 153 million and NLG 29 million on operating results in 1997 and 1996, respectively, and had a negative effect of NLG 48 million on operating results in 1995. At constant rates of exchange, operating results would have increased 35.5% in 1997 compared to 1996 and 31.8% in 1996 compared to 1995. Operating results improved in 1997 as a percentage of sales to 3.6% from 3.4% in 1996 and 3.1% in 1995. This improvement was primarily attributable to the inclusion of Stop & Shop, whose operating results, as a percentage of sales, were higher than those of Ahold’s other operating companies.
374. On April 2, 1998, the Company filed a Prospectus Supplement (the “April 2, 1998
Prospectus Supplement”) with the SEC entitled, “Prospectus Supplement to Prospectus Dated March 16,
1998.” In the April 2, 1998 Prospectus Supplement, the Company stated in pertinent part:
Ahold reported 1997 net earnings of NLG 934 million compared to NLG 632 million in 1996 and NLG 457 million in 1995, representing increases in net earnings of NLG 302 million or 47.8% in 1997 compared to 1996 and NLG 175 million or 38.3% in 1996 compared to 1995. Earnings per share were NLG 1.77, NLG 1.41 and NLG 1.21 in 1997, 1996 and 1995, respectively. Earnings per share increased 25.5% in 1997 compared to 1996 and 16.5% in 1996 compared to 1995. Operating results in 1997 rose to NLG 1,837 million, an increase of NLG 594 million or 47.8% compared to 1996 operating results of NLG 1,243 million which increased NLG 328 million or 35.7% as compared to operating results of 1997, 1996 and 1995, respectively, reflecting increases in sales of 38.4% in 1997 compared to 1996 and 23.4% in 1996 compared to 1995. At
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constant rates, net earnings grew 35.5% in 1997 and 35.2% in 1996, while increased 28% in 1997 and 20% in 1996.
* * * Completed Transactions, 1995-1997 Acquisitions are a key component of Ahold’s growth strategy in the United States and in the relatively underdeveloped markets of Southern and Central Europe, Asia Pacific and Latin America. The Company substantially expanded its business through acquisitions in the three years 1997, 1996 and 1995. Over this period, Ahold completed 11 significant business acquisition transactions, paying total consideration of approximately NLG 4.3 billion in cash excluding assumed indebtedness. The Company’s acquisition program has considerably broadened the geographical spread of worldwide business. Through the business acquisition transactions completed in 1997, 1996 and 1995, Ahold established a significant presence in a number of new markets, including Spain, Poland, Thailand and Brazil.
2. Ahold Announces First Quarter 1998 Results
375. On May 12, 1998, the Company issued a press release (the “First May 12, 1998 Press
Release”) entitled, “Ahold 1998 First Quarter Sales Up 14.6% to NLG 16.1 Billion.” In this press
release, the Company made the following materially false and misleading statement:
Royal Ahold, the leading international food retailer, achieved 1998 first quarter consolidated sales (16 weeks) of NLG 16.1 billion (excluding VAT), 14.6% rise over 1997 first quarter. At a constant US dollar rate, sales would have risen by 8.9%.
* * *
Based on current performance, Ahold’s Corporate Executive Board confirms its expectation, expressed in the 1997 annual report, that both consolidated net earnings and earnings per share will be significantly higher in 1998.
376. On May 12, 1998, the Company issued a press release (the “ Second May 12, 1998 Press
Release”) setting forth a speech that defendant Van der Hoeven gave to current and prospective
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Company shareholders entitled, “International Growth Supported by Focus on Local Customer.” This
press release contained the following statements of defendant Van der Hoeven:
Global consolidation process accelerating ‘The food retailer sector is characterized today by an accelerating consolidation process,’ said Van der Hoeven. ‘The best cards in the deck are now being dealt, and on all continents the players are having to raise the stakes to stay in the game. Ahold categorically intends to remain at the forefront of these developments, because as a global retailer we stand to benefit from the ensuing economies of scale.’ Important areas in which these benefits can be captured are IT, relations with major suppliers, global sourcing, joint development of private label products and the sharing of experience and know-how.
* * * 1998 outlook confirmed In his address to shareholders, Van der Hoeven reiterated the company’s previously stated expectation that sales in all regions will increase still further and results will improve correspondingly. Net earnings and earnings per share in 1998 are expected to be significantly higher in 1997.
377. On May 18, 1998, the Company filed a Form 6-K (the “May 18, 1998 Form 6-K”) which
attached as an exhibit the First May 12, 1998 Press Release and Second May 12, 1998 Press Release”).
Defendant Van der Hoeven signed the May 18, 1998 Form 6-K.
3. Ahold Announces Acquisition of Giant Food, Inc.
378. On May 19, 1998, the Company issued a press release (the “May 19, 1998 Press
Release”) entitled, “Ahold Announces Large New US Acquisition.” In the May 19, 1998 Press Release,
which announced Ahold’s $2.7 billion acquisition of Giant Foods, Inc., the Company stated in pertinent
part:
Ahold acquires control of Giant Food, Inc. with sales of USD 4.2 billion. • Giant Food Inc. operates 176 supermarkets, prominent in
Washington and Baltimore
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• Acquisition is perfect fit with Ahold USA (1997 sales of USD 14.3 billion)
• Considerable synergies with Ahold’s existing US operations • Tender offer at USD 43.60 per share to be made for all of Giant
Food Inc.’s outstanding non-voting shares • Considerable contribution to growth of Ahold’s earnings per share.
* * *
Full Integration of Giant Food Inc. within Ahold USA Upon completion of the acquisition, Ahold intends to continue operating Giant Food Inc. as a separate operating company. Giant Food Inc. will be fully integrated within Ahold USA. Ahold USA achieved 1997 sales of USD 14.3 billion. Considerable synergy benefits among Ahold’s current four US operating companies and Giant Food Inc are anticipated.
379. The May 19, 1998 Press Release also quoted defendant Van der Hoeven, as follows:
Our US strategy continues to move forward as another prominent supermarket company reinforces our market coverage and growth prospects. Giant Food, Inc. is an excellent company with a strong consumer franchise and a high quality operating base. Giant is highly compatible with our other US companies and as part of Ahold USA will significantly accelerate its development, benefiting all our US customers. We have been following Giant Food, Inc. for some time and are delighted to be able to integrate them into our US operations. The acquisition is a perfect fit with our existing US organization and is fully in the line with our long-term strategic objectives.
380. On June 8, 1998, the Company filed a Form 6-K with the SEC signed by Defendant Van
der Hoeven which attached as an exhibit the May 19, 1998 Press Release.
381. On June 11, 1998, the Company issued a press release (the “June 11, 1998 Press
Release”) entitled “Ahold 1st Quarter 1998 Net Earnings up 25.2% to NLG 293.4 Million.” In this press
release, the Company made the following materially false and misleading statements regarding Ahold’s
sales results:
• First Quarter net earnings surge 25.2% to NLG 293.4 million • Operating results increase 19.5% to NLG 569.9 million • Sales rise 14.6% to NLG 16.1 billion • Earnings per common share climb 22.4% to NLG 0.54
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• Corporate Executive Board confirms expectations significantly higher net earnings and significant growth of earnings per common share for full-year 1998
* * *
1998 Outlook Based on the current state of affairs, the Ahold Corporate Executive Board confirms its previously-expressed expectation that consolidated net earnings and earnings per common share will be significantly higher for the full year 1998.
382. On July 2, 1998, the Company filed a Form 6-K (the “July 2, 1998 Form 6-K”) which
attached as an exhibit the June 11, 1998 Press Release. Defendant Van der Hoeven signed the July 2,
1998 Form 6-K.
383. On August 26, 1998, Ahold announced that the Company would make a $2 billion global
offering of shares. The proceeds of the foregoing offering would be used to help finance the acquisition
of Giant Food, Inc. The Company announced that Goldman Sachs and ABN AMRO Rothschild would
act as joint global coordinators and bookrunners while the syndicate would include ING Barings,
Deutsche Bank, and Morgan Stanley Dean Witter. The offering documents contained 1997 and 1998
financials that were materially false and misleading as described herein.
384. Each of the statements made from March 10, 1998 through August 1998 concerning
Ahold’s fiscal 1997 and/or fiscal 1998 sales performance and/or the Company’s success at integrating
acquired entities and/or joint ventures was materially false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
(a) At no time during 1997 or 1998 did Ahold have the requisite control over JMR or Bompreco to consolidate 100% of the financial results of either of these joint ventures as the Company did, thus forcing the Company to restate its improperly consolidated financial results. As the Company admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
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(b) Ahold’s financial statements and results issued during 1998 were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR and Bompreco. Ahold has admitted that its net sales for fiscal 1998 were overstated by 12.5%;
(c) By virtue of the improper consolidation of JMR and Bompreco, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1998 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP as Ahold lacked the requisite control over these joint ventures;
(d) Contrary to representations by Deloitte that its audit of Ahold’s fiscal 1998 financial statements was conducted in accordance with Dutch and U.S. GAAS, it was not as set forth in detail below in the section entitled, “Defendants’ Vio lation of Dutch and United States Accounting Principles and Auditing Standards;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they artificially inflated net income. In its 2002 Form 20-F, Ahold has admitted that its net income during fiscal 1998 was overstated by €38 million, or 7% under Dutch GAAP, and was overstated by €38 million, or 9.6% under U.S. GAAP; and
(f) Contrary to Ahold’s Van der Hoeven’s and Tobin’s positive representations during 1998 concerning Aho ld’s successful integration of operations and generation of synergies, the Company was not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
4. Ahold Announces Results for the Second Quarter of 1998
385. On September 3, 1998, the Company issued a press release (the “First September 3, 1998
Press Release”) entitled “Ahold 2nd Quarter Net earnings Rise 30.7% to NLG 271.0 Million.” In the
First September 3, 1998 Press Release, the Company made the following materially false and misleading
statements:
Highlights • 2nd quarter net earnings rise 30.7% to NLG 271.0 million • Earnings per common share rise 21.3% to NLG 0.47 • Operating results increase 19.5% to NLG 497.8 million • Sales rise 11.2% to NLG 12.9 billion • Ahold confirms that full-year 1998 net earnings and earnings per common share
will be significantly higher than in 1997
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* * *
2nd quarter 1998 sales rise 11.2% to NLG 12.9 billion Consolidated sales in guilders amount to NLG 12.9 billion (1997: NLG 11.6 billion), an 11.2% rise.
*** In Other European Countries (Poland, Portugal, Spain and Czech Republic), sales increased 25.7% to NLG 915.7 million (1997: NLG 728.5 million). Sales in Portugal (Pingo Doce and Feira Nova), rose significantly by 15.1%. Sales in Poland, Spain and the Czech Republic continued to grow strongly. In Latin America (Brompreço in Brazil), sales increased to NLG 891.8 million (1997: NLG 504.4 million), a rise of 76.8%. This increase is largely attributable to the consolidation of the Brompreço Bahia supermarket chain acquired in July 1997. Excluding the effect of the Brompreço Bahia sales, the rise would have amounted to 23.9%. Sales at supermarket companies Disco in Argentina and Santa Isabel in Chile, Peru, Paraguay and Ecuador were not consolidated in the 1998 second quarter.
386. The First September 3, 1998 Press Release and Second September 3, 1998 Press Release
were was attached to a Form 6-K filed by the Company with the SEC on September 11, 1998 and signed
by Van der Hoeven.
387. Also on September 3, 1998, the Company issued another press release (the “Second
September 3, 1998 Press Release”) entitled “Speech by Cees Van der Hoeven, President and CEO of
Royal Ahold, The Netherlands Press Conference September 3, 1998, 2:40 pm.” This press release
contained the following statements of defendant Van der Hoeven:
Our company is in excellent shape and we are most happy to share with you where we stand and also where we are heading. The second quarter and half-year results that we have just announced are very good and in line with previously announced targets. The growth rate of earnings is brisk and our balance sheet is solid. The earnings growth is also broad-based and supported by excellent developments in most of our operations.
***
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Recently we have seen an increase in consolidation activities in the US with more companies being interested in mergers and acquisitions. Our name is often mentioned in this regard but we continue to work our own agenda. We have told you many times that we will not be lead by opportunities but rather by our strategy. We have work to do with the integration of Giant Food and the further implementation of Project Complete. As a consequence we are not right now actively pursuing major acquisitions in the US. However, if and when one of our top- listed targets becomes available, we will take the appropriate action.
*** All in all we are in truly excellent shape Our operations are doing well almost everywhere. We have a very strong team in place to run them and we have successfully stepped up our international management development efforts. Our group is strongly motivated by the company mission and we are squarely on the road to become one of the world’s most successful supermarket companies. In the past we have delivered on our promises and we will do so in the future.
5. Ahold Completes Global Share Offering
388. In September 1998, the Company filed a Prospectus Supplement with the SEC entitled,
“Prospectus Supplement to Prospectus Dated September 8, 1998.” In the September 8, 1998 Prospectus
Supplement, the defendants made the following materially false and misleading statements:
Summary Consolidated Financial Data The annual summary consolidated financial data presented below have been derived from the Consolidated Financial Statements. The summary consolidated financial data presented below for the First Half 1998 and First Half 1997 have been derived from the Company's First Half 1998 Interim Financial Information which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. The operating results for the First Half 1998 are not necessarily indicative of the operating results for the full fiscal year. The Consolidated Financial Statements and the Interim Financial Information have been prepared in accordance with Dutch GAAP which differs in certain respects from U.S. GAAP. See Note 23 to the 1997 Consolidated Financial Statements for a discussion of the principal differences between Dutch GAAP and U.S. GAAP relevant to the Company. The following summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of
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Financial Condition and Results of Operations" and the 1997 Consolidated Financial Statements and the related notes thereto and the First Half 1998 Interim Financial Information included elsewhere in this Prospectus Supplement.
First Half Fiscal Year 1998 1997 1997 1996(1) 1995 1994 1993
$ (NLG) (NLG) $ (NLG) (NLG) (NLG) (NLG) (NLG) (in millions, except per common share data) Statements of Earnings Data Amounts in accordance with Dutch GAAP:
Net Sales...............................................14,155 29,017 25,668 25,271 50,568 36,538 29,617 29,010 27,120
Net Sales Net sales in 1997 rose by 38.4% or NLG 14,030 million to NLG 50,568 million from NLG 36,538 million in 1996. At constant exchange rates, consolidated sates growth was 28% in 1997 compared to 1996. Net sales In 1996 Increased NLG 6,921 million, or 23.4%, to NLG 36.538 million from NLG 29,617 million in 1995. At constant exchange rates, consolidated sales growth was 20.0% in 1996 compared to 1995.
389. Page F-2 of the September 8, 1998 Prospectus Supplement contained Deloitte-
Netherlands’ Independent Auditors’ Report which stated among other things:
We conducted our audits in accordance with auditing standards generally accepted in the Netherlands and the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
6. Ahold Acquires Giant Food, Inc.
390. On October 23, 1998, the Company issued a press release (the “October 23, 1998 Press
Release”), entitled “Ahold Successfully Completes Tender Offer for Giant Food.” In the October 23,
1998 Press Release, the Company stated in pertinent part:
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Ahold announced the completion of its tender offer for the non-voting Class A Common Stock of Giant Food, Inc. Based on information provided by the Depository, a total of 59,224,361 shares (or approximately 98.8% of the outstanding Class A shares) were validity tendered and have been accepted for payment. Such share amount includes 344,516 shares subject to guarantee of delivery. The tender offer expired at 5pm on October 22, 1998. A total of 690,149 Class A Shares remain outstanding.
391. On October 28, 1998, the Company issued a press release (the “October 28, 1998 Press
Release”), entitled, “Ahold Closes Purchase of Giant Food.” In the October 28, 1998 Press Release, the
Company stated in pertinent part:
Comments by Bob Tobin, President/CEO Ahold USA Bob Tobin, Ahold corporate Executive Board member and President/CEO Ahold USA said: ‘We are delighted to finalize this substantial acquisition. Giant Food has a lot to contribute to Ahold USA and offers great opportunities for further growth. The company offers its customers high-quality products and excellent service in attractive stores. Its operating results are showing an upward trend. Ahold’s internal exchange of best practices, the use of the advantages of economies of scale and participation in successful synergy projects will have a very positive effect. We are on the eve of a new chapter of Ahold supermarket operation in the US. The possibilities for improvement are plenty and Ahold has shown with Stop & Shop that the exchange of best practices works. We’re very excited about bringing Giant into the Ahold family.’
392. On October 28, 1998, the Company filed a Form 6-K with the SEC signed by Defendant
Meurs which attached as an exhibit the October 28, 1998 Press Release.
393. On November 4, 1999, the Company filed a Form 6-K with the SEC signed by Defendant
Van der Hoeven which attached as an exhibit the October 23, 1998 Press Release.
7. DAIH Acquires Disco
394. Continuing its voracious expansion campaign, on November 13, 1998, Ahold announced
that it, along with Velox Retail Holdings, the Company’s joint venture partner in DAIH, would purchase
the 48% of Disco that DAIH did not already own. At the time of this announcement, Ahold did not
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control DAIH. The Company estimated that it would pay approximately $160 million for the remaining
shares of Disco.
395. On November 20, 1998, The Financial Times published an article entitled, “Shopping
Around for Global Status,” which contained materially false and misleading statements regarding
Ahold’s sales results that defendant Van der Hoeven made during an interview with Financial Times
reporter, Peggy Hollinger. Among other things, The Financial Times reported:
[Van der Hoeven] has repeatedly said he intends to become the world’s number one food retailer, not in some foggy future, but within the next four years. “O ur intention is to double sales,” he says from his office on the outskirts of Amsterdam. “In 1997 we made sales of $26 billion and we will have over $50 billion in 2002.”
396. On December 18, 1998, Ahold announced that it, along with Velox Retail Holdings, had
successfully completed DAIH’s tender offer for the shares of Disco that DAIH did not already own. As
of December 18, 1998, DAIH owned 42,834,678 of Disco’s outstanding shares, which constituted
90.3% of Disco’s total outstanding shares at that time. Ahold, through DAIH had planned to acquire
100% of Disco’s outstanding shares. At the time of DAIH’s acquisition of the additional shares of
Disco, Ahold owned 50% of DAIH, but, as the Company admits in its 2002 Form 20-F, Ahold did not
have control of DAIH at this time.
8. Analysts Embrace The Defendants’ False and Misleading Statements
397. During the time period from January 1, 1998 through December 31, 1998, analysts
followed Ahold’s public statements and announcements closely in connection with reporting Company
developments to investors. Analysts routinely repeated Ahold’s false and misleading financial
information, using it as the basis for their reports:
• On November 25, 1998, Morgan Stanley Dean Witter issued a report on
Royal Ahold. It rated Ahold an “Outperform” with a price target of
$40.00. The report further provided:
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Total 3Q98 company sales advanced by 2.4%, to NLG 12.6 billion.
* * * OTHER EUROPEAN COUNTRIES (7.6% of total sales) reported a sales gain of 15.1% to NLG 957.4 million, continuing the trend in 2Q98. Portugal (Pingo Doce and Feira Nova) reported a strong sales gain of 11.2%.
* * * LATIN AMERICA: Ahold was delighted by the performance of its stores in Latin America, where the slowdown in Brazil has had little effect. Latin America sales contributed NLG 851.1 million (6.8% of total sales), marking an increase of 8.4%, and operating earnings tripled to NLG 28.3 million. Bompreço’s market share increased and operating earnings improved.
• On September 4, 1998, Credit Suisse First Boston issued a report on Royal
Ahold. It rated Ahold a “Buy,” with a 12-month price target of NLG
69.00. The report further stated:
Ahold reported Q2 results ahead of market expectations. Net profit rose 30.7% to NLG 271m versus consensus of NLG 260m and versus a CSFB forecast of NLG 250m. Driving this growth was an 11.2% increase in group sales to NLG 12.9bn and a 19.5% increase in EBIT to NLG 497.8m taking group EBIT margin from 3.58% to 3.85%....
* * * In Holland, EBIT grew 10.3% on the back of margin expansion at both Albert Heijn and Schuitema, ongoing productivity improvements again enabling Ahold group to take share in this market. Notwithstanding the current consumer environment in Brazil, Bompreço recorded a 25.5% increase in EBIT to NLG 25m. (Disco and Santa Isabel will be consolidated for the first time in Q4). Asia losses grew to NLG 21.3m despite last year’s devaluation, although Ahold still expects to break even at operating level by 2000.
• On September 7, 1998, Bank Labouchere issued a report on Royal Ahold.
It rated Ahold a “Buy,” and stated:
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Strong sales growth in Other Europe (+26%). EBIT growth was also healthy (+26%) driven by a good performance in Portugal.
* * *
Another set of sparkling numbers. Constant $ EPS growth of 17.5% compares to 14.8% in Q1 ‘98. Once again EBIT growth in the key markets of the Netherlands (+10%) and the US (+15%) was in line with long-term targets. Portugal also saw significantly higher operating profits.
398. Each of the statements made from September 1998 to December 1998 concerning
Ahold’s fiscal 1997 and/or fiscal 1998 sales performance and/or the Company’s success at integrating
acquired entities and/or joint ventures was materially false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
(a) At no time during 1997 or 1998 did Ahold have the requisite control over JMR or Bompreco to consolidate 100% of the financial results of either of these joint ventures as the Company did, thus forcing the Company to restate its improperly consolidated financial results. As the Company admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(b) Ahold’s financial statements and results issued during 1998 were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR and Bompreco. Ahold has admitted that its net sales for fiscal 1998 were overstated by 12.5%;
(c) By virtue of the improper consolidation of JMR and Bompreco, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1998 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP as Ahold lacked the requisite control over these joint ventures;
(d) Contrary to representations by Deloitte that its audit of Ahold’s fiscal 1998 financial statements was conducted in accordance with Dutch and U.S. GAAS, it was not as set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they artificially inflated net income. In its 2002 Form 20-F, Ahold has admitted that its net income during fiscal 1998 was overstated by €38 million, or 7% under Dutch GAAP, and was overstated by €38 million, or 9.6% under U.S. GAAP; and
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(f) Contrary to Ahold’s Van der Hoeven’s and Tobin’s positive representations during 1998 concerning Ahold’s successful integration of operations and generation of synergies, the Company was not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
B. 1999 Events and False and Misleading Statements
399. In 1999, the defendants made and/or caused to be issued numerous materially false and
misleading statements and/or omissions of material facts, some of which were made in connection with
the events depicted on the following graph:
1. Ahold Previews Year-End 1998 Results
400. On January 8, 1999, the Company issued a press release (the “January 8, 1999 Press
Release”) entitled, “Ahold 1998 sales increase 15.5% to NLG 58.4 billion.” In the January 8, 1999
Press Release, the Company made the following materially false and misleading statement:
January 8, 1999 – Ahold announces that its 1998 sales increased 15.5% to NLG 58.4 billion.”
January 11, 1999 - Ahold announces that it has expanded its operations in Spain by acquiring 100% ownership of Dialco and Dumaya, two of the leading supermarket companies in southern Spain.
February 2, 1999 - Ahold announces that it has acquired additional supermarket companies in Spain: Castillo del Barrio in Malaga and Guerrero in Grenada .
March 9, 1999 – Ahold announces that its nets earnings rose 29% to NLG 1.2 billion, earnings per common share increased 19% to NLG 2.06 billion, operating results rose 22% to NLG 2.2 billion, and 1999 outlook was 15-20% higher earnings per share.
March 9, 1999 – Ahold announces its agreement to acquire Pathmark Stores, Inc.
March 19, 1999 – Ahold announces that it has acquired additional grocery stores in Argentina through Ahold’s 50% interest in DAIH.
April 12, 1999 – Ahold files its Form 20-F with the SEC and reports net earnings of NLG 1,206 million representing an increase in net earnings of NLG 272 million or 29% in 1998 compared to 1997, as well as earnings per common share increase of 18% in 1998 compared to 1997.
May 4, 1999 - Ahold announces that the Company’s Disco joint venture has acquired two other supermarket chains in Argentina.
May 10, 1999 – Ahold announces that first quarter sales were up by 27.2% to 9.3 Billion Euros (NLG 20.5 billion).
June 10, 1999 - Ahold announces that its first quarter 1999 net earnings increased by 31.6% to 175.1 Million Euros.
September 2, 1999 – Ahold announces that its second quarter net earnings rose 40.6% to Euro 172.9 million. Defendant van der Hoeven states that the company’s second quarter net earnings were more than 40% higher than last year, and that there is "no doubt" that the US companies, which represent almost 60% of sales and 70% of operating results, are having a very good year.
September 7, 1999 –Ahold announces that it has acquired two supermarket chains in Southern Spain.
September 27, 1999 -Buenos Aires Economico published an article stating that Disco is planning further acquisitions as part of its expansion plan which it intends to continue developing over the next few years with its Dutch partners Ahold.
October 29, 1999 – Defendant Van der Hoeven states during the shareholders' meeting that “Ahold has been able to deliver significant shareholder value over the last few years. During the last 5 years, our turnover has risen on average 20% per year, with growth in net profits of 32% per year and a market capitalization increase of 50% of per annum since 1994.”
December 9, 1999 – Ahold announces its intent to acquire 50% of ICA Group.
December 22, 1999 – Ahold announces its expansion into Central America.
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Royal Ahold, the international food retailer, today reported 1998 consolidated sales (53 weeks) of NLG 58.4 billion (26.5 billion Euros), a 15.5% increase over 1997 (52 weeks).
401. The January 8, 1999 Press Release also quotes the following materially false and
misleading statements by defendant Van der Hoeven, as follows:
Ahold President & CEO Cees Van der Hoeven expressed his satisfaction with the 1998 sales results: “We are delighted with the acquisition of Giant Food in the United States last year which again enables us to boost synergy among our now five US operating companies. Our position in Latin American has been strengthened considerably through our investment in Bompreço-Bahia in Brazil, Disco in Argentina and Santa Isabel in Chile. These operations now rank us among the leading food retailers on the Latin American continent. We are also proud of the performance in The Netherlands, particularly at Albert Heijn and Schuitema, and of our Pingo Doce Feira Nova operations in Portugal. We remain positive about Asia once the economies there have turned around. Ahold is right on track and we expect strong profitable growth for the future.
402. On January 19, 1999, the Company filed a Form 6-K (the “January 19, 1999 Form 6-K”)
which attached as an exhibit the January 8, 1999 Press Release. Defendant Van der Hoeven signed the
January 19, 1999 Form 6-K.
2. Ahold Announces Acquisitions in Spain
403. Continuing its unwavering quest to become the leading supermarket company in the
world, Ahold announced on January 11, 1999, that it had expanded its operations in Spain by acquiring
100% ownership of Dialco and Dumaya, two of the leading supermarket companies in southern Spain.
In connection with this transaction, the Company issued a press release in which it stated, among other
things:
These acquisitions are very important developments for us in Spain, where we now work totally independently. Both Dialco and Dumaya operate first-class supermarkets and are market leader in their respective trade areas. They are well suited to each other and will work closely together. In Spain, we expect considerable further growth, partially from our existing operations and also from the acquisition of companies who want to be part
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of a strong worldwide organization instead of doing it alone. The Spanish retail sector is consolidating rapidly. Thanks to our international know-how and experience, we are well positioned to realize our objectives and become one of the leading supermarket companies in Spain in the coming years.
404. Again furthering its acquisition program, Ahold announced on February 12, 1999 that it
had acquired additional supermarket companies in Spain: Castillo del Barrio in Malaga and Guerrero in
Grenada. In connection with completing this transaction, the Company issued a press release in which it
stated, among other things:
Our Spanish operations are now taking off rapidly. We will be generating sales this year of approximately USD 500 million and plan considerable further growth. We want to acquire supermarkets in densely populated cities and areas, where customers appreciate shopping in modern supermarkets. The consolidation process is in full swing and Ahold sees excellent opportunities. Regional and local supermarket companies want to join forces with us for our international know-how and sizeable network. We plan to build a competitive group of prominent and profitable supermarket companies meeting the needs of the Spanish customer. 3. Ahold Issues Its 1998 Annual Report
405. On or about March 9, 1999, Ahold issued its Annual Report to investors announcing the
Company’s financial results for 1998 (the “1998 Annual Report”). Ahold’s 1998 Annual Report made,
among others, the following false representations concerning operations in Portugal, which omitted to
disclose the material fact that Ahold did not possess the requisite control over JMR to fully consolidate
JMR’s sales figures:
Jerónimo Martins Retail (JMR), the successful company in which Ahold has held a 49% stake since 1992, retained its authoritative position in Portuguese food retailing in 1998. Over the last six years, Ahold and its partner have benefited substantially from their joint expertise in all aspects of food retailing. JMR operates flourishing supermarkets and hypermarkets throughout the country and continued to strengthen its presence in the capital Lisbon and the northern city of Oporto in 1998. Sales rose by 12% to NLG 2.6 billion as Portugal again made a strong contribution to earnings from this region. Supported by the financial and logistical strength of its parent companies, JMR looks set to sustain this
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pattern of consistent growth in Portugal’s highly competitive food retail sector.
406. On March 9, 1999, the Company issued a press release (the “First March 9, 1999 Press
Release”) entitled “Ahold 1998 net earnings surge 29% to NLG 1.2 billion.” In the First March 9, 1999
Press Release, the Company again made materially false and misleading statements and omissions
regarding its sales figures:
Highlights • Net earnings rise strongly by 29% to NLG 1.2 billion • Earnings per common share increase 19% to NLG 2.06 • Operating results rise 22% to NLG 2.2 billion • 1998 dividend proposal: NLG 0.86 (1997: NLG 0.72) per common
share • 1999 outlook: 15-20% higher earnings per share
* * * The significant increase in net earnings was mainly attributable to further growth in the United States. The acquisition of US supermarket company Giant Food, Inc. (‘Giant- Landover’) on October 28, 1998, contributed to the increase in net earnings. The Netherlands, Portugal, Brazil and Argentina all made healthy contributions.
* * * 1998 sales rise 15% to NLG 58.4 billion Consolidated sales in guilders rose 15% to NLG 58.4 billion (1997: NLG 50.6 billion). Sales in the United States rose 13% to USD 16.2 billion (1997: USD 14.3 billion), all operating companies contributing to the increase. In particular, Stop & Shop and Giant-Carlisle generated markedly higher sales. The consolidation of Giant-Landover in the 1998 fourth quarter also impacted positively.
* * *
In Latin America, sales rose 78% to NLG 4.7 billion (1997: NLG 2.6 billion). This sharp rise reflects the full-year consolidation of Bompreço Bahia in Brazil. The consolidation of Disco in Argentina and Santa Isabel based in Chile, both as of the 1998 fourth quarter, also boosted sales.
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* * *
Operating results in the United States rose 24% to USD 713.5 million (1997: USD 574.2 million), with all operating companies, particularly Stop & Shop and Tops, contributing. The consolidation of Giant-Landover as of October 28, 1998, also impacted positively on operating results. Its integration is on schedule and operating results were above expectations. Fourth quarter net earnings rise 36% In the fourth quarter of 1998 (13 weeks), net earnings rose 36% to NLG 385.0 million (1997, 12 weeks: NLG 282.3 million). Earnings per common share rose 15% to NLG 0.60 (1997: NLG 0.52). Earnings in guilders in this quarter were negatively impacted by the lower average exchange rate of the US dollar (NLG 1.88 vs NLG 1.98). At a constant US Dollar exchange rate, earnings per share rose 19%. The considerable growth in net earnings partly reflects of the consolidation of Giant-Landover in the United States and Disco in Argentina, both as of the 1998 fourth quarter. Fourth quarter sales rise 33% Consolidated sales in the 1998 fourth quarter rose 33% to NLG 16.8 billion (1997: NLG 12.6 billion) due partly to the impact of the extra week in the fiscal fourth quarter of 1998.
407. On March 15, 1999, the Company filed a Form 6-K with the SEC signed by Defendant
Van der Hoeven which attached as an exhibit the First March 9, 1999 Press Release.
4. Ahold Announces Intended Acquisition of Pathmark
408. Fueled by the misleading financial results that the Company had been reporting, on
March 9, 1999, the Company issued another press release (the “Second March 9, 1999 Press Release”)
entitled “Ahold Announces New US Supermarket Acquisition.” In the Second March 9, 1999 Press
Release, the Company stated in pertinent part:
Royal Ahold, the international food retailer, has agreed to acquire the US supermarket company Pathmark Stores Inc (“Pathmark”). The company has reached agreement with SMG-II Holdings Corporation (“SMG-II”) to acquire all of the outstanding capital stock of SMG-II. This holding company controls Pathmark through its subsidiary Supermarket General Holdings Corporation (“SMGH”).
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The total price payable by Ahold for all of the capital stock of SMG-II and the preferred stock of SMGH is approximately USD 250 million. Pursuant to the agreement, Ahold will also indirectly assume all of the indebtedness of Pathmark amounting currently to approximately USD 1.5 billion. In connection with the acquisition, Ahold will make a tender offer for all of the publicly traded preferred shares of SMGH at a price of USD 38.25 per preferred share. The SMGH board of directors has unanimously determined that the tender offer is fair to, and in the best interests of, the preferred shareholders. The acquisition is expected to be non-dilutive to Ahold’s earnings per share growth in the first year and enhancing thereafter.
* * *
Funding of Pathmark acquisition Ahold intends to fund the purchase of all of the SMG-II common stock and the SMGH preferred stock (USD 250 million) by drawing on existing committed long-term credit facilities. Once Ahold has taken control of Pathmark it plans to immediately redeem all existing outstanding debt obligations. Part of the debt restructuring may be funded with newly issued equity capital. Comments by Bob Tobin, President & CEO Ahold USA. “The acquisition of Pathmark provides Ahold with a large number of high quality locations in an attractive market where our position left room for improvement. This is now going to change. We are delighted to be able to service many new customers under the Pathmark banner. We have various positive contributions in mind and expect considerable synergies from the integration with our sister operations. We have already gained quite a lot of experience in generating synergies following our other successful acquisitions. We have shown this recently after the fourth quarter 1998 acquisition of Giant-Landover and earlier in 1996 with Ahold’s acquisition of Stop and Shop. In particular, the exchange of best practices, the restructuring of the Pathmark balance sheet and the integration of certain administrative functions will positively impact on cost and benefit the bottom line significantly. We also see important advantages for local Pathmark customers as we offer them the upgrading of their favorite stores and the continuity of shopping in a well-stocked supermarket where they can count on quality service. That’s what Ahold stands for. We are very excited about this acquisition.”
409. On March 15, 1999, the Company filed a Form 6-K with the SEC signed by Defendant
Van der Hoeven which attached as an exhibit the Second March 9, 1999 Press Release.
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5. Ahold Announces Consolidation of United States Operations
410. On March 9, 1999, the Company issued a press release (the “Third March 9, 1999 Press
Release”) entitled “Ahold USA Consolidates Accounting Departments of its Five US Supermarket
Chains.” In the Third March 9, 1999 Press Release, the Company stated in pertinent part:
New financial service center in Carlisle, PA Ahold USA Inc., US headquarters of international food retailer Royal Ahold, announced today the consolidation of its five US operating companies’ accounting departments into a single financial service center named Ahold Financial Services. “A consolidated Financial Service Center allows us to capitalize on the economies of scale achieved by owning five separate supermarket chains in the US,” said Bob Tobin, President and CEO of Ahold USA. “The Financial Service Center strengthens our competitive position and also will assist us with the integration of new acquisitions.”
*** Reduction overall expenses Once the consolidation of all five accounting departments into one center is completed, annual savings will allow Ahold USA to reduce overall expenses. The consolidation of selected financial processes for Ahold’s five US operating companies improves operating efficiencies and strengthens Ahold USA’s position in its markets. “Ahold will continue to leverage its knowledge, expertise and synergies to remain a leader in the food retail industry”, said Tobin.
411. On March 15, 1999, the Company filed a Form 6-K (the “March 15, 1999 Form 6-K”)
which attached as exhibits the First and Second March 9, 1999 Press Releases. Defendant Van der
Hoeven signed the March 15, 1999 Form 6-K.
6. DAIH Acquires Additional Supermarkets in Argentina
412. On March 19, 1999, the Company issued a press release (the “March 19, 1999 Press
Release”) announcing that it had acquired additional grocery stores in Argentina through Ahold’s 50%
interest in DAIH. Specifically, the Company stated in this press release:
Disco-Ahold International Holdings, the joint venture in Argentina in which Royal Ahold, the food retailer, has a 50% stake, has agreed to
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acquire two Argentine food retailers, Supamer and Gonzalez, which operate a total of 75 stores. The transactions, subject to customary conditions, are expected to close at the end of April. The acquisitions boost annualized sales in Latin America to approximately USD 5 billion and the number of stores in six countries to well over 350.
7. Ahold Offers Debt Securities in the United States to Maintain its Acquisition
Campaign
413. On April 15, 1999, the Company issued a press release (the “April 15, 1999 Press
Release”) entitled “Ahold Files Debt Securities in US.” In the April 15, 1999 Press Release, the
Company stated in pertinent part:
Ahold, the food retailer, announced today the filing of a preliminary prospectus supplement with the US Securities and Exchange Commission (SEC) for the sale of up to USD 1 billion of senior unsecured debt securities in the US. The securities will be issued by Ahold’s indirect wholly-owned subsidiary Ahold Finance U.S.A., Inc. and will be fully and unconditionally guaranteed by Ahold. The offering, pursuant to Ahold’s USD 3 billion shelf registration of January 28, 1999, is expected to include a medium-term tranche and a long-term tranche. The proceeds will be used to refinance existing debt. Ahold Finance expects the securities will be offered during the week of April 19, 1999. Chase Securities Inc. and J.P. Morgan & Co. will act as joint book-running managers and ABN AMRO Inc. and Goldman, Sachs & Co. will act as co-managers.
414. On May 4, 1999, the Company filed a Form 6-K with the SEC signed by Defendant Van
der Hoeven which attached as an exhibit the April 15, 1999 Press Release.
415. On April 26, 1999, Ahold issued a press release (the “April 26, 1999 Press Release”)
announcing the pricing terms of a $1 billion (USD) Yankee bond. In the April 26, 1999 Press Release,
the Company stated:
Ahold, the food retailer, Friday, April 23, priced a USD 1 billion Yankee bond, to be offered by Ahold’s wholly owned subsidiary Ahold Finance U.S.A., Inc. The offering, pursuant to Ahold’s USD 3 billion shelf registration statement, comprised a USD 500 million, ten-year tranche, priced at 112.5 basis points over Treasuries, to yield 6.326%. The second tranche consisted of a USD 500 million, thirty-year bond, priced at 125 basis points over Treasuries, to yield 6.939%.
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The securities will be fully and unconditionally guaranteed by Royal Ahold. The issue was rated A3 by Moody’s Investor Service and A by Standard & Poor’s. The proceeds will be used to refinance existing debt. Chase Securities Inc. and J.P. Morgan & Co. acted as joint book-running managers and ABN AMRO Inc. and Goldman, Sachs & Co. acted as co-managers.
416. On May 24, 1999, the Company filed a Form 6-K with the SEC signed by Defendant Van
der Hoeven which attached as an exhibit the April 26, 1999 Press Release.
8. Ahold Files Its 1998 Form 20-F
417. On April 12, 1999, the Company filed a Form 20-F (the “1998 Form 20-F”) with the SEC
entitled, “1998 Form 20- F.” In the 1998 Form 20-F, the Company made the following materially false
and misleading statements and/or omissions:
Royal Ahold reported 1998 net earnings of NLG 1,206 million compared to NLG 934 million in 1997 and NLG 632 million in 1996, representing increases in net earnings of NLG 272 million or 29% in 1998 compared to 1997 and NLG 302 million or 48% in 1997 compared to 1996. Earnings per common share were NLG 2.06, NLG 1.74 and NLG 1.38 in 1998, 1997, and 1996 respectively. Earnings per common share increased 18% in 1998 compared to 1997 and 26% compared to 1996. Operating results in 1998 rose to NLG 2,242 million, an increase of NLG 405 million or 22% compared to 1997 operating results of NLG 1,837 million, which increased NLG 594 million or 48% as compared to operating results of NLG 1,243 million in 1996. Net sales were NLG 58,364 million, NLG 50,568 million and NLG 36,538 million in 1998, 1997 and 1996, respectively, reflecting increases in sales of 15% in 1998 compared to 1997 and 38% in 1997 compared to 1996. At constant exchange rates, net earnings grew 28% in 1998 and 36% in 1997, while sales increased 15% in 1998 and 28% in 1997.
* * * Net Sales Net sales in 1998 increased NLG 7,796 million or 15% to NLG 58,364 million, from NLG 50,568 million in 1997. At constant exchange rates, consolidated net sales growth was 15% in 1998 compared to 1997. The major reasons for this increase were, in addition to autonomous growth, the fourth quarter consolidation of Giant-Landover, Disco and Santa Isabel and the additional week in fiscal 1998 for the Dutch and U.S.
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operations. Net sales in 1997 increased NLG 14,030 million or 38% to NLG 50,568 million from NLG 36,538 million in 1996. At constant exchange rates, consolidated sales growth was 28% in 1997 compared to 20% in 1996. The major reasons for this increase were the full year consolidation of both Stop & Shop and Bompreço.
418. On May 4, 1999, Ahold issued a press release (the “May 4, 1999 Press Release”)
announcing that the Company’s Disco joint venture had acquired two other supermarket chains in
Argentina. In the May 4, 1999 Press Release, the Company made the following statements, which
omitted to disclose the material fact that Ahold did not own the requisite control over DAIH to fully
consolidate Disco’s financial results:
Ahold, the food retailer, announced today that Disco, a prominent Argentine supermarket chain co-owned by Ahold, has successfully completed the acquisition of Supamer and Gonzalez. These Argentine chains jointly operate 82 supermarkets. Their acquisition boosts the number of stores now operated by Disco to 195 and sales to approximately USD 1.8 billion. The acquisitions further strengthen the position of Ahold in Argentina where Disco is already the leading urban supermarket chain with among others a prominent position in Buenos Aires. Supamer operates 46 ‘Americanos’ supermarkets and 25 ‘Mini Sol’ convenience stores with joint sales of approximately USD 190 million in the province of Cordoba. Gonzalez has 11 supermarkets with sales of approximately USD 42 million in the province of San Juan. 9. Ahold Announces Results for the First Quarter of 1999
419. On May 10, 1999, the Company issued a press release (the “May 10, 1999 Press
Release”) entitled, “Ahold 1999 First-Quarter Sales up 27.2% to 9.3 Billion Euros (NLG 20.5 billion).”
In the May 10, 1999 Press Release, the Company made the following materially false and misleading
statements and/or omissions:
Royal Ahold, the leading international food retailer, achieved 1999 first-quarter (16 weeks) consolidated sales (excluding VAT) of Euro 9.3 billion (NLG 20.5 billion), an increase of 27.2% over the first-quarter of 1998. At constant exchange rates, sales would have risen 31.7%.
* * *
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Outlook full-year 1999 Based on current performances, the Corporate Executive Board confirms its expectation expressed in the 1998 annual report that sales and results will improve in all regions. Excluding currency fluctuations, earnings per share will rise between 15% and 20%. Results for 1999 first-quarter will be in line with the outlook for the full-year.
420. On May 11, 1999, the Company issued a press release (the “May 11, 1999 Press
Release”) entitled, “Ahold president Cees Van der Hoeven at Shareholders’ Meeting” in which Ahold’s
financial information was presented in a materially false and misleading manner because the
consolidated sales results improperly included 100 percent of the results of joint ventures that Ahold did
not control:
Van der Hoeven also announced that Ahold has made an excellent start to 1999. Consolidated sales in the first 16-week quarter of the year rose 27.2% to $9.3 billion (approximately USD 10.0 billion). Ahold announces its results over the first quarter of June 10, 1999. Stockholders approved the financial statements and the 1998 final dividend. The Ahold president confirmed that Ahold is right on track and expects earnings per share, excluding currency fluctuations, to rise by 15 to 20% in 1999 compared to the year before.
421. In the May 11, 1999 Press Release defendant Van der Hoeven reaffirmed his mission to
create a global conglomerate:
“Let me assure you this is the goal upon which each and every one of us at Ahold is focused,” he said. “Our vision is to create a network of superior supermarket companies in the world’s important trade areas. Individually, these companies should be among the world’s best. Jointly, however, they should generate substantial added value, benefiting from the achievement of knowledge transfer and economies of scale. The contours of this network are becoming increasingly visible” In his speech, the Ahold president expressed his satisfaction that the integration of Giant-Landover into Ahold’s US operations is proceeding well ahead of schedule. He also commented on the acquisition of US supermarket company Pathmark in the New York metropolitan area. In The Netherlands, he added, “Albert Heijn knows how to retain its
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customers by keeping its stores in excellent shape, safeguarding high quality, offering plenty of choice, popular new products, appealing produce departments, friendly service and a great price-quality ratio.” In Latin America, Ahold’s activities are developing apace. In Asia, Ahold is strengthening its current business while keeping a close watch on costs ahead of a resurgence of the region’s national economies. In Central and Southern Europe, Ahold’s stores are improving their performance, increasingly aligning their activities and accelerating the pace of knowledge transfer and the sharing of experience. 1999 outlook confirmed The Ahold president confirmed that Ahold is right on track and expects earnings per share excluding currency fluctuations to rise 15% to 20% in 1999 compared to the year before.
422. On May 19, 1999, the Company filed a Form 6-K (the “May 19, 1999 Form 6-K”) which
attached as an exhibit the May 11, 1999 Press Release. Defendant Van der Hoeven signed the May 19,
1999 Form 6-K.
423. On May 28, 1999, the Company filed a Form 6-K (the “May 28, 1999 Form 6-K”) which
attached as an exhibit the materially false and misleading May 10, 1999 Press Release. Defendant Van
der Hoeven signed the May 10, 1999 Form 6-K.
424. On June 8, 1999, the Company issued a press release (the “June 8, 1999 Press Release”)
entitled “Royal Ahold Files Shelf Registration Statement With SEC.” In the June 8, 1999 Press Release,
the Company stated in pertinent part:
Royal Ahold, the international food retailer, and its US affiliate Ahold Finance U.S.A., Inc., have filed a shelf registration statement with the SEC, the Securities and Exchange Commission, to restore the shelf to USD 3.0 billion. The filing was made to replace the USD 1.0 billion which was used for Ahold’s Yankee Bond offering in April 1999. Ahold has previously filed shelf registration statements. At this moment in time, neither Ahold nor Ahold Finance U.S.A., Inc., intend to issue registered financing instruments under this filing.
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425. On June 10, 1999, the Company issued a press release (the “June 10, 1999 Press
Release”) entitled, “Ahold 1st Quarter 1999 Net Earnings Increase By 31.6% to 175.1 Million Euros.”
In the June 10, 1999 Press Release, the Company made the following materially false and misleading
statement and/or omission regarding the results of its operations:
Other European countries Sales in other European countries (Portugal, Spain, Poland and the Czech Republic) rose 39.1% to E 517.4 million (1998: E 372.0 million). All operating companies contributed to this sales increase. The Spanish supermarket chains acquired in January 1999 were consolidated for the first time in this quarter. Operating results in the region rose 18.5 % to E 21.1 million (1998: E 17.8 million). In Portugal, the Pingo Doce supermarkets and Feira Nova hypermarkets again achieved higher operating results.
*** Latin America In Latin America, sales rose to E 769.4 million (1998: E 384.6 million). This doubling of sales mainly reflects the consolidation of Disco in Argentina and the Chilean chain Santa Isabel. Consolidated sales in Euros were negatively impacted by the devaluation of the Real in January; sales in Brazil in local currency rose further in the first quarter. Operating results in Latin America increased to E 19.4 million (1998: E 9.2 million), the rise largely reflecting improved results at Bompreço and the consolidation of Disco in Argentina.
426. On June 11, 1999, the Company issued a press release (the “June 11, 1999 Press
Release”) announcing that it would relocate the headquarters of defendant Ahold USA from Atlanta to
Washington, D.C. Among other things, the Company’s June 11, 1999 Press Release stated:
‘The move from Atlanta to Washington DC is a logical step as our US headquarters will now be located among our rapidly growing operating companies,’ said Robert Tobin, President & CEO of Ahold USA. ‘Basing our headquarters in the nation’s capital facilitates support, coordination and synergy activities. We will be located closer to where most of our business is generated.’
427. On June 21, 1999, the Company filed a Form 6-K with the SEC signed by Defendant Van
der Hoeven which attached as an exhibit the June 8, 1999 Press Release.
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428. On June 25, 1999, the Company filed a Form 6-K (the “June 25, 1999 Form 6-K”) which
attached as an exhibit the June 10, 1999 Press Release. Defendant Van der Hoeven signed the June 25,
1999 Form 6-K.
429. On June 25, 1999, the Company filed a Form 6-K with the SEC signed by Defendant Van
der Hoeven, which attached as an exhibit the June 11, 1999 Press Release.
10. Ahold Extends Time Period for Pathmark Tender Offer
430. Continuing its mission to expand operations in the United States, Ahold announced on
August 27, 1999 that it was extending the time period and increasing the offering price in connection
with its tender offer to acquire Pathmark Stores, Inc. in the United States. In this regard, the Company
stated:
Ahold today announced that its wholly-owned subsidiary Ahold Acquisition, Inc. is extending the tender offer for the preferred stock of Supermarkets General Holdings Corporation until 5:00 p.m., New York City time, on Friday, October 8, 1999 and is increasing the offer price for the preferred stock from $38.25 to $39.85 per share. The offer had been scheduled to expire on Friday, September 3, 1999. The tender offer has been made pursuant to a merger agreement under which Royal Ahold will acquire all of the outstanding shares of SMG-II Holdings Corporation, the company which controls the US supermarket company Pathmark Stores, Inc. through Supermarkets General. The increase in the offer price for the Supermarkets General preferred stock is being made in connection with a Settlement Agreement reached in a stockholder class action lawsuit. The Settlement Agreement was approved by the Court of Chancery of the State of Delaware on July 22, 1999, and the period for appeal or review expired on August 23, 1999.
431. Each of the statements made from September 1998 through August 1999 concerning
Ahold’s fiscal 1998 and/or fiscal 1999 sales performance and/or the Company’s success at integrating
acquired entities and/or joint ventures was materially false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
(a) At no time during 1998 or 1999 did Ahold have the requisite control over JMR or Bompreco to consolidate 100% of the financial results of either of these joint
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ventures as the Company did, thus forcing the Company to restate its improperly consolidated financial results. As the Company admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(b) Ahold’s financial statements and results issued during 1999 were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR and Bompreco. Ahold has admitted that its net sales for fiscal 1999 were overstated by 16.6%;
(c) By virtue of the improper consolidation of JMR and Bompreco, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP as Ahold lacked the requisite control over these joint ventures;
(d) Contrary to representations by Deloitte that its audit of Ahold’s fiscal 1999 financial statements was conducted in accordance with Dutch and U.S. GAAS, it was not as set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they artificially inflated net income. In its 2002 Form 20-F, Ahold has admitted that its net income during fiscal 1999 was overstated by €14 million, or 1.9% under Dutch GAAP, and was overstated by €30 million, or 5.1% under U.S. GAAP; and
(f) Contrary to Ahold’s, Van der Hoeven’s and Tobin’s positive representations during 1999 concerning Ahold’s successful integration of operation and generation of synergies, the Company was not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
11. Ahold Announces Results for the Second Quarter of 1999
432. On September 2, 1999, the Company issued a press release (the “First September 2, 1999
Press Release”), entitled “Ahold 2nd Quarter net earnings surge 40.6% to Euro 172.9 million.” In the
First September 2, 1999 Press Release, the Company made the following representations:
Royal Ahold, the leading food retailer, achieved second quarter 1999 net earnings of € 172.9 million (1998: € 123.0 million), a 40.6% increase for the 12 week period ended July 18, 1999. Net earnings totaled € 170.2 million (1998: €121.0 million) after deduction of the preferred dividend. Earnings per common share amounted to € 0.27 (1998: € 0.21), an
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increase of 27.0%. Excluding currency fluctuations, specifically the higher average exchange rate of the US dollar (€ 0.96 vs. € 0.92), the earnings per common share growth was 20.2%. Consolidated sales rose 34.5% to € 7.9 billion (1998: €5.9 billion). Operating results rose 42.3% to € 321.4 million (1998: € 225.9 million). As a percentage of net sales, operating results rose from 3.9% to 4.1%. Operating results before depreciation (EBITDA) rose 38.1% to € 523.4 million (1998: € 379.1 million). As a percentage of net sales, EBITDA rose from 6.5% to 6.6%. The United States: sales +34.6%; operating results +45.7% In the United States, sales increased 34.6% to USD 4.7 billion (1998: USD 3.5 billion). This increase is largely attributable to the consolidation of Giant-Landover and substantial sales growth at Stop & Shop. Other European Countries: sales +32.8%; operating results +21.7% In other European countries, sales rose 32.8% to € 551.6 million (1998: € 415.5 million). Portugal, Poland and notably the Hypernova hypermarkets in the Czech Republic, contributed to sales growth. The consolidation of the Spanish supermarket chains acquired in January 1999, also contributed to the increase in sales.
*** Latin America: sales +115.7%; operating results +89.7% Latin American sales rose 115.7% to € 872.7 million (1998: € 404.6 million), a doubling largely due to the consolidation of Disco and Santa Isabel. In Brazil, sales in local currency also increased during the second quarter. Operating results in Latin America rose 89.7% to € 22.0 million (1998: € 11.6 million), mainly reflecting the consolidation of Disco.
433. Also on September 2, 1999, the Company issued another press release (the “Second
September 2, 1999 Press Release”) entitled “Remarks by President & CEO Cees Van der Hoeven.”
Among other things, defendant Van der Hoeven reaffirmed the Company’s acquisition mission and
made materially false and misleading statements and/or omissions regarding the Company’s operating
results:
As you have seen from the press release, our second quarter net earnings were more than 40% higher than last year. Earnings per share grew by 27% and excluding currency impact by 20%, our new and increased target
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number for the year. Most increases in the second quarter were higher than in the first and overall, we can look back at an excellent first half ‘99. There is no doubt that our US companies, which now represent almost 60% of sales and 70% of operating results, are having a very good year. Although all companies are showing improvements, it is particularly rewarding to note that the two largest, Stop & Shop and Giant Landover, are leading the way. We are more than pleased with the progress that is being made at Giant Landover, where sales and results clearly exceed our expectations due to increased promotional activity and cost savings. Overall, in Ahold USA the many initiatives to extract benefits from economies of scale, best practice exchanges and other cost-saving efforts are bearing fruit.
* * * Elsewhere in Europe, the Portuguese results again were excellent.
*** In Latin America, the impact of the Real devaluation has stabilized so that the currency losses of the first quarter have not reappeared. Bompreço’s sales have been relatively strong throughout the period, but we have invested some money into lower prices. Disco’s earnings in Argentina are holding up quite well, despite the recessionary economic environment. At Santa Isabel in Chile, we are finally seeing some real improvements taking hold.
*** We are still very much committed to our mission to become the best and most successful food retailer in the world. As you know, our vision is to succeed in this mission by building a mutually beneficial global network of best-of-breed regional companies. Our roadmap is clear as we continue to improve and grow our existing operations, whilst at the same time targeting top-notch food retailers in the US, Europe and Latin America for acquisition or joint-venture. As you know there is still one thoroughbred, Pathmark, waiting on the sidelines to join our stable. We are working with the FTC to expedite its review of this transaction You have recently seen that we apply stringent financial criteria to acquisitions, when in a limited auction for Hannaford in the USA we were not the highest bidder. It is our stated objective to only pursue acquisitions when we are convinced that we can add significant value over and above the purchase price. In the meantime, we continue to see
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significant further growth potential on the US East Coast, autonomously as well as through acquisitions.
* * * When I spoke about our vision earlier I mentioned a mutually beneficial global network of superior brand names. With the words mutually beneficial we mean in particular economies of scale, benchmarking, best practice exchange and knowledge transfer. We strongly believe that these are the cornerstones of our global strategy to add value for our customers locally. As an example, during the last press conference I mentioned to you our internal initiative to build an Ahold intranet to facilitate the process of extracting benefits such as cost savings on a global scale. I can now report that we have made great progress. It is particularly exciting to find that this initiative dovetails seamlessly with the regional synergy efforts that have become so successful in recent years. With the help of some advanced technical tools and the right mindset, we are able to raise the bar in all our companies.
* * * We have strengthened our controls throughout the supply chain and expanded our communication to customers about food quality and safety.
* * * For the rest of the year we foresee no major surprises and hence our outlook in the press release that for full year 1999 we see our earnings per share, excluding currency fluctuations, grow by approximately 20%. Net earnings will therefore grow by a significantly higher percentage because of a greater number of shares outstanding than last year.
434. The First September 2, 1999 Press Release was attached as an exhibit to a Form 6-K filed
by the Company with the SEC on October 12, 1999 and signed by Defendant Van der Hoeven.
435. On September 13, 1999, the Company filed a Form 6-K with the SEC signed by
Defendant Van der Hoeven which attached as an exhibit the August 27, 1999 Press Release.
436. On October 12, 1999, the Company filed a Form 6-K (the “October 12, 1999 Form 6-K”)
which attached as an exhibit to the First September 2, 1999 Press Release. Defendant Van der Hoeven
signed the October 12, 1999, 1999 Form 6-K.
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12. Ahold Announces Further Acquisitions in Spain
437. On September 7, 1999, the Company issued a press release (the “September 7, 1999
Press Release”) entitled “Ahold acquires two supermarket chains in Southern Spain.” In the September
7, 1999 Press Release, the Company stated in pertinent part:
Royal Ahold, the international food retailer, has acquired the Mercasol and Las Postas supermarket companies in southern Spain. The chains are ideally located on the Costa del Sol and draw shoppers from both the local community and from the millions of tourists who flock to the region every year. The acquisitions bring the number of Ahold supermarkets in Spain to about 200, with annualized sales approaching Euro 400 million.
438. On September 27, 1999, Buenos Aires Economico published an article entitled, “Ahold
satisfied with 50% stake in Disco.” The September 27, 1999 article stated in pertinent part:
The Argentinean supermarket chain Disco is planning further acquisitions as part of its expansion plan which it intends to continue developing over the next few years with its Dutch partners Ahold. The food retailing group Ahold is currently attempting to respond to the merger between Promodes and Carrefour, which merged to create the second largest retail group in the world after Walmart of the U.S. The chairman of Royal Ahold, Cees Van der Hoeven, however, implicitly ruled out increasing the group’s stake in Disco, stating that it was very satisfied with its 50 per cent stake in the supermarket chain.
439. On October 12, 1999, the Company filed a Form 6-K with the SEC signed by Defendant
Van der Hoeven which attached as an exhibit the September 7, 1999 Press Release.
13. DAIH Acquires More Supermarkets in Argentina
440. On October 7, 1999, the Company announced that its DAIH joint venture had acquired
additional supermarkets in Argentina. Ahold’s corresponding press release omitted to disclose the
material fact that Ahold did not possess the requisite control over DAIH to fully consolidate DAIH’s
financial results:
Disco-Ahold International Holdings, the Argentine joint venture between the international food retailer Royal Ahold and Velox Retail Holdings, announces its purchase of the La Plata-based Pinocho
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supermarket chain. Disco also announces the opening this month of its new, state-of-the-art distribution center in the outskirts of Buenos Aires. Regional leader expands Disco, already a leading supermarket chain in Buenos Aires and surrounding areas with annualized sales of approximately USD 1.8 billion, has purchased the eight Pinocho stores in and around the town of La Plata with total annual sales of approximately USD 36 million. The acquisition brings the number of stores in Argentina operated by Disco to 208. The joint venture also holds a 65% stake in the Santa Isabel chain, which operates 90 stores in Chile, Peru, Paraguay and Ecuador. 14. Defendant Van der Hoeven’s “Day of the Stockholder Presentation”
441. On October 29, 1999, the Company issued a press release (the “October 29, 1999 Press
Release”) entitled “Speech by Cees Van der Hoeven.” Defendant Van der Hoeven’s speech was
occasioned by the “Day of the Stockholder” in the Netherlands. In pertinent part, defendant Van der
Hoeven made the following statements regarding Ahold’s operations, contained statements that were
materially false and misleading and/or omitted to disclose material fact:
Accessing this new source of capital increased the level of ambition, boost discipline and strengthened the company’s focus. Today, we are not only the company where (we hope) most of you do your shopping, but Ahold’s shares make up roughly half of the Dutch private share portfolios. Over the years in the Netherlands, we have become a household name, as the Americans would say, and we are proud of it. True, our share price has come under some pressure lately. While many factors affect our share price at any given moment, the precise reasons for the current pressure are unclear to us. In any case, Ahold has been able to deliver significant shareholder value over the last few years. During the last 5 years, our turnover has risen on average 20% per year, with growth in net profits of 32% per year and a market capitalization increase of 50% of per annum since 1994. During this period, we have generated returns to our investors of, on average, 35% per year. We are determined to show considerable growth in the years to come as well, and I shall return to this point in a moment. First I would like to make a few brief comments on the business itself.
* * * Then, ladies and gentleman, as in other sectors, there is a significant wave of consolidation in food retailing. I believe this will lead to regional
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businesses becoming a part of a larger entity, and that there will ultimately be a very limited number of large, global companies. We are determined to be one of the global players and our strategy is totally focused on that endeavor.
* * *
But there’s one factor we haven’t spoken about yet that is always grossly underestimated. I am talking about knowledge. In our company, developing knowledge is considered a core activity with top priority. Progress in technology and the right attitude towards learning and sharing make it possible to realize enormous improvements in operational management through the effective exchange of knowledge. Within Ahold we have a worldwide project which is essentially combining and exchanging practically all of our knowledge via an intranet . Virtual team rooms are set up for just about all parts of our company. This makes it possible for thousands of people in the world to exchange experiences, successes and mistakes, but mostly, ideas. This all takes place behind the scenes. At the same time, we try to have our stores tune in to local needs more clearly and sharply. With new technology we are able to approach our customers on a more individual level and to give our stores a local identity. This dichotomy in managing our company and its operations is indeed a great challenge, but we have taken major steps forward. The success of the integration of newly acquired companies also depends on it. Now we can implement improvements very quickly and add value to acquisitions and joint ventures. A perfect example of this is our most recent acquisition of Giant Food in the United States, where we see profits practically double within a period of 1½ years, while turnover is growing strongly and prices have been reduced. Virtually all management details of Giant Food have been examined and measured together, forming the basis of hundreds of improvements that have been implemented. Our great strength is that we make optimal use of the advantages of scale, exchange knowledge effectively and still manage to appreciate and improve the local identity. That makes us the preferred party in the consolidation changing the face of the market. For the rest, this consideration of the forces that play a part in the consolidation process also indicates that success is not guaranteed for everyone. Only working with the idea “Big is Beautiful” is doomed to fail. This is why we have been busy for years establishing a structure with which we can benefit from the advantages of growth, while sharing them with the consumer as well. As a second course of growth, we regularly add small takeovers to existing store chains. This year, for example, we announced a number of acquisitions in Spain, Poland, Argentina and Brazil. In general, these are
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very profitable acquisitions, whereby the stores are quickly converted to our well-known brand name in that region. The third course of growth is our trademark, known worldwide. Partly because of that, Ahold was recently acclaimed by Global Finance Magazine as the best supermarket organization in the world. This is the area of acquisitions and joint ventures with absolutely top regional companies that vary in turnover from NLG 2 to 10 billion (US$ 1 to 5 billion). Companies with a tremendous brand name, well managed, innovative and highly quality-oriented. In these cases, we refer to our stable of thoroughbreds, to which we periodically add a new racehorse. Recent examples include Stop & Shop and Giant Food in the United States, Bompreço in Brazil and Disco in Argentina. In all these cases, we have been able to add knowledge and a great deal of value. We have carefully mapped out this third course of growth worldwide. At this time we see about ten potential candidates for acquisition or a joint venture. The total sales of these 10 candidates is roughly equal to the present sales of Ahold ? some USD 35 billion. Three companies on this list are in the United States, three in South America and four in Europe. What is significant is that eight of the ten are family businesses, which, with their culture and structure, will fit very well with us. From the viewpoint of families who have built up such a top organization over a span of one or more generations, it is almost essential that the name, identity and culture be preserved while at the same time realizing the advantages of scale. As I said earlier, this is exactly where our great strength lies. The owners of these companies see the consolidation process continue. True, they sometimes look on with sorrow, but they also realize that they cannot remain on the sidelines. There have already been discussions with most of these candidates, some of which have reached a serious phase. We will be very surprised if we don’t realize at least one such transaction next year. Meanwhile, there is still one racehorse that is warming up on the sidelines before stepping onto the field ? Pathmark. We still hope to get the green light from the American FTC before the end of the year. On the basis of the first three elements of our growth strategy, Ahold is expected once again to see sales double over the next five years, while increasing margin at the same time. This also indicates that the fourth element is not absolutely necessary to occupy a position among the top 3-5 world players. But this fourth element attracts the most publicity: THE big acquisition, or THE merger. What are the opportunities and possibilities? We are talking about companies with turnover in excess of US$ 15 billion, which definitely limits the choices. Absolutely essential is that the cultures seamlessly connect with each other and that both parties, for the benefit of all stakeholders and particularly the consumer, can increase each other’s value. Our aim is not necessarily to be the biggest: the business case for such a merger or acquisition must be a
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better proposition for the customers of the companies involved, and for the shareholders a more profitable enterprise. Let there be no mistake about it: we know all the potential candidates and are conducting an in-depth study. No one can allow himself to make a mistake in this course of action. At this time, I estimate the chance of having something come out of this fourth part of our strategy within the next three years, at about 50%. Once again, I want to emphasize that this element is not absolutely essential, but it would help us become a world player. All in all, and without taking into account the fourth element of growth, Ahold is on the road toward doubling its sales in the next 5 years and realizing at least 15% earnings-per-share growth, excluding currency fluctuations. This year the earnings-per-share growth, as mentioned earlier, will be around 20%, excluding currency fluctuations. Regarding financing our growth, you know that we generally finance acquisitions with external capital, ±50% with equity and 50% with debt. This year there will not be a public offering of shares. It is possible, however, that particularly as a result of our success with the third element of our growth strategy, an appeal will be made next year to the capital markets. You have our explicit promise that this will never be the case for an acquisition which, including its financing, would dilute our earnings-per-share. In other words, fears of negative effects of an offering are totally groundless. Ladies and Gentlemen, Ahold is right on course and is moving steadily forward to realize its mission to become “the best and most successful supermarket organization in the world.”
442. Each of the statements made from September 1999 through October 1999 concerning
Ahold’s fiscal 1998 and/or fiscal 1999 sales performance and/or the Company’s success at integrating
acquired entities and/or joint ventures was materially false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
(g) At no time during 1998 or 1999 did Ahold have the requisite control over JMR or Bompreco to consolidate 100% of the financial results of either of these joint ventures as the Company did, thus forcing the Company to restate its improperly consolidated financial results. As the Company admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(h) Ahold’s financial statements and results issued during 1999 were materially overstated because they included artificially inflated net sales due to the improper
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consolidation of all of the reported net sales of JMR and Bompreco. Ahold has admitted that its net sales for fiscal 1999 were overstated by 16.6%;
(i) By virtue of the improper consolidation of JMR and Bompreco, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP as Ahold lacked the requisite control over these joint ventures;
(j) Contrary to representations by Deloitte that its audit of Ahold’s fiscal 1999 financial statements was conducted in accordance with Dutch and U.S. GAAS, it was not as set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(k) Ahold’s financia l statements and results issued during this period were materially overstated because they artificially inflated net income. In its 2002 Form 20-F, Ahold has admitted that its net income during fiscal 1999 was overstated by €14 million, or 1.9% under Dutch GAAP, and was overstated by €30 million, or 5.1% under U.S. GAAP; and
(l) Contrary to Ahold’s, Van der Hoeven’s and Tobin’s positive representations during 1999 concerning Ahold’s successful integration of operation and generation of synergies, the Company was not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
15. Ahold Announces Results for the Third Quarter of 1999
443. On November 23, 1999, the Company issued a press release (the “November 23, 1999
Press Release”) entitled “Ahold Third Quarter Net Earnings Surge 43.4% to €166.9 Million.” In the
November 23, 1999 Press Release, the Company made materially false and misleading statements
and/or omitted to state material facts concerning the Company’s operating results:
Royal Ahold, a leading international food retailer, achieved third quarter 1999 net earnings of $ 166.9 million (1998: $ 116.4 million), a 43.4% increase for the 12 week period ended October 10, 1999. Net earnings totaled $ 164.1 million (1998: $ 114.0 million) after deduction of the preferred dividend. Earnings per share amounted to $ 0.25 (1998: $ 0.19), an increase of 30.8%. Excluding currency fluctuations, specifically the higher average exchange rate of the US dollar ($ 0.95 vs. $ 0.90), earnings per share growth was 26.2%. Consolidated net sales rose 36.7% to $ 7.8 billion (1998: $ 5.7 billion).
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Operating results rose 53.1% to $ 327.3 million (1998: $ 213.8 million). As a percentage of net sales, operating results rose from 3.7% to 4.2%. Operating results before depreciation (EBITDA) rose 49.5% to $ 534.4 million (1998: $ 357.5 million). As a percentage of net sales, EBITDA rose from 6.3% to 6.8%. The United States: sales +32.7%; operating results +57.0% In the United States, sales increased 32.7% to USD 4.6 billion (1998: USD 3.5 billion). This increase is largely attributable to the consolidation of Giant-Landover. BI-LO, Giant-Carlisle and specifically Stop & Shop contributed to sales growth. Operating results in the U.S. rose 57.0% to USD 228.9 million (1998: USD 145.8 million). All U.S. operating companies turned in better results, reflecting successful marketing campaigns, synergy benefits and strict cost control. Giant-Landover made particularly strong contributions to the improved operating results. Other European Countries: sales +38.8%; operating results +20.4% In other European countries (Portugal, Spain, the Czech Republic and Poland) sales rose 38.8% to $ 603.1 million (1998: $ 434.5 million).
*** Latin America: sales +126.4%; operating results +76.7% Latin American sales rose 126.4% to $ 874.5 million (1998: $ 386.3 million), largely due to the consolidation of Disco in Argentina and Santa Isabel in Chile. At Bompreço in Brazil, sales in local currency also increased during the third quarter.
*** FIRST THREE QUARTERS 1999 NET EARNINGS RISE 38.2% TO $ 514.9 MILLION Net earnings for the 40-week period ended October 10, 1999 amounted to $ 514.9 million (1998: $ 372.5 million), an increase of 38.2%. Net earnings after the deduction of the preferred dividend amounted to $ 505.6 million for the period (1998: $ 365.6 million). Earnings per share for the first three quarters 1999 amounted to $ 0.79 (1998: $ 0.64), a 22.5% increase. Excluding currency fluctuations, earnings per share rose 21.7%. • Sales for the first three quarters +32.3%
Consolidated sales for the first three quarters of 1999 amounted to $ 25.0 billion (1998: $ 18.9 billion), an increase of 32.3%. In the U.S., sales increased 34.9% to USD 15.4 billion (1998: USD 11.4 billion). This increase was largely attributable to the
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consolidation of Giant-Landover. Sales in The Netherlands rose 5.8% to $ 6.1 billion (1998: $ 5.7 billion). In other European countries, sales rose 36.8% to $ 1.7 billion (1998: $ 1.2 billion). Latin American sales totaled $ 2.5 billion (1998: $ 1.2 billion). The doubling of sales reflects primarily the consolidation of Disco and Santa Isabel. In Asia, sales amounted to $ 0.4 billion (1998: $ 0.3 billion).
444. The November 23, 1999 Press Release was attached as an exhibit to a Form 6-K which
the Company filed with the SEC on January 3, 2000 (the “January 3, 2000 Form 6-K”). Defendant Van
der Hoeven signed the January 3, 2000 Form 6-K.
16. Ahold Announces Acquisition of 50% Interest in ICA
445. On December 9, 1999, the Company issued a press release (the “December 9, 1999 Press
Release”) entitled “Ahold Set to Acquire 50% of ICA Group, the leading Scandinavian food retailer.”
In the December 9, 1999 Press Release, announcing the joint venture that Ahold used to artificially
inflate its sales results by billions of dollars during the Class Period, Ahold stated:
Under the initial agreement, Ahold and the current main shareholders of ICA, ICA Forbundet and Canica, will each take a 50% share in a new entity to hold all current and future activities of the ICA Group in northern Europe. The transaction includes the ICA Group’s operations in Sweden and Norway, its 50% stake in Statoil Retail, operations in Baltic countries and various other interests such as institutional food supply operations. Four members of the ICA Group have a seat on the Board of the new alliance. Roland Fahlin, currently Chairman and CEO of ICA Group, will be Chairman and Stein Erik Hagen will be Co-Vice Chairman. Among the four representatives from Ahold, Jan Andreae, member of the Corporate Executive Board responsible for European activities, will act as Co-Vice Chairman of the new joint venture Board. Ahold to pay $1.8 billion for its 50% stake in ICA Under the initial agreement to acquire 50% of the ICA Group, Ahold plans to pay a total of approximately $1.8 billion. The transaction is subject to conditions including the full acceptance by ICA Förbundet, a due diligence review conducted by Ahold and approval by anti-trust authorities. An extraordinary shareholders meeting of the ICA Group to approve the transaction is scheduled for March. The impact of the transaction on Ahold’s earnings per share will be positive in the year 2000, growing gradually thereafter. Ahold will
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finance the transaction in line with past practice, which may include an equity offering. Ahold will announce details after the signing of the final contract, scheduled for the end of January 2000. The transaction is expected to close by mid-2000. Earlier the ICA Group had contemplated a partial float of its shares to finance further growth and international expansion. However, retailers/shareholders of the Group and management clearly prefer teaming up with Ahold. It not only provides excellent financial compensation to current shareholders but also contributes state of the art retail expertise and full access to Ahold’s European and worldwide network, vital to long-term continuity in today’s rapidly-changing food retail environment. Royal Ahold Upon completion of the transaction, Ahold will generate worldwide annualized sales of approximately $41 billion, of which about $19 billion will be generated from its European operations. This will rank Ahold among the larger European food retailers in terms of sales. Joining forces with the ICA Group in Scandinavia is fully in line with Ahold’s ambition to become the world’s best and most successful supermarket company. The transaction supports Ahold’s position as a global player and significantly strengthens its European position. Ahold currently employs 300,000 people worldwide.
*** The partnership between Ahold and the ICA Group is expected to generate synergy savings in 2001 of approximately $35 million (0.5% of total 1999 ICA Group sales) on top of the synergies to be generated from the 1999 merger between ICA and Hakon. These synergies are expected to increase gradually thereafter and will be found in procurement, development of private label brands, store operations, logistics, distribution, IT, business development and the merchandising of non-food items. ICA retailers and consumers in Sweden and Norway are expected to benefit from the alliance through pricing initiatives, store upgrades and enhanced services to make the associated ICA Group stores even more competitive. The pricing initiatives in particular reflect increased volume and cost savings from best practice exchange and the sharing of experience, expertise and knowledge.
446. The December 9, 1999 Press Release also set forth the following false and misleading
statements and omissions made by Van der Hoeven in connection with Ahold’s acquisition of its 50%
interest in ICA:
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Joining forces with the ICA Group considerably strengthens our European position. This is one of the most sizeable transactions in our company’s history. The partnership is expected to have an immediate and sustained impact on net earnings and earnings per share. The excellent business case enables us to achieve the desired scaling up of our European stature with a known partner in a proven structure on a basis that is EPS enhancing. It strengthens our European base and positions us strategically for future steps. Our market leading positions help protect our profitability and optimize our growth prospects in a unifying Eurozone. And together with our partner’s strong management team and successful operator entrepreneurs, we will develop the efficiencies and service enhancements that today’s consumers demand. The exchange of European and global know-how, the pooling of expertise and the joint generation of new growth in northern Europe are now very much on the agenda. We are convinced of the fit between our cultures and welcome this Scandinavian thoroughbred into our stable. The venture is timely, right for all stakeholders and fully in line with our ambition to become the world’s best and most successful supermarket company. We’re very pleased.
447. On December 10, 1999, the Company issued a press release (the “December 10, 1999
Press Release”) entitled, “Ahold-ICA Group Joint Venture Has Immediate and Sustained Positive
Impact on Earnings Per Share.” The December 10, 1999 Press Release repeated certain of defendant
Van der Hoeven’s false and misleading statements and/or material omissions in connection with
announcing the joint venture, and stated in pertinent part:
‘The newly announced joint venture between Royal Ahold and the ICA Group will considerably strengthen our European position. This is one of the most sizeable transactions in our history. The partnership will have an immediate positive impact on net earnings and earnings per share in 2000 which will continue,’ said Cees Van der Hoeven, President & CEO of food retailer Royal Ahold at a press conference today at corporate headquarters in The Netherlands.
* * * At the press conference, Van der Hoeven reiterated that Ahold continues to grow profitably through autonomous growth of at least 7% per annum, smaller and fill- in acquisitions, and through large regional acquisitions or joint ventures such as the one announced with the ICA Group. Commenting on Ahold’s US business, Van der Hoeven said fourth-quarter sales there are robust and may well exceed expectations once again. “We’re flying!,” he enthused.
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* * *
“The ICA Group and Ahold are a truly magnificent fit,” said Van der Hoeven. ‘We see many synergy opportunities and benefits from economies of scale. We will pool our resources and make the already substantial Scandinavian operation even better and more competitive.’ 17. The FTC Opposes Ahold’s Bid to Acquire Pathmark
448. On December 16, 1999, the Company issued a press release (the “December 16, 1999
Press Release”) entitled “US Regulators Oppose Ahold Acquisition of Pathmark.” In the December 16,
1999 Press Release, the Company stated in pertinent part:
Royal Ahold, the international food retailer, announced today that the Federal Trade Commission (“FTC”) has communicated its strong opposition to Ahold’s acquisition of the Pathmark supermarket chain. In light of this opposition, the Ahold Corporate Executive Board has exercised its right to terminate the agreements with SMG-II Holdings Corporation (“SGHC”), effective as of December 16, 1999. Consequently, the tender offer for the preferred stock of SGHC has also been terminated. Royal Ahold has instructed Citibank, N.A., the depository for the tender offer, to return all tendered shares of preferred stock of SGHC to the holders thereof. 18. Ahold Enters Into The Paiz Ahold Joint Venture
449. On December 22, 1999, the Company issued a press release (the “December 22, 1999
Press Release”) entitled “Ahold Expands Into Central America.” In this press release, the Company
announced that it had entered into the Paiz Ahold’s joint venture with La Fragua, the leading
supermarket operator in certain countries in Central America. Ahold improperly consolidated Paiz
Ahold’s financial results from the date of formation through the end of the Class Period. The press
release stated:
Royal Ahold, the food retailer, and the principal stockholders of La Fragua, the leading supermarket and hypermarket company in the Central American republics of Guatemala, El Salvador and Honduras (combined population of 24 million), announced today they have signed an agreement to jointly expand the retail activities of La Fragua in the region.
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The companies announce the formation of a new 50/50 joint venture [Paiz Ahold] into which La Fragua brings all of its 119 stores with 1999 sales of approximately USD 535 million. For Ahold, the joint venture offers excellent opportunities for regional development. Ahold is already well positioned in Latin America through its joint ventures with prominent local partners Bompreço (in Brazil), Disco (in Argentina) and Santa Isabel (in Chile, Peru, Paraguay and Ecuador). For La Fragua, teaming up with Ahold provides international experience and know-how, important economies of scale and financial resources to boost its growth in the markets of Central America, where it is the prominent food retailer.
*** Ahold in Latin America In Latin America, Ahold is already co-owner of the leading Brazilian food retailer Bompreço, the prominent Argentine supermarket chain Disco, and the Santa Isabel supermarket company with stores in Chile, Peru, Paraguay and Ecuador. Ahold’s overall annualized sales for the region, including those of the new joint venture with La Fragua, are expected to amount to USD 4.3 billion with considerable potential for further growth. 19. Analysts Embrace The Defendants’ False and Misleading Statements
450. During the time period from January 1, 1999 through December 31, 1999, analysts
closely followed Ahold’s public statements and announcements in connection with reporting Company
developments to investors. Analysts routinely repeated Ahold’s false and misleading financial
information, using it as the basis for their reports:
• On March 10, 1999, F Van Lanschot Bankiers NV - Auerbach Grayson
issued a report stating that:
This afternoon Ahold impressed with the announcement of FY98 net earnings growth of 29%. . . .The recently acquired Giant (Giant-Landover), consolidated as of October 28, has been able to succeed in a turnaround . . . Ahold’s activity in Brazil and Argentina impressed also with operating margin slightly lower than last year . . .Ahold claimed that in the recent past its activities in Latin-America were not really pressed by the sluggish economic environment. The company proves to be right in this.
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• On March 30, 1999 Morgan Stanley Dean Witter issued a report on Royal
Ahold. It rated Royal Ahold a “Strong Buy,” with a $45.00 price target.
The report also stated:
We Are Reiterating Our Strong Buy Rating On Shares Of Ahold Following An Upbeat Meeting With Management on March 30,1999, held in NY. Management continues to see excellent progress at Giant Food (acquired in October 1998), strong results at its other US operations, and is enthusiastic regarding its forthcoming acquisition of Pathmark.
• On June 2, 1999, Credit Suisse First Boston issued a report on Royal
Ahold. It rated Royal Ahold a “Buy,” and provided its preview of 1st
Quarter 1999 results. The report stated:
Q1 sales (which have already been published) were up 27.2% to NLG 20.5bn. Highlights included the US where sales increased 36.7% reflecting both the acquisition of Giant Food Inc. as well as strong underlying like for likes (+2/3%); and Latin America where sales doubled to NLG 1,700m, reflecting the consolidation of Disco and Santa Isabel and robust like for likes in Brazil (+c.10%).
• On July 8, 1999, Morgan Stanley Dean Witter issued a report on Royal
Ahold. It rated Royal Ahold a “Strong Buy,” with a price target of
$43.00. The report discussed the results of an analyst meeting held in
Washington, D.C. It stated:
Our Enthusiasm For Ahold’s Growth Prospects Was Bolstered Following Well Attended Analyst Meeting Held In Washington, D.C., On July 7, 1999.
Management reviewed its U.S. and Dutch retail efforts, emphasizing the growing benefits of synergies and best practices from which we believe Ahold will continue to drive substantial benefits going forward. In addition, we expect Ahold to benefit from solid square-footage growth in the U.S., which is accelerating in a number of divisions.
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20. Additional SEC Filings That Certain Individual Defendants Signed
451. In addition to the foregoing 1999 statements identified above, certain Individual
Defendants signed the following documents that were filed with the SEC and incorporated, either
directly or by reference, various materially false and misleading statements relating to the Company’s
financial performance during the Class Period:
1/29/99 Form S-3 (containing false and misleading 1997 and 1998 financial results for Ahold), signed by Van der Hoeven, Andreae, Meurs, and Tobin;
3/15/99 Form 14D-1 (containing false and misleading 1997 financial results for Ahold) signed by Tobin;
6/6/99 Form F-3 (containing false and misleading 1999 financial results for Ahold), signed by Van der Hoeven, Andreae, Meurs, and Tobin.
452. Each of the above statements made from November 1999 through December 1999 above
concerning Ahold’s fiscal 1998 and/or fiscal 1999 sales performance and/or the Company’s success at
integrating acquired entities and/or joint ventures was materially false and misleading when issued. The
true but concealed and/or misrepresented facts included, but were not limited to:
(a) At no time during 1998 or 1999 did Ahold have the requisite control over JMR or Bompreco to consolidate 100% of the financial results of either of these joint ventures as the Company did, thus forcing the Company to restate its improperly consolidated financial results. As the Company admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(b) Ahold’s financial statements and results issued during 1999 were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR and Bompreco. Ahold has admitted that its net sales for fiscal 1999 were overstated by 16.6%;
(c) By virtue of the improper consolidation of JMR and Bompreco, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP as Ahold lacked the requisite control over these joint ventures;
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(d) Contrary to representations by Deloitte that its audit of Ahold’s fiscal 1999 financial statements was conducted in accordance with Dutch and U.S. GAAS, it was not as set forth in detail below in the section entitled, “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they artificially inflated net income. In its 2002 Form 20-F, Ahold has admitted that its net income during fiscal 1999 was overstated by €14 million, or 1.9% under Dutch GAAP, and was overstated by €30 million, or 5.1% under U.S. GAAP; and
(f) Contrary to Ahold’s, Van der Hoeven’s and Tobin’s positive representations during 1999 concerning Ahold’s successful integration of operation and generation of synergies, the Company was not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “The company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
C. 2000 Events and False and Misleading Statements
453. The defendants made and/or caused to be issued numerous materially false and
misleading statements and/or omissions of material facts, some of which were made in connection with
Jan. 6, 2000 - Ahold announces that its sales surged 29.1% to 33.5 billion Euros
Jan. 13, 2000 - Ahold announces its intent to extendand enlarge the joint venture with Jeronimo Martins Retail (JMR).
March 7, 2000 - Ahold announces its intent to acquire USF.
March 7, 2000 - Ahold announces that its 1999 net earnings surged 37% to $752.1 million.
Mar. 24, 2000 - Ahold announces its joint venture with ICA AB, which according to Ahold, will increase Ahold's annual sales in Europe to over Euro 20 billion.
April 10, 2000 - Ahold announces the successful completion o f the Tender Offer for USF.
April 13, 2000 - Ahold announces that the USF purchase has been completed.
April 19, 2000 - Ahold announces its plans to acquire Golden Gallon in the U.S.
April 27, 2000 - Ahold announces that it completed its new joint venture with ICA Group, and has a 50% in the ICA Group.
May 16, 2000 - Ahold announces that its First Quarter sales surged 18.1% to Euro 11.0 Billion. In a separate press release, Defendant Van Der Hoeven's s tatement at the shareholders' meeting that "Ahold continues to grow faster han the market" were reiterated.
May 23, 2000 -Ahold announces its intent to increase its stake in the Brazilian Joint Venture Bompreço.
June 7, 2000 Ahold announces that its first quarter 2000 net earnings increased by 31.5% to Euro 230.2 million.
June 26, 2000 - Ahold announces that its ownership in Bompreço increased from 50% to 100%.
July 12, 2000 - Ahold announces its intent to acquire GFG Foodservice through USF.
Aug. 16, 2000 - Ahold announces its intent to acquire PYA/Monarch, a subsidiary of Sara Lee.
Sept. 7, 2000 - Ahold announces its intent to acquire Spanish food retailer, Superdiplo.
Sept. 7, 2000 - Ahold announces that its 2nd Quarter net earnings surged 48.2% to Euro 256.2 million.
Oct. 27, 2000 - Ahold announces that it expects to double sales in Spain within three years.
November 28, 2000 - Ahold announces that it has agreed to purchase certain assets from Grand Union, including 56 of the bankrupt grocer's stores for $178 million
November 28, 2000 - Ahold announces that its 3rd Quarter net earnings rose 55.5% to Euro 259.6 million.
December 5, 2000 - Ahold announces th at USF completed the acquistion of PYA/Monarch.
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1. Disco Acquires Additional Supermarkets in Argentina
454. On January 3, 2000, the Company issued a press release (the “January 3, 2000 Press
Release”) entitled “Ahold Expands in Argentina.” In the January 3, 2000 Press Release, the Company
stated in pertinent part:
Disco S.A., the Argentine supermarket chain 90% owned by the 50/50 joint venture Disco-Ahold International Holdings, has announced it has agreed to acquire 100% of the outstanding shares of Supermercados Ekono S.A. In the capital city Buenos Aires, Ekono operates 10 large supermarkets with annual sales of approximately USD 165 million. The stores are known for their wide assortment and excellent service. Next to groceries and fresh products, the stores also carry a variety of non food items. Disco, already a leading supermarket chain in Buenos Aires and surrounding areas with annualized sales of approximately USD 1.7 billion, has purchased the Ekono stores for a total of USD 150 million. The acquisition brings the number of stores in Argentina operated by Disco to 220, with total selling space of approximately 255,000-sq. m., an increase of 66% over year-end 1998. Disco-Ahold also holds a 65% stake in the Santa Isabel chain, which operates 90 stores in Chile, Peru, Paraguay and Ecuador. Allan Noddle, Ahold’s Corporate Executive Board member responsible for Latin America, called the acquisition ‘an excellent contribution to Disco’s supermarket leadership role in Buenos Aires. The Ekono stores strengthen our position considerably. Recently, we also announced the new Ahold joint venture in Central America with La Fragua with 199 stores and sales of USD 535 million. Also in Brazil, our joint venture continues to grow. We see significant opportunities to strengthen our position in the whole Latin American region.’
455. On January 4, 2000, the Company issued a press release (the “January 4, 2000 Press
Release”) entitled “Highlights of Royal Ahold Press Conference.” In the January 4, 2000 Press Release,
the Company stated in pertinent part:
‘Ahold ICA group joint venture has immediate and sustained positive impact on earnings per share’
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456. According to the January 4, 2000 Press Release, defendant Van der Hoeven reiterated at
the press conference that:
Ahold continues to grow profitably through autonomous growth of at least 7% per annum, smaller and fill-in acquisitions, and through large regional acquisitions or joint ventures such as the one announced with the ICA Group. Commenting on Ahold’s US business, Van der Hoeven said fourth-quarter sales there are robust and may well exceed expectations once again. “We’re flying!” he enthused. “Our US customers love shopping with us.” He also commented favorably on the announcement by Schuitema, the Dutch food wholesaler in which Ahold has a 73% stake, that it has reached initial agreement with the Dutch branch of German food retailer Tengelmann to acquire all of its 125 supermarkets and six hypermarkets in The Netherlands that trade under A&P store brand. 2. Ahold Previews Year-End 1999 Results
457. On January 6, 2000, the Company issued a press release (the “January 6, 2000 Press
Release”) entitled “Ahold 1999 Sales Surge 29.1% to 33.5 Billion Euros.” In the January 6, 2000 Press
Release, the Company stated in pertinent part:
Ahold 1999 sales surge 29.1% to 33.5 billion Euros Royal Ahold, the international food retailer, today reported 1999 consolidated sales of Euro 33.5 billion, a 26.6% rise over the Euro 26.5 billion sales generated in 1998 (53 weeks). Based on a comparable 52-week period, sales rose 29.1%.
* * * In a comment Ahold President & CEO Van der Hoeven said: “Ahold sales growth in the past year has developed excellently. Specifically in the fourth quarter, sales were robust. In our trade areas, all sales records were broken in the last weeks of the year.” Ahold will release its fourth quarter and full-year 1999 results on March 7, 2000.
458. The January 6, 2000 Press Release was attached as an exhibit to a Form 6-K, which the
Company filed with the SEC on February 10, 2000 (the “February 10, 1999 Form 6-K”). Defendant
Van der Hoeven signed the February 10, 2000 Form 6-K.
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3. JMR Attempts to Expand
459. On January 13, 2000, the Company issued a press release (the “January 13, 2000 Press
Release”) entitled “Ahold and Portugal’s Jeronimo Martins Enlarge Joint Venture.” In the January 13,
2000 Press Release, the Company stated in pertinent part:
Food retailers Jeronimo Martins in Portugal and Royal Ahold in The Netherlands have announced they are currently in discussion to significantly extend and enlarge their current joint venture operations. The two companies jointly own the joint venture Jeronimo Martins Retail (JMR) in Portugal with 1999 consolidated sales of Euro 1.38 billion. The Boards of Jeronimo Martins and Royal Ahold intend to establish a new 50/50 venture which includes the current operations of JMR in Portugal: Pingo Doce supermarkets, Feira Nova hypermarkets and JMR’s interest in Madeira.
4. Ahold Announces Year-End 1999 Results
460. On March 7, 2000, the Company issued a press release (the “First March 7, 2000 Press
Release”) entitled, “Ahold 1999 Net Earnings Surge 37% to $752.1 Million.” In the First March 7, 2000
Press Release, the Company stated in pertinent part:
Royal Ahold, the food retailer, achieved net earnings in 1999 (52 weeks) of $752.1 million (1998, 53 weeks: $547.2 million), an increase of 37%. After deduction of the preferred dividend, net earnings totaled $739.9 million (1998: $537.3 million). Earnings per common share rose 25% to $1.15 (1998: $0.92). Excluding currency fluctuations, mainly the effect of the higher average exchange rate of the US dollar ($0.94 in 1999 vs $0.90 in 1998), earnings per share rose by 22%. Consolidated sales rose 27% to $33.6 billion (1998: $26.5 billion). Operating results increased by 39% to $1.4 billion (1998: $1.0 billion). As a percentage of net sales, operating results increased to 4.2% from 3.8%. Operating results before depreciation (EBITDA) grew by 35% to $2.3 billion (1998: $1.7 billion). As a percentage of net sales, EBITDA rose to 6.8% from 6.4%.
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5. Ahold Announces Acquisition of USF
461. On March 7, 2000, the Company issued a press release (the “Second March 7, 2000 Press
Release”) entitled, “Ahold Set to Acquire U.S. Foodservice.” In the Second March 7, 2000 Press
Release, the Company discussed Ahold’s bold expansion of its United States operations, stating in
pertinent part:
Ahold, the leading food provider with major operations in the US, Europe and Latin America, today announced it has entered into a merger agreement with America’s second largest food service distributor, U.S. Foodservice[], to acquire all 101.5 million common shares outstanding. Ahold is offering USD 26.00 in cash per share for a total transaction size of approximately USD 3.6 billion, including debt. U.S. Foodservice is the second largest food distributor in the rapidly-growing US food service market. Annual sales now total over USD 7 billion, including two recent acquisitions. Its sales in fiscal 1999 (July 1, 1998 to June 30, 1999) amounted to USD 6.2 billion. On January 31, 2000, U.S. Foodservice disclosed second quarter sales growth of 9.3%, net earnings growth of 53% and earnings per share growth of 29%. U.S. Foodservice is listed on the New York Stock Exchange (NYSE:UFS). The company distributes food and related products to restaurants and institutional food service establishments across the United States. Its customer base also includes sports stadiums, hospitals, schools, company cafeterias, government and military facilities. Overall, U.S. Foodservice currently provides over 140,000 companies of varying size with a broad range of items including national signature and private- label brands as well as kitchen equipment and restaurant supplies. The company employs 13,250 people. Nationwide network for Ahold with major synergy benefits The acquisition of U.S. Foodservice grants Ahold access to a nationwide food distribution and sales network. The company operates 40 distribution centers with marketing and sales offices, from the Atlantic Ocean, down to Texas across to California and the areas in between. The activities blend well with Ahold’s retail operations along the US eastern seaboard. The acquisition presents Ahold with opportunities for nationwide growth in a food service market that has double the growth rate of food retail, is still fragmented and has sales of approximately USD 150 billion. Ahold generated 1999 sales of USD 20.3 billion in the United States and $33.6 billion worldwide. The company sees considerable growth for its
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US store operations, both autonomously and through acquisitions such as U.S. Foodservice which further expands Ahold’s overall business by adding a new strategic and complementary marketing channel for food and related products. Significant synergy benefits in procurement, logistics and distribution, IT, and private label development, are anticipated. In the food service sector there are further synergies. Ahold operates successfully through its wholly-owned Dutch subsidiary, Deli XL, servicing 30,000 customers in The Netherlands with 1999 sales of $800 million. Ahold’s prospective Scandinavian partner, ICA, is also active in the field and holds a leading market position. The acquisition of U.S. Foodservice and Ahold’s food service activities in The Netherlands and Scandinavia will total approximately USD 9 billion in sales. Financial details The planned transaction to acquire all outstanding shares of U.S. Foodservice amounts to approximately USD 3.6 billion, including debt of USD 925 million. In line with past practice, Ahold intends to finance the transaction through 50% equity and 50% debt. In Spring 2000, the company plans to issue equity and/or equity linked instruments for an amount of approximately $3 billion. Royal Ahold will commence a cash tender offer to purchase all of the outstanding common shares on March 13, 2000. The tender offer will remain open for 20 business days, unless extended in accordance with the merger agreement, and is conditioned on the tender of a sufficient number of shares to give Royal Ahold ownership of at least a majority of the outstanding shares on a fully diluted basis. Shares not purchased pursuant to the tender offer will be converted into the right to receive the same USD 26 per share in cash in a subsequent merger. The tender offer will also be subject to other customary closing conditions, including the need to obtain antitrust approvals. The offering also takes into account proportional financing of its stakes in the ICA operation announced December 1999 and transactions in Spain and Central America. Upon completion of the U.S. Foodservice acquisition expected by May 2000, Ahold’s annualized US sales will total approximately USD 30 billion. Synergies and cost savings from this transaction are expected to amount to a minimum of USD 75 million by 2001. The acquisition is expected to have a positive impact on Ahold’s earnings per share growth in 2000, increasing thereafter. Comments Cees Van der Hoeven, Ahold President/CEO Ahold President Cees Van der Hoeven described the planned acquisition of U.S. Foodservice as ‘fully in line with our growth strategy and our ambition to become the world’s best multi-channel food provider. This is a great opportunity and considerably expands our US geographical reach. It
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provides us with significant additional growth. U.S. Foodservice has enormous potential as it has a solid infrastructure in place and management professionals at the helm. Critical mass and economies of scale along with new synergies will positively impact all our businesses. We’re excited and see a very positive future ahead.’ Comments Jim Miller, Chairman and President/CEO U.S. Foodservice ‘Teaming up with Ahold is a magnificent step forward for U.S. Foodservice. The new economies of scale now available, the financial means and the sharing of know-how and experience will greatly help U.S. Foodservice to speed up the gains to be made through the huge potential of the food service market. We realized we couldn’t do this on our own and needed a strong partner that knows the food business inside out. The transaction with Ahold enables U.S. Foodservice to accelerate its already rapid growth and use today’s momentum to the maximum. Joining Ahold and benefiting from their expertise in the food business is going to strengthen U.S. Foodservice’s position. It provides access to a global market.’ Comments Bob Tobin, President/CEO Ahold USA ”For Ahold, the planned acquisition of U.S. Foodservice is a major strategic leap forward. We now have direct access to the rapidly expanding US food service market and enter this new business channel in a prominent position. We see food services complementing our operations in a natural way with some of U.S. Foodservice’s activities also proving highly valuable for our existing stores. This acquisition opens up a new growth corridor and elevates us from the position of supermarket operator to multi-channel food provider. I’m also particularly excited that this acquisition makes us a national player for the first time. The distribution and marketing network across the US adds tremendous value to our company, including the e-commerce business with home delivery, as started by U.S. Foodservice. We’re gaining a second platform for considerable growth and that’s wonderful news. We are also familiar with their excellent management team. They share our values and strategies and have a culture that will welcome knowledge sharing and business synergies.” On March 7, 2000 Ahold also announced record earnings for 1999. Increasing by 37% net profit amounted to $752.1 million with 25% earnings per share growth and a 29% dividend increase. Ahold shares are listed in Amsterdam (Ahold) and as ADRs on the New York Stock Exchange (AHO). Ahold shares are also listed in Zurich, Switzerland. Ahold’s website can be found at www.ahold.com.
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462. On March 7, 2000, the Company issued a third press release entitled, “From Food
Retailer to Food Provider.” In this press release, the Company reiterated certain of Ahold’s positive
pronouncements regarding the planned acquisition of USF, and further stated with respect to comments
issued by defendant Van der Hoeven:
Confident about the strength of the company’s future autonomous growth, Van der Hoeven said Ahold will continue to acquire or joint venture with best of class, significant and superior businesses. He stated there are ample investment opportunities in the existing chain, ‘and Ahold sees major contributions to growth and results through its joint venture with the ICA Group, further expected enlargement of its joint venture with Jeronimo Martins and of course, today’s announcement, the acquisition of U.S. Foodservice.’
463. Each of the statements made from January 2000 through March 7, 2000 concerning
and/or the Company’s internal controls, was false and misleading when issued. The true but concealed
and/or misrepresented facts included, but were not limited to:
a. The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
b. The financial results, inc luding revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold USA’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
c. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was
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inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2000 were overstated by $10.58 billion due to the improper consolidation of these joint ventures;
d. By virtue of the improper consolidation of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures.
e. Ahold’s improper consolidation of ICA, also artificially inflated Ahold’s net income. Specifically, Ahold’s net income was overstated by EUR 10 million in fiscal 2000 because restructuring costs associated with Ahold’s acquisition of its 50 percent interest in ICA in April 2000 were improperly accrued rather than expensed in the periods in which they were incurred. As Ahold admits in its 2002 Form 20-F, and as explained in detail below, the failure to treat these costs in the periods in which they were incurred violated Dutch and U.S. GAAP because Ahold lacked control over ICA during fiscal 2000;
f. At no time during fiscal 2000 did Ahold own the requisite interest in JMR, Bompreco (until its acquisition in July 2000), DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
g. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.
6. Ahold Issues Its 1999 Annual Report
464. On or about March 9, 2000, Ahold issued its Annual Report to investors announcing the
Company’s financial results for 1999 (the “1999 Annual Report”). Concerning Ahold’s sales
performance, the 1999 Annual Report stated:
Our company has once again delivered an excellent year with record sales and results in almost all segments of our worldwide business. Sales surged 27% to Euro 33.6 billion, operating results increased by 39% to Euro 1.4 billion and net earnings totaled Euro 752 million, 37% more than the previous year.
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The strong overall performance resulted in an earnings per share growth of 25%. Excluding currency fluctuations, earnings per share rose 22%, exceeding our increased target.
465. Ahold’s 1999 Annual Report made, among others, the following false representations
concerning the Company’s overall sales figures in Europe. The Company stated in the 1999 Annual
Report:
In Europe, Ahold again achieved impressive results and strengthened its position considerably. Ahold’s 2,442 stores in five countries – The Netherlands, Portugal, Spain, the Czech Republic and Poland – generated sales of Euro 10.5 billion, an increase of 11% over 1998 and representing 31% of worldwide sales. Operating results in Europe increased by 14% to Euro 459 million. Substantial autonomous growth in all five countries, a wave of new acquisitions in Spain, initial agreement with Scandinavia’s ICA Group to become 50% owner by mid-2000 and planned expansion of the Portuguese partnership with Jeronimo Martins will considerably boost Ahold’s European operations and market position.
466. Ahold’s 1999 Annual Report made, among others, the following false representations
concerning operations in Portugal:
In Portugal, Ahold’s joint venture with Jeronimo Martins Retail (JMR) saw sales rise 12% to Euro 1.3 billion through 163 Pingo Doce supermarkets and 21 Feira Nova hypermarkets. At the end of 1999, Ahold and Jeronimo Martins began discussions aimed at significantly extending and enlarging their current joint venture operations. It is the intention to establish a new 50/50 joint venture that includes the current operations of JMR in Portugal – the Pingo Doce supermarkets, the Feira Nova hypermarkets – and JMR’s interest in Madeira.
467. On March 13, 2000, Ahold filed with the SEC a Schedule TO (the “March 13, 2000
Schedule TO”) Tender Offer Statement concerning the transaction with USF. The Tender Offer
statement contained false and misleading statements with respect to representations concerning USF
sales and earnings in addition to financial information incorporated therein by USF, Ahold, and Deloitte.
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The March 13, 2000 Schedule TO also indicated the following regarding the “Source and Amount of
Funds:”
The amount of funds required by the Purchaser to purchase all of the outstanding shares of Common Stock pursuant to the Offer and pay related fees and expenses is expected to be approximately $2.83 billion. The Purchaser currently intends to obtain all such funds through a combination of loans from and/or capital contributions by Parent or other affiliates. Parent currently intends to obtain such funds primarily through a loan facility (the “Credit Facility”) to be provided by ABN AMRO Bank N.V. and Chase Manhattan plc. (collectively, the “Arrangers”). Parent has received a commitment letter (the “commitment Letter”) from the Arrangers pursuant to which the Arrangers have agreed to lend to Parent up to EUR 4.4 billion of the credit facility. It is currently contemplated that the Arrangers will syndicate some or all of the Credit Facility to other banks or financial institutions.
7. ICA Acquires Scandinavian Food Retailer
468. On March 24, 2000, the Company issued a press release (the “March 24, 2000 Press
Release”) entitled “Ahold Public Offer for ICA Shares in Sweden Successfully Concluded.” In the
March 24, 2000 Press Re lease, Ahold made materially false and misleading statements and omitted to
state material facts relating to its consolidation of ICA’s financial results:
The public offer by the 50/50 joint venture ICA Ahold Holding AB for the shares in leading Scandinavian food retailer ICA AB has been successfully concluded. Close to 99% of the voting rights and the share capital in ICA AB has been offered at the time of closing of the tender offer period, March 21, 2000.
* * * Once completed, Ahold will hold a 50% interest in ICA Ahold Holding AB, in which all activities of the ICA Group have been brought together. The other 50% of ICA Ahold Holding AB will be held by Canica, the investment company of the Norwegian Hagen family, and by ICA Förbundet, the association of ICA retailers. Ahold will pay a total of Euro 1.8 billion for its 50% interest in ICA. The impact of the transaction on Ahold’s earnings per share growth is expected to be positive in the year 2000, growing gradually thereafter.
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* * * Once the transaction is completed, annual Ahold sales in Europe will increase to over Euro 20 billion.
469. On April 7, 2000, the Company issued a press release (the “April 7, 2000 Press Release”)
entitled “European Commission Approves Ahold-ICA Joint Venture.” In the April 7, 2000 Press
Release, the Company stated in pertinent part:
Royal Ahold, the international food provider, today announced it has received the green light from the European Commission (EC) in Brussels to finalize its 50-50 joint venture transaction with the ICA Group, Scandinavia’s leading food retailer with 3,100 stores and 1999 sales of Euro 6.7 billion. The EC’s Competition Directorate notified Ahold that the proposed joint venture, ICA Ahold Holding AB, raises no serious doubts as to its compliance with common market principles. The EC also concluded that the Ahold-ICA transaction would not result in any overlaps in the parties’ activities at either national or any narrower level. For these reasons, the EC has decided not to oppose the transaction and to declare it compatible with its merger regulations. ‘Now that we have the go-ahead from the European Commission following on a successful March 24 conclusion of the public offer for ICA shares, we expect to close the transaction, including payment, by April 28, 2000,’ said an Ahold spokesman. ‘We anticipate any remaining conditions should be met over the next couple of weeks.’ Upon finalization of the transaction, Ahold will hold a 50% interest in ICA Ahold Holding AB, the joint venture into which the ICA Group’s activities have been brought. ICA Förbundet, the association of ICA retailers, and Canica, the investment company of the Norwegian Hagen family, hold the other 50% of ICA Ahold Holding AB.
470. On April 7, 2000, the Company filed a Form 6-K (the “April 7, 2000 Form 6-K”) which
attached as an exhibit the March 7, 2000 Press Release. Defendant Van der Hoeven signed the April 7,
2000 Form 6-K.
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8. Ahold Consummates Global Securities Offering to Finance ICA Joint Venture and USF Acquisition
471. Also on April 10, 2000, the Company issued a press release (the “First April 10, 2000
Press Release”) entitled, “Ahold Global Offering to Finance Recent Acquisitions.” The offering
documents were false and misleading for the reasons stated elsewhere herein, including with respect to
the financial information contained therein. In the April 10, 2000 Press Release, the Company made
materially false and misleading statements and omissions of material fact concerning its global sales
results and integration of acquired companies and joint ventures:
Ahold, the food provider, today announced preliminary details of a global offering of Ahold common shares and/or convertible subordinated bonds of approximately Euro 3 billion. ABN AMRO Rothschild, Goldman Sachs International and Merrill Lynch International are the Joint Global Bookrunners and are in the process of preparing the offering. The offer will also contain a ‘green shoe’ option of up to 15%. The proceeds of the offering will be used to finance Ahold’s acquisition of U.S. Foodservice, a leading food distributor in the US, Ahold´s 50/50 joint venture with Scandinavia’s leading food retailer, the ICA Group and several smaller acquisitions in Spain and Latin America. 9. Ahold Announces Highlights From the 1999 Annual Report
472. On April 10, 2000, the Company also issued a further press release (the “Second April
10, 2000 Press Release”) entitled “Highlights From the Ahold 1999 Annual Report.” In this press
release, the “Company” reiterated some of the false and misleading statements contained in the 1999
Annual Report stating in pertinent part:
Ahold expects that sales and operating earnings in 2000 will rise in all trade areas, reflecting healthy autonomous growth and new acquisitions. The company anticipates that net earnings will be strongly higher than in 1999. Earnings per share, excluding currency fluctuations, are expected to increase by at least 15%. The acquisition of U.S. Foodservice is expected to further enhance this growth to 17-20% in 2000. U.S. Foodservice - a major strategic step
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In the report Ahold President & CEO, Cees Van der Hoeven explains in the ‘Message from the Corporate Executive Board’, that Ahold in 1999 once again delivered an excellent year with record sales and results in almost all segments of the company’s worldwide business. He highlights Ahold’s expansion into the food service business through its acquisition of U.S. Foodservice, announced in March 2000. The acquisition of U.S. Foodservice is a very significant strategic step forward in the US. It elevates Ahold to the position of national food provider in the United States with distribution, sales offices and marketing operations, including e-commerce and internet shopping, across the country. It provides us with an additional platform for significant growth. With our economies of scale, synergy benefits and expertise, we can jointly build U.S. Foodservice into a powerful and much larger operation. In this way we benefit from the food service industry consolidation, which has only just begun, leaving room for further improvements in performance. This acquisition makes Ahold USA a true multi-channel food company with a national presence.’ In Europe, Ahold sees significant future growth through the ICA 50/50 joint venture and among others, “sustained organic growth and ongoing innovation in The Netherlands. The possibility of a major alliance with a sizeable European company is still very much alive. While we believe Ahold is in an excellent position to make such a move, we are also poised to become one of Europe’s strongest players through organic growth and other mid-sized acquisitions and joint ventures.” “We feel very good about our business and the way we are growing into a multi-channel food provider, blending together successful new technology elements with those of an established food distributor,’ Mr. Van der Hoeven states. ‘We continue to grow, accelerate where we can, innovate constantly and keep the customer first and foremost to benefit all our stakeholders in the way they’ve become accustomed.” The Ahold 1999 Annual Report contains various other details regarding the current year. For its operations in the United States, Ahold expects for 2000 identical sales growth of more than 2% while autonomous growth will amount to about 7%. Current Ahold USA operating companies will open over 50 new supermarkets and remodel a further 200 existing stores. This will boost the number of Ahold’s US supermarkets to about 1100 (1999 year-end 1063). Investment in current US business is expected to total approximately USD 1.1 billion (1999: USD 0.9 billion). Operating margin is expected to rise again, reflecting considerable synergy benefits and strict cost control. In Europe, Ahold expects its activities to show average autonomous growth of approximately 11%. Current Ahold and Ahold-associated
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companies are expected to open about 170 new stores in 2000 and remodel a further 400 this year, bringing Ahold’s operations in Europe to about 2600 stores (1999 year-end 2442). This figure excludes the ICA Group (3100 stores). Total investment in Ahold’s current European business is expected to total approximately Euro 710 million. (1999: Euro 533 million). Operating margin is expected to rise in all trade areas. Ahold expects autonomous sales growth in 2000 of approximately 11% in Latin America. Its current joint ventures are expected to open 30 large new stores and remodel a further 50, bringing the total to about 557 stores, including La Fragua. (1999 year-end 408). Investment in Latin America in existing operations is expected to total approximately Euro 370 million (1999: Euro 303 million).
10. Ahold Files Its 1999 Form 20-F
473. On April 12, 2000, Ahold filed its year-end report on Form 20-F for the fourth quarter
and year ended January 2, 2000 (the “1999 Form 20-F”). The 1999 Form 20-F was signed by Defendant
Van der Hoeven.
474. The 1999 Form 20-F contained the following materially false and misleading statements
with regard to the Company’s prospective acquisition of USF:
In March 2000, we entered into a merger agreement to acquire U.S. Foodservice, the second largest food service distributor in the United States for approximately EUR 3.6 billion in cash. U.S. Foodservice, with annual net sales of over $6 billion for its fiscal year ending July 3, 1999, distributes food and related products to restaurants and food service establishments across the United States. Pursuant to the merger agreement, we commenced a tender offer for the outstanding shares of common stock of U.S. Foodservice that was successfully completed April 7, 2000. We expect to complete the transaction in April 2000.
475. The Company also reported the following materially false and misleading consolidated
sales figures in the 1999 Form 20-F:
Net sales in 1999 increased by EUR 7,076 million, or 27%, to EUR 33,560 million, from EUR 26,484 million in 1998. At constant exchange rates, consolidated net sales growth was 25% in 1999 compared to 1998. The major reasons for the increase in net sales were, in addition to autonomous growth, the full-year consolidation of Giant-Landover, Disco and Santa Isabel and the July 1999 acquisition of Gastronoom. These increases were partly offset by the additional week in fiscal 1998
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for our operations in The Netherlands and the United States. Net sales in 1998 increased EUR 3,537 million, or 15%, to EUR 26,484 million from EUR 22,947 million in 1997. At constant exchange rates, consolidated sales growth was 15% in 1998 compared to 1997. The major reasons for this increase were the fourth quarter consolidation of Giant-Landover, Disco and Santa Isabel and the additional week in fiscal 1998 for our U.S. and Dutch operations. [Emphasis Added]
476. In the 1999 Form 20-F, the Company stated the following relating to its policy for
consolidating earnings, which the Company’s admissions have proven to be materially false and
misleading:
Consolidation
The financial statements of Royal Ahold presented herein, and the notes thereto, are prepared on a consolidated basis in conformity with Dutch GAAP. Generally, all companies in which Royal Ahold can exercise control or where Royal Ahold has a direct or indirect interest of more than 50% are included in the consolidation. All significant intercompany transactions and accounts are eliminated in consolidation.
477. In the 1999 Form 20-F, Deloitte made the following statement, which the Company’s
revised financials results have proven to be materially false and misleading:
Independent Auditors’ Report
To the Supervisory Board and Stockholders of Koninklijke Ahold N.V.:
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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Koninklijke Ahold N.V. at January 2, 2000, January 3, 1999 and the results of its operations, changes in its equity and its cash flows for each of the three fiscal years in the period ended January 2, 2000, in conformity with generally accepted accounting principles in The Netherlands.
478. On April 13, 2000, the Company issued a press release (the “April 13, 2000 Press
Release”) entitled, “U.S. Foodservice Purchase Complete.” In the April 13, 2000 Press Release, Ahold
stated in pertinent part:
U.S. Foodservice (NYSE: UFS), one of the nation’s largest food service distributors, today announced that it has closed the transaction with Royal Ahold, whereby Ahold has acquired full ownership of U.S. Foodservice. Royal Ahold announced its intention to buy U.S. Foodservice on March 7, 2000, making a cash tender offer of $26 per share for U.S. Foodservice common stock.
Royal Ahold has merged its wholly-owned acquisition subsidiary into U.S. Foodservice, resulting in U.S. Foodservice becoming a wholly-owned subsidiary of Ahold USA.
479. On April 27, 2000, the Company issued a press release (the “April 27, 2000 Press
Release”) entitled “Ahold now 50% owner of ICA Group in Scandinavia.” In the April 27, 2000 Press
Release, the Company made the following statements which demonstrated among other things, that
Ahold would not possess the requisite basis for consolidating ICA’s financial results:
Ahold, the food provider, and the leading Scandinavian food retailer ICA Group, successfully completed their new joint venture. For its 50% stake in the ICA Group, Ahold paid today an amount of Euro 1.8 billion. Earlier, stockholders of the ICA Group approved the joint venture and the European Commission gave its green light. The other half of the joint
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venture ‘ICA Ahold Holding AB’ is owned by ICA associated retailers (30%) and Canica (20%), the investment company of the Norwegian Hagen family.
* * * Through know-how exchange, the use of economies of scale and synergy benefits, the partnership with ICA is expected to strengthen Ahold’s position in Europe considerably and grants the opportunity to expand elsewhere in Northern Europe. Synergies are expected to amount to a minimum of Euro 33 million over the first twelve months and Euro 50 million during the first full calendar year.
480. The Second April 10, 2000 Press Release was attached as an exhibit to a Form 6-K filed
by the Company with the SEC on May 2, 2000 and signed by Van der Hoeven.
481. On April 13, 2000, news emerged regarding Ahold’s attempts to renegotiate certain terms
of its JMR joint venture with Jeronimo Martins, Ahold’s partner in JMR. According to the English
version of Diario de Noticias:
The pause until September will allow Ahold to evaluate the proposals made by Jeronimo Martins, which it has rejected. It is now possible that Jeronimo Martins will form an alliance with Sonae’s Continente. Jeronimo Martins would probably buy out Ahold’s 49% stake in its capital.
There was no reasonable basis for either Ahold or Deloitte to assume that the Company controlled JMR
in a manner that would have made consolidation of JMR’s financial results appropriate.
11. Ahold Announces Acquisition of Golden Gallon
482. In furtherance of its global expansion, on April 19, 2000, Ahold issued a press release
(the “April 19, 2000 Press Release”) announcing its plans to acquire Go lden Gallon in the United States.
In the April 19, 2000 Press Release, the Company stated in pertinent part:
Royal Ahold, the international food provider, announced today it has signed a definitive agreement to acquire Golden Gallon, a leading operator of fueling stations and merchandise convenience stores in the southeast of the United States. Golden Gallon operates 134 stores with 1999 sales of approximately USD 300 million. Fuel accounts for almost two-thirds of
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total sales, with tobacco, milk and packaged beverages making up most of the remainder.
*** The transaction is structured as an asset purchase and covers the 40-year-old Golden Gallon brand name, the stores, their inventory and cash. Assets include 20 sites for future stores and other real estate. The acquisition is subject to regulatory approval and is expected to close by the end of May. 12. Ahold Completes Global Offering to Finance ICA Joint Venture and USF
Acquisition
483. On April 28, 2000, Ahold issued a press release announcing a global offering of
securities, the proceeds of which were to be used to finance the acquisition of USF and the Company’s
joint venture arrangement pursuant to which Ahold acquired a 50% interest in the ICA Group. In
pertinent part, the Company stated in this press release stated:
Ahold, a leading food provider, today announced that its global offering of approximately Euro 3 billion will consist of approximately Euro 2.0 /$2.4 billion in common shares (or American Depositary Shares) and approximately Euro 0.6/$ 0.8 billion in convertible subordinated notes. In addition, Ahold has granted the syndicate banks ‘green shoe’ options, potentially increasing the total proceeds by a maximum of 15%. The preliminary prospectus will be available as of May 1, 2000.
*** Proceeds to refinance recent expansion The proceeds of the offering will be used to refinance debt incurred in connection with Ahold’s purchase of its 50% interest in the ICA Group, the Scandinavian leading food retailer with over 3,100 stores and 1999 sales of Euro 6.6 billion and partially refinance Ahold’s acquisition of U.S. Foodservice, a leading food distributor in the US with net sales of USD 6.2 billion for fiscal year 1999. Commitment from institutions Several Dutch institutional investors have committed to buy, and will be allotted, in aggregate a minimum of 17,175,000 common shares up to a maximum of 24,175,000 common shares at the issue price in the offering. ICA Förbundet and Canica, partners with Ahold in the newly formed Scandinavian partnership, have committed to buy, and will be allotted, in
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the offering Ahold common shares at the issue price for an aggregate amount of Euro 300 million.
*** International syndicate ABN AMRO Rothschild, Goldman Sachs International and Merrill Lynch International are the Joint Global Bookrunners for Ahold’s global offering. In The Netherlands, Rabo Securities, ING Barings and Kempen & Co are co-managers of the offering.
484. On May 9, 2000, the Company issued a press release (the “May 9, 2000 Press Release”)
entitled, “Ahold Details Offering of Convertible Subordinated Notes.” The financial and operating
information included in the offering documents contained materially false and misleading statements
concerning Ahold’s operating results. In the May 9, 2000 Press Release, the Company stated in
pertinent part:
Royal Ahold, a leading food provider, today provided details on the issue of between $600,000,000 and $800,000,000 convertible subordinated notes, due 2005. Ahold has granted the syndicate an option to purchase up to an additional 15% of convertible notes, exercisable within 30 days after closing of the transaction (‘greenshoe option’).
* * * Syndicate Ahold has appointed ABN AMRO Rothschild, Goldman Sachs International and Merrill Lynch International as Joint Global Bookrunners. ING Barings, Kempen & Co and Rabo Securities have been appointed Co-Managers. Issue of common shares On April 28, 2000 Ahold announced its intention to issue common shares expected to represent a minimum amount of $2.0 and a maximum amount of $2.4 billion (excluding a greenshoe option of 15%). The subscription opened on Monday May 1, 2000 and is expected to close on Monday May 15, 2000 at close of trading. Proceeds to refinance recent expansion
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Ahold will use the net proceeds from the global offering of the common shares and convertible notes to refinance debt incurred in connection with Ahold’s purchase of its 50% interest in the ICA Group, the Scandinavian leading food retailer with over 3,100 stores and 1999 sales of Euro 6.6 billion and partially refinance Ahold’s acquisition of U.S. Foodservice, a leading distributor in the US with net sales of USD 6.2 billion for fiscal year 1999.
485. Each of the statements made from March 2000 through May 2000 concerning Ahold’s
fiscal 1999 and/or fiscal 2000 financial results, success at integrating acquired companies, and/or the
Company’s internal controls, was false and misleading when issued. The true but concealed and/or
misrepresented facts included, but were not limited to:
a. The USF net income that Ahold reported during fiscal 2000 was materially overstated by $110 million by virtue of deliberate fraud. The $110 million restatement for fiscal 2000 includes amounts allocable to pre-acquisition periods at USF since, as Ahold stated in a press release that the Company issued on May 8, 2003, “inappropriate vendor allowance accounting had existed at the date of the acquisition of USF.” Ahold has admitted in the Company’s 2002 Form 20-F, that the $110 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplicat ion of Dutch GAAP and U.S. GAAP;”
b. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
c. Defendants’ statements during fiscal 2000 regarding integration, recognition of synergies, and recognition of economies of scale, made in connection with, among other things: Ahold’s acquisition of USF; USF’s acquisition of PYA/Monarch; and Van der Hoeven’s statements at set forth in the Company’s Second September 7, 2000 Press Release -- in which he said: “Our record of generating synergies, exchanging best practices and sharing knowledge speaks for itself and we have never failed to deliver on our promises in this regard;” were materially false and misleading because, inter alia:
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(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii) Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F; and
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
d. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold USA’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
e. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not
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control them.” Ahold has admitted that its net sales for fiscal 2000 were overstated by $10.58 billion due to the improper consolidation of these joint ventures;
f. By virtue of the improper consolidation of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures.
g. Ahold’s improper consolidation of ICA, also artificially inflated Ahold’s net income. Specifically, Ahold’s net income was overstated by EUR 10 million in fiscal 2000 because restructuring costs associated with Ahold’s acquisition of its 50 percent interest in ICA in April 2000 were improperly accrued rather than expensed in the periods in which they were incurred. As Ahold admits in its 2002 Form 20-F, and as explained in detail below, the failure to treat these costs in the periods in which they were incurred violated Dutch and U.S. GAAP because Ahold lacked control over ICA during fiscal 2000;
h. At no time during fiscal 2000 did Ahold own the requisite interest in JMR, Bompreco (until its acquisition in July 2000), DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
i. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
13. Ahold Announces Results for the First Quarter of 2000
486. On May 16, 2000, the Company issued a press release (the “First May 16, 2000 Press
Release”) entitled, “Ahold 2000 First-Quarter Sales Surge 18.1% to Euro 11.0 Billion,” reporting
Ahold’s financial results for the first quarter ended April 22, 2000. This press release contained
materially false and misleading statements and /or omissions of material facts concerning Ahold’s sales
results:
Royal Ahold, the international food provider, generated consolidated sales (excluding VAT) over the first quarter (16 weeks through April 22, 2000) of Euro 11.0 billion, a rise of 18.1% over the 1999 first-quarter.
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United States: sales up 5.0% to USD 6.4 billion In the United States, sales increased by 5.0% to USD 6.4 billion, largely attributable to strong identical sales growth at Stop & Shop and Giant-Landover. The other U.S. chains also contributed to sales growth. Sales of U.S. Foodservice will be consolidated as of the second quarter. Europe: sales up 11.0% to Euro 3.2 billion In Europe, sales rose 11.0% to Euro 3.2 billion. In The Netherlands, sales were 8.2% higher and other European countries (Portugal, Spain, the Czech Republic and Poland) also contributed significantly to the sales rise. Sales of the ICA Group will be consolidated as of the second quarter.
* * *
Outlook full-year 2000 Sales and operating results are expected to improve further in all trade areas through healthy autonomous growth and acquisitions. Net earnings will rise strongly. Including the acquisition of U.S. Foodservice and excluding currency impact, it is now expected that earnings per share growth for the full-year 2000 will rise from the 15% projected earlier to 17-20%.
487. The First May 16, 2000 Press Release was attached as an exhibit to a Form 6-K filed by
the Company with the SEC on June 6, 2000 and signed by Defendant Van der Hoeven.
488. Also on May 16, 2000, the Company issued another press release (the “Second May 16,
2000 Press Release”) entit led, “Ahold President Cees Van der Hoeven At Shareholders’ Meeting:
‘Ahold Continues to Grow Faster Than the Market,’” which included Ahold’s financial results for the
first quarter ended April 22, 2000. As reflected in this press release, defendant Van der Hoeven made
the following remarks concerning Ahold’s global ambition at the Annual General Meeting of
Stockholders of Royal Ahold in The Hague on May 16, 2000:
Royal Ahold, the international food provider, will continue its rapid growth in years to come. Our company is sometimes described as acquisitive, and we are certainly that at the right moment, but over time, nearly all our current activities have developed more rapidly than the market and faster than almost all our competitors.
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489. In the Second May 16, 2000 Press Release, the Company further stated that defendant
Van der Hoeven “disclosed the company’s consolidated sales in the first quarter of the year (16 weeks
through April 22, 2000), which increased by 18.1% to Euro 11.0 billion.” The foregoing statement was
materially misleading and failed to disclose material facts concerning Ahold’s improper consolidation of
JMR, Bompreco, and DAIH.
490. In addition, the Second May 16, 2000 Press Release further stated that defendant Van der
Hoeven commented “on the successful combined global offering of common shares and subordinated
convertible notes” and that Van der Hoeven “said the proceeds of Euro 3.2 billion would ‘facilitate the
funding of the company’s continued expansion.’” The Company further informed that “Ahold’s strategy
remains focused on healthy, profitable growth of its current operations.” Specifically, defendant Van
der Hoeven stated:
In addition, we generate considerable growth by acquiring new companies capable of making an important contribution . . . We support our autonomous and external growth with the help of state-of-the-art technology, constant innovation and advanced sales and distribution channels that assist us in offering tailored products and services to some 30 million customers every week. This proposition enables us to become the world’s best and most successful food provider.
491. Moreover, under the title “Innovation a way of life,” the Second May 16, 2000 Press
Release repeated certain of Van der Hoeven’s materially false and misleading statements concerning
Ahold’s ability to integrate acquired companies and joint ventures:
Ongoing innovation is a way of life at Ahold . . . Those of you who follow our company closely see new technological applications, creative ideas and dynamic activities taking place somewhere in the world of Ahold on a day-to-day basis. These initiatives reflect the capacity of our local management and associates to run and develop our operations more efficiently and effectively.
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492. Further, the Second May 16, 2000 Press Release repeated and/or summarized the
following materially false and misleading statements and omissions of material fact made by defendant
Van der Hoeven:
Reviewing the successful completion of the global offering, Van der Hoeven stated unequivocally that Ahold’s earnings per share have never been diluted through the issue of new equity. ‘We use the newly- issued stock to acquire profitable companies that generate additional growth and boost earnings per share. Moreover, our company is able to make an immediate impact on the results of both the newly-acquired company and our existing operations through synergy benefits, cost cuts and economies of scale.’ 2000 first quarter sales up 18.1% to Euro 11.0 billion Van der Hoeven commented on the sales performance of all trade areas in the first quarter of the year 2000. Ahold generated consolidated sales (excluding VAT) over the first 16 weeks (through April 22, 2000) of Euro 11.0 billion, a rise of 18.1% over the 1999 first quarter. In the U.S., sales rose 5.0% to USD 6.4 billion. In Europe, sales increased by 11.0% to Euro 3.2 billion. In Latin America, sales surged 44.9% to Euro 1.1 billion while in Asia, sales amounted to Euro 103.3 million. Strongly higher net earnings expected for full-year 2000 Concluding his address, Van der Hoeven reiterated that profitable growth, both organic and external, is a fundamental part of Ahold’s strategic mission. ‘Sales and operating results are expected to improve further in all Ahold trade areas, reflecting healthy autonomous growth and new acquisitions,’ he said. ‘We anticipate net earnings will be strongly higher than in 1999. Including the acquisition of U.S. Foodservice and excluding currency impact, we now expect earnings per share growth for the full-year 2000 to rise from the 15% projected earlier to 17-20%.’
493. On May 23, 2000, the Company issued a press release (the “First May 23, 2000 Press
Release”) entitled “Ahold Strengthens U.S. Organization in Anticipation of Further Growth.” In the
First May 23, 2000 Press Release, the Company announced, among other things, the appointment of
defendants Tobin and Grize to new corporate positions which required these defendants to supervise,
among other things, USF:
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Royal Ahold, the food provider, has announced key executive management appointments for its rapidly growing operations in the United States. Bob Tobin, Member of the Corporate Executive Board and currently President and CEO of Ahold USA, has been appointed Chairman of Ahold USA, effective September, 2000. He reports to Royal Ahold President and CEO Cees Van der Hoeven and continues to serve on the Ahold Corporate Executive Board. Under Tobin’s leadership, Ahold USA has grown swiftly from a supermarket group with USD 14.3 billion in sales to a multi-channel food provider with annual sales of over USD 30 billion. The success is also reflected in autonomous annual growth of over 7%, the number of jobs, significant top and bottom line contribution from acquisitions and synergies and the rapid increase in customers shopping over 1,000 Ahold stores in the U.S. Bob Tobin was also instrumental in Ahold’s 1998 acquisition of supermarket chain Giant Food, headquartered in Landover, Maryland, and more recently U.S. Foodservice, the number two player in the United States food service sector. The Ahold Corporate Executive Board has also announced the following appointments: Bill Grize, currently President and CEO of Stop & Shop, will become President & CEO of Ahold USA, effective September 2000. He succeeds Tobin, to whom he will continue to report. All Ahold USA retail operating companies and support groups will report to Grize. Marsh Collins will continue as President and CEO of Ahold USA Support Services. His primary responsibilities include the direction of all supply chain activities in the U.S., synergy initiatives and the development and implementation of integration plans. He will report to Grize. Jim Miller, President and CEO of U.S. Foodservice, will continue to report to Bob Tobin.
494. The First May 23, 2000 Press Release contained the following comments by defendant
Van der Hoeven regarding defendants Tobin and Grize:
The appointment of Bob Tobin t o Chairman of Ahold USA is much deserved. It recognizes the considerable contribution Bob has made to the growth of our U.S. operations in a short period of time. He not only boosted our U.S. business, but also had a keen eye for the development of senior management at our operating companies. Though Ahold is also growing rapidly in Europe and Latin America, the importance and success of our U.S. operations are obvious. They represent the largest portion of
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our worldwide business. Bob has brought all U.S. companies under one roof while enabling them to maintain their own identity. They all benefit from economies of scale and major synergies. Bill Grize, Bob’s successor at Stop & Shop, is a seasoned executive. His track record at Stop & Shop and his credibility within the industry will serve him well in leading Ahold USA to even greater achievements. He is respected by our senior executives both in the USA and other parts of the Ahold world. With all new appointments, we’re confident the success of our U.S. operations will be sustained in the years to come. 14. Ahold Increases Ownership in Bompreço
495. On May 23, 2000, Ahold issued a second press release (the “Second May 23, 2000 Press
Release”) entitled “Initial Agreement to Increase Ahold Stake in Brazilian Joint Venture Bompreço.” In
this press release Ahold stated:
The Board of Royal Ahold and the other controlling shareholders of Bompreço, Mr. João Carlos Paes Mendonça and his family, have announced an agreement in principle under which Ahold will acquire the stake of Mr. João Carlos Paes Mendonça and his family in the Bompreço joint venture in Brazil. In December 1996, Bompreço and Ahold established a 50/50 joint venture to support and accelerate Bompreço’s leadership position in North and Northeastern Brazil. Bompreço’s 1999 sales were BRL 2.7 billion (Euro 1.3 billion). The joint venture operates 61 supermarkets, 19 hypermarkets and 22 other food retail stores and employs 21,500 associates. The transaction is expected to be completed before the end of the third quarter of 2000. 15. Ahold Provides Further Details on First Quarter 2000 Results
496. On June 7, 2000, the Company issued a press release (the “June 7, 2000 Press Release”)
entitled “Ahold 1st Quarter 2000 Net Earnings Increase By 31.5% To Euro 230.2 Million,” reporting
Ahold’s financial results for the first quarter ended April 23, 2000. In the June 7, 2000 Press Release,
Ahold made materially false and misleading statements and omissions of material fact concerning the
Company’s financial results:
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Royal Ahold, the international food provider, achieved net earnings of Euro 230.2 million for the first quarter of 2000 (16 weeks ended April 23), an increase of 31.5% (1999: Euro 175.1 million). Net earnings after deduction of the preferred dividend amounted to Euro 226.5 million (1999: Euro 171.4 million).
Earnings per common share amounted to Euro 0.35 (1999: Euro 0.27), an increase of 30.8%. Excluding currency fluctuations, mainly the higher average exchange rate of the U.S. Dollar, earnings per common share rose 18.8%. Sales and results in Euros were positively impacted by the higher Dollar (Euro 1.02 vs. Euro 0.90).
Consolidated sales in Euros rose 18.0% to Euro 11.0 billion (1999: Euro 9.3 billion). Operating results rose 30.8% to Euro 452.4 million (1999: Euro 345.9 million). Expressed as a percentage of net sales, operating results rose from 3.7% to 4.1%. Operating results before depreciation (EBITDA) rose 27.3% to Euro 743.8 million (1999: Euro 584.2 million). Expressed as a percentage of net sales, EBITDA increased from 6.3% to 6.8%. United States In the United States, sales increased by 5.0% to USD 6.4 billion (1999: USD 6.1 billion), largely attributable to strong identical sales growth at Stop & Shop and Giant-Landover. The other U.S. chains also contributed to sales growth. Operating results rose 17.6% to USD 313.7 million (1999: USD 266.7 million). All U.S. companies, in particular Giant-Landover and Stop & Shop, generated higher operating results. The ongoing synergy activities among the U.S. chains and strict cost control contributed considerably to the improved operating results. Europe In Europe, sales rose 11.0% to Euro 3.2 billion (1999: Euro 2.9 billion). In The Netherlands, sales were 8.8% higher and other European countries (Portugal, Spain, the Czech Republic and Poland) also contributed strongly to the sales rise. Operating results climbed 9.5% to Euro 122.4 million (1999: Euro 111.8 million). In The Netherlands, operating results increased by 8.5%. Latin America. In Latin America, sales surged by 44.7% to Euro 1.1 billion (1999: Euro 769.4 million), mainly reflecting the consolidation of La Fragua in Guatemala. Sales of Bompreço in Brazil and Disco in Argentina also improved strongly. Operating results increased by 47.9% to Euro 28.7
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million (1999: Euro 19.4 million), the rise largely reflecting the consolidation of La Fragua in Guatemala and improved results at Disco in Argentina.
* * * Commenting on the first-quarter results, Ahold President & CEO Cees Van der Hoeven said: “These results are fully in line with our expectations. Ahold is right on track. The acquisition of U.S. Foodservice and our 50% stake in the ICA Group will be consolidated as of the second quarter and will then start to contribute to the company’s growth. Our strategy of servicing the customer through a network of store chains and food service companies, complemented by e-commerce activities, offers new growth opportunities in all trade areas for both our current operations and those to come. We are in excellent shape.”
* * * Ahold confirms that sales and operating results are expected to improve further in all trade areas, reflecting healthy autonomous growth and new acquisitions. Ahold anticipates that net earnings will be strongly higher. Including the acquisition of U.S. Foodservice and excluding currency impact, Ahold expects earnings per share growth for the full-year 2000 to amount to 17-20%.
497. The June 7, 2000 Press Release was attached as an exhibit to a Form 6-K filed by the
Company on July 3, 2000 and signed by defendant Van der Hoeven.
498. On June 26, 2000, Ahold issued a press release announcing that the Company, as
anticipated in its May 23, 2000 press release, had acquired the remaining 50% of the voting shares of
Bompreço in Brazil. This transaction increased Ahold’s ownership in Bompreço from 50% to 100%.
16. Ahold Gears for Further Expansion in the United States
499. On July 12, 2000, the Company issued a press release (the “July 12, 2000 Press Release”)
entitled “Ahold Strengthens US Organization In Anticipation of Further Growth.” In the July 12, 2000
Press Release, Ahold stated in pertinent part:
Royal Ahold, the international food provider, is further strengthening its management organization at corporate headquarters, Ahold Europe and Ahold USA. The executive appointments reflect Ahold’s goal to maximize
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benefits from its rapid worldwide growth, economies of scale and new technological opportunities.
500. In furtherance of its global acquisition campaign, on July 18, 2000, the Company issued a
press release (the “July 18, 2000 Press Release”), entitled “Ahold prices USD 700 million Yankee
Bond.” In the July 18, 2000 Press Release, which supplemented the July 12, 2000 release, Ahold stated
in pertinent part:
Royal Ahold, the international food provider, priced a USD 700 million Yankee Bond, offered by Ahold’s wholly owned subsidiary Ahold Finance U.S.A., Inc. The offering, pursuant to Ahold’s USD 3 billion shelf registration statement, was priced at 209 basis points over Treasuries, to yield 8.259%. Because of very strong demand, the size of the issue was enlarged from USD 500 million to USD 700 million. The securities will be fully and unconditionally guaranteed by Royal Ahold. The proceeds will be used to refinance existing debt of US Foodservice, acquired by Ahold in April 2000.
501. On July 20, 2000, the Company issued a press release (the “July 20, 2000 Press Release”)
entitled, “Ahold Acquisition In the US Food Service Sector.” In the July 20, 2000 Press Release, Ahold
stated in pertinent part:
Ahold, the food provider, today announced that U.S. Foodservice, its wholly-owned food service company in the United States, and GFG Foodservice, a broadline distributor and market leader in North Dakota, South Dakota and Northern Minnesota, have signed a definitive agreement whereby U.S. Foodservice will acquire 100% of GFG’s shares and related real estate. 17. USF Acquires PYA/Monarch
502. On August 16, 2000, the Company issued a press release (the “August 16, 2000 Press
Release”) entitled “Ahold Announces New Acquisition in the U.S. Foodservice Sector.” In the August
16, 2000 Press Release, announcing USF’s acquisition of this Sara Lee subsidiary, with which
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defendants Miller and Kaiser were previously affiliated, contained materially false and misleading
statements and omissions:
Royal Ahold, the food provider, today announced its wholly owned subsidiary U.S. Foodservice (USF) has signed a definitive agreement to acquire PYA/Monarch, a major foodservice distributor in the southeast of the United States. PYA/Monarch is currently a subsidiary of Sara Lee Corporation. Combined with USF, Ahold foodservice sales in the US should exceed USD 12 billion in 2001. The total consideration to be paid for the acquisition amounts to USD 1.57 billion. The transaction is subject to customary closing conditions including the need to obtain regulatory approvals. Closing is expected in fourth quarter 2000. Ahold President & CEO Cees Van der Hoeven said the acquisition of PYA/Monarch is ‘fully in line with our international growth strategy and with Ahold’s ambition to become the world’s best multi-channel food provider. Our company continues to grow profitably, organically and through acquisitions in three market channels. First, through its retail store operations - selling directly to the consumer. Second, its foodservice operations - serving the needs of the fast-growing out of home market. Third, in e-commerce. Today´s transaction clearly strengthens the market position of U.S. Foodservice, acquired by Ahold in spring 2000.’
* * * Financing details The total consideration to be paid by U.S. Foodservice for the acquisition amounts to USD 1.57 billion which translates into an EBITDA multiple comparable to what Ahold paid for the acquisition of U.S. Foodservice. For tax purposes, the transaction is structured as an asset transaction which will yield significant tax benefits. The transaction also includes a supply agreement and is expected to close in fourth quarter 2000. It will be immediately accretive to Ahold’s earnings per share. Initially, Ahold will finance the transaction by drawing under a bridge facility. This facility will be refinanced by available cash and proceeds from issuing debt instruments later this year. Remarks by Bob Tobin, Chairman Ahold USA: We are very pleased with operations at U.S. Foodservice and therefore anxious to increase our involvement in the American foodservice industry. The acquisition is a perfect fit as the cultures of the two companies are similar and their activities complementary. Combining the two companies will result in many cost savings in areas such as sourcing,
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IT, distribution and knowledge sharing. We anticipate total synergy savings of over USD 30 million in year one, growing to over USD 60 million in year two. This transaction is consistent with our previously announced strategy to be involved in all eating occasions.
503. The same day that Ahold announced that USF would acquire PYA/Monarch, The Daily
Deal published an article on USF’s intended acquisition of the Sara Lee subsidiary. Among other
things, the foregoing article reported that: “[t]o sweeten the deal, Ahold agreed to a supply
arrangement with Sara Lee’s food and beverage manufacturing units. Details of that deal were not
disclosed.”
504. Similar to the August 16, 2000 article that appeared in The Daily Deal concerning USF’s
acquisition of PYA/Monarch, The Financial Times reported on August 17, 2000: “[a]s part of the deal,
Sara Lee’s food and beverage operations will have a multi-year supply agreement with Ahold.”
505. Regarding the history that existed between USF and Sara Lee, The Washington Post
reported on August 17, 2000:
PYA and U.S. Foodservice have a bit of a tug-of-war history. They were part of the same Sara Lee subsidiary until 1989, when a group of Sara Lee investors and managers – including current U.S. Foodservice chief executive James L. Miller – bought part of PYA from Sara Lee in a leveraged buyout, creating a company known a JP Foodservice, now U.S. Foodservice.
506. On September 7, 2000, the Company issued a press release announcing, consistent with
its aggressive acquisition campaign, that it would acquire Spanish food retailer, Superdiplo. In this press
release the Company stated:
Royal Ahold, the international food provider, has signed an agreement with several major shareholders of Spanish food retailer, Superdiplo S.A. to tender their 69% stake in the company to Ahold. In order to complete the transaction, Ahold will conduct a tender offer for all the outstanding shares of Superdiplo. As part of the transaction, Ahold will offer 0.74 of an Ahold common share for each Superdiplo share, representing approximately Euro 24 per
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Superdiplo share. As Superdiplo has 51 million shares outstanding, the total transaction amounts to approximately Euro 1.25 billion. Upon completion of the Superdiplo transaction, Ahold Spain will operate 530 stores with sales of approximately Euro 2 billion. 18. Ahold Announces Results for the Second Quarter of 2000
507. On September 7, 2000, the Company issued a press release (the “First September 7, 2000
Press Release”) entitled “Ahold 2nd Quarter 2000 Net Earnings Surge 48.2% to Euro 256.2 Million;
Profit Outlook Reconfirmed for Full Year,” reporting Ahold’s financial results for the second quarter of
2000. In this press release, the Company made materially false and misleading statements:
Royal Ahold, the international food provider, achieved second quarter 2000 net earnings of Euro 256.2 million, a 48.2% increase. Sales rose 57.7% to Euro 12.4 billion and operating results increased by 68.0% to Euro 539.9 million. Earnings per share for the quarter rose 31.8% to Euro 0.35. Excluding currency fluctuations, specifically the higher average exchange rate of the U.S. dollar, earnings per common share grew 18.8%.
508. The First September 7, 2000 Press Release further stated that defendant Van der Hoeven
made the following statement concerning Ahold’s ability to integrate acquired companies, which was
false and misleading:
commented that the results were “fully in line with the outlook the company has consistently announced. Our various operating units have performed well and the company is right on track. Our autonomous sales growth is robust while recent acquisitions and new joint ventures have contributed to the significant growth of sales and results.
509. The press release further stated that defendant Van der Hoeven reiterated the Company’s
excitement about the adapted multi-channel strategy:
Our activities in the American foodservice sector, targeting the market for out-of-home consumption, are highly promising. This strategy enables us to reach consumers when they are eating out, which they are doing more regularly. We will be prominently positioned across the United States in this rapidly-growing food consumption segment thanks to our acquisition of U.S. Foodservice (UFS), the country’s second largest food distributor, and our planned purchase of PYA/Monarch.
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510. Moreover, the press release contained the following materially false and misleading
statements:
In the United States, sales rose 43.4%. This increase mainly reflects the acquisition of U.S. Foodservice and, to a lesser degree, the Golden Gallon and Sugar Creek convenience store chains. The supermarket chains also contributed to sales growth. Operating results in the United States rose 47.8%, partially reflecting the consolidation of U.S. Foodservice, whose results were fully in line with expectations. All U.S. operating companies achieved higher operating results.
***
European sales rose 62.5%. This sharp sales increase largely reflects the newly-established joint venture with the ICA Group. The store chains in other European countries also contributed to sales growth. In The Netherlands, sales grew by 6.6%, partially reflecting the earlier acquisition of Dutch foodservice company Gastronoom. Sales increases in Portugal, the Czech Republic and Poland reflected the opening of new supermarkets and hypermarkets. The Czech Republic and Poland generated high identical sales growth, particularly through their hypermarkets. Operating results in Europe increased 53.5%, partly attributable to the results of the ICA Group, that were fully in line with expectations. Operating results in The Netherlands grew by 7.5%. The results in Poland and the Czech Republic improved somewhat after absorption of costs, due to store openings and remodelings.
*** Outlook for full year 2000: EPS to grow by 17-20% Ahold reconfirms its earlier expectation that sales and operating results for the full-year 2000 will increase in all regions, reflecting healthy autonomous growth and acquisitions. It is expected that net earnings will be sharply higher than in 1999. Earnings per common share, excluding currency impact, are expected to rise by 17-20%.
511. The First September 7, 2000 Press Release was attached as an exhibit to a Form 6-K filed
by the Company with the SEC on September 13, 2000, and signed by Defendant Van der Hoeven.
512. Also on September 7, 2000, the Company issued another press release (the “Second
September 7, 2000 Press Release”) containing a speech that defendant Van der Hoeven made to Ahold
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current and prospective shareholders in connection with Ahold’s announcement of its results for the
second quarter of 2000. In pertinent part, defendant Van der Hoeven’s speech discussed the Company’s
ambitious expansion plans and contained materially false and misleading statements concerning Ahold’s
financial results as well as the Company’s success at integrating acquired entities:
Ladies & Gentlemen, Once again Ahold has shown excellent results for the quarter and the first half-year. We are particularly proud of the substantial increases in sales, operating results and net earnings. The earnings per share increased by 31.8% for the quarter, which translates into 18.8% after currency impact and 19.7% for the first-half. This is of course within our earlier projections. All operating companies performed well in comparison with last year and the new acquisitions were right on target. Michael Meurs will discuss the results with you in more detail and therefore at this stage I would only like to repeat our projection for the full year. Sales and operating results in all regions will increase further, autonomously as well as through acquisitions, net earnings will be substantially higher than in 1999 and earnings per share, excluding currency fluctuations, are expected to grow by 17-20%.
***
Therefore, when the opportunity arose to buy PYA/Monarch it was logical for us to pursue this vigorously. PYA/Monarch fits hand in glove with U.S. Foodservice, for historical, geographical and cultural reasons. Together they will be a very strong number 2 food service company in the US with projected sales of US$ 12 billion next year. The synergies between these two companies will come on top of the earlier synergies we projected at the time of the acquisition of U.S. Foodservice.
*** You all know by now that our ambition is to build a stable of thoroughbreds. This applies to all three channels of trade. The companies that form part of Ahold’s global support network have to be the best brand names in the market: consumer products and services companies that provide top value for money, superior customer service and are renowned for their quality orientation and innovation. It is with this vision in mind that we continue to vigorously pursue improvements in our existing markets as well as new acquisitions and joint ventures. We will not compromise our strict acquisition criteria.
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We had another example today when we announced the proposed acquisition of Superdiplo in Spain. Superdiplo is a young but extremely well run supermarket and hypermarket company on the Spanish mainland and on the Canary Islands. The company is an amalgamation of recent acquisitions as well as many recently built stores. In many ways it mirrors our own growth strategy. We have seen, with growing admiration, how the management has put together a new powerhouse in Spanish food retailing. Not only is the existing store base in excellent shape, there are also many new locations on the shelf. In partnership with Ahold España, Superdiplo will no doubt also become the acquirer of choice for the many remaining independent Spanish operators. Today, it is more realistic than ever before to expect we will be a major force in Spain in the future. The economics of the transaction are sound and we will already see accretion to earnings per share next year. We are also pleased that a majority of shareholders have already agreed to accept payment in Ahold stock. We were also recently able to acquire the remaining stake in another thoroughbred, Bompreço in Brazil. This proves that our strategy to enter into joint ventures with strong regional companies is very successful and can ultimately lead to full control. In search of other thoroughbreds around the world, we have found a lot of opportunities out there. These are in the United States, Europe and Latin America, and you will not be surprised to hear that we continue to pursue them as and when appropriate. We feel particularly good about our ability to preserve the cultural heritage of these companies and their strong brand names, and to retain management. Our record of generating synergies, exchanging best practices and sharing knowledge speaks for itself and we have never failed to deliver on our promises in this regard. I have mentioned to you before that we rate our chances of a major acquisition or merger in Europe to be 50% in the next 1-2 years. There is nothing new to report in this respect. We are convinced the sector will continue to consolidate further and that a higher level of concentration is almost inevitable. But you have also seen that our company is able to grow very fast without concluding such a major transaction. Behind the scenes we continue to strengthen the support network in the United States. We have taken further steps to develop a common infrastructure in which certain activities and services are shared. Ahold USA has been beefed up, not as a regional headoffice but rather as a competence center. We stay clear of divisional or regional structures. The same is true for Europe where the European Competence Center is taking shape and is now well placed to support the operating companies in the region. Today we have also announced several changes in the structure and
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management of ICA/Ahold. These will lead to a more focused, result-oriented line-up of people and business processes.
***
We also continue to rely on external funds to finance new acquisitions and joint ventures. As a stated policy we have a requirement to maintain a minimum interest coverage of 3 and a maximum net debt to EBITDA of approximately 2¼. As and when feasible we will try to acquire new companies and set up joint ventures in exchange for shares, an example of which you have seen today. We have also indicated that we intend to issue in the fall preferred shares in the Netherlands. The amount thereof still needs to be determined. We have no current plans for a new issue of common stock. We have also announced that we may consider adopting international accounting standards for goodwill amortization with effect from January 1, 2000. The final decision will depend upon a number of factors that are currently still pending. We should have more clarity on this situation within 2-3 months time. So, having said all this, the limiting factors to growth are very manageable. We have previously indicated to you our ambitious goal to double the 1999 size of our company expressed in Euro sales in 2002. This now looks very doable, even somewhat conservative. Therefore, as a representative of almost 400,000 Ahold associates, I can say that we take pride in our accomplishments and that we look forward to the future with great excitement.
513. Each of the statements made from May 2000 through September 2000 concerning
and/or the Company’s internal controls, was false and misleading when issued. The true, but concealed,
and/or misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2000 was artificially inflated by EUR 103 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. This improper recognition of net income was directly contrary to the representations in Ahold’s 2000 Form 20-F that the Company adhered to a policy to ensure that “vendor allowances and credits that relate to the Company’s buying and merchandising activity are recognized as earned.” As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
b. Ahold’s reported revenues during fiscal 2000 were materially overstated by EUR 44 million due to the failure to attribute appropriately earned vendor allowances to the
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“cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. Ahold’s net assets reported during fiscal 2000 were also materially overstated in the amount of EUR 70 million commencing with the second quarter of fiscal 2000 because receivables from vendors as of the April 2000 acquisition of USF were fictitious, as admitted by Ahold in its 2002 Form 20-F, at F-27;
d. The USF net income that Ahold reported during fiscal 2000 was materially overstated by $110 million by virtue of deliberate fraud. The $110 million restatement for fiscal 2000 includes amounts allocable to pre-acquisition periods at USF since, as Ahold stated in a press release that the Company issued on May 8, 2003, “inappropriate vendor allowance accounting had existed at the date of the acquisition of USF.” Ahold has admitted in the Company’s 2002 Form 20-F, that the $110 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
e. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
f. Defendants’ statements during fiscal 2000 regarding integration, recognition of synergies, and recognition of economies of scale, made in connection with, among other things: Ahold’s acquisition of USF; USF’s acquisition of PYA/Monarch; and Van der Hoeven’s statements at set forth in the Company’s Second September 7, 2000 Press Release -- in which he said: “Our record of generating synergies, exchanging best practices and sharing knowledge speaks for itself and we have never failed to deliver on our promises in this regard;” were materially false and misleading because, inter alia:
(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its
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income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii) Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.;”
g. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
h. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2000 were overstated by $10.58 billion due to the improper consolidation of these joint ventures;
i. By virtue of the improper consolidation of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
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j. Ahold’s improper consolidation of ICA, also artificially inflated Ahold’s net income. Specifically, Ahold’s net income was overstated by EUR 10 million in fiscal 2000 because restructuring costs associated with Ahold’s acquisition of its 50 percent interest in ICA in April 2000 were improperly accrued rather than expensed in the periods in which they were incurred. As Ahold admits in its 2002 Form 20-F, and as explained in detail below, the failure to treat these costs in the periods in which they were incurred violated Dutch and U.S. GAAP because Ahold lacked control over ICA during fiscal 2000;
k. At no time during fiscal 2000 did Ahold own the requisite interest in JMR, Bompreco (until its acquisition in July 2000), DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures;
l. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
19. Ahold Announces Further Expansions in Spain
514. Taking another step in its mission to be the leading supermarket company in the world,
on October 27, 2000, Ahold issued a press release (the “October 27, 2000 Press Release”) entitled,
“Ahold Expects to Double Sales in Spain Within Three Years.” In pertinent part, the Company stated in
this press release:
Ahold expects its sales in Spain will doubl e within three years to approximately Euro 4 billion annually. The growth projection is based on strong autonomous sales growth and new acquisitions. So stated Ahold President & CEO, Cees Van der Hoeven, while addressing a group of Spanish retailers at a Food Congress in Valencia yesterday. Including the acquisition of supermarket operator, Superdiplo, Ahold in Spain will own at year-end 530 stores with annualized sales of Euro 2 billion. It makes the company’s Spanish operations three times as large as they are today.
515. The October 27, 2000 Press Release further stated:
Superdiplo acquisition to be finalized before end 2000 Van der Hoeven said he expects that the Superdiplo transaction will be completed before year-end. The offer for all outstanding Superdiplo shares
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is currently being prepared and will be issued once Spanish Stock Market authorities in Madrid approve the prospectus. The planned acquisition of Superdiplo immediately contributes to Ahold’s earnings per share.
516. The October 27, 2000 Press Release was attached to a Form 6-K filed by the Company
with the SEC on December 15, 2000 and signed by Van der Hoeven.
20. The FTC Approves USF’s Acquisition of PYA/Monarch
517. On November 20, 2000, the Company issued a press release entitled, “Ahold’s U.S.
Foodservice Acquires PYA/Monarch.” In this press release, the Company made the following
materially false and misleading statements:
The acquisition of PYA/Monarch by U.S. Foodservice, Royal Ahold’s wholly-owned foodservice company in the United States, has been approved by the Federal Trade Commission (FTC). The transaction increases Ahold’s foodservice sales in the U.S. to approximately USD 12 billion and boosts overall projected Ahold sales in the U.S. to close to USD 35 billion in 2001. Completion of the acquis ition is expected in the first week of December. Sister companies join forces again Once the transaction is finalized, PYA/Monarch (sales of USD 3 billion) will team-up with U.S. Foodservice (sales of USD 8 billion) and considerably strengthen Ahold’s position in the out-of-home food consumption market. U.S. Foodservice and PYA/Monarch were sister companies in the late ‘90s and specialize in supplying quality food to institutions across America including restaurants, sports stadiums, hospitals and schools. PYA/Monarch is currently owned by Sara Lee and operates successfully in the southeastern United States. U.S. Foodservice operates nationwide, focusing on the northeast.
Impressive synergies among Ahold food retail and foodservice activities Ahold is a leading food provider in the United States and elsewhere in the world. Over 60% of its worldwide sales are currently generated in the United States. Its five successful U.S. supermarket operations - Stop & Shop in New England; Giant Food in Maryland, Virginia and Washington D.C.; Giant Food Stores in Pennsylvania, New York and New Jersey; Tops Markets in western New York state and Ohio; and BI-LO in the Carolinas, Georgia and Tennessee - generate sales of over USD 20 billion. Ahold has also developed a very strong presence this year in the rapidly growing foodservice sector. Impressive cost-effective synergies are being generated among Ahold’s food retail and foodservice channels.
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518. On November 28, 2000, Ahold announced another increment in its aggressive acquisition
of supermarkets in the United States. In this regard, the Company announced that through its Tops and
Stop & Shop units, Ahold had agreed to purchase certain assets from Grand Union, including 56 of the
bankrupt grocer’s stores for $178 million.
21. Ahold Announces Results for the Third Quarter of 2000
519. On November 28, 2000, the Company issued a press release (the “November 28, 2000
Press Release”) entitled “Ahold 3rd Quarter 2000 Net Earnings Rise 55.5% to Euro 259.6 Million,”
reporting Ahold’s financial results for the third quarter of 2000. This press release, contained the
following materially false and misleading statements regarding Ahold’s financial results:
Royal Ahold (NYSE: AHO), the international food provider, achieved third quarter 2000 net earnings of Euro 259.6 million, a 55.5% increase. Sales rose 76.5% to Euro 13.8 billion and operating results increased by 67.5% to Euro 548.1 million. Earnings per common share for the quarter rose 31.6% to Euro 0.33. Excluding currency fluctuations, specifically the higher average exchange rate of the U.S. dollar, earnings per common share grew 18.4%.
520. The November 28, 2000 Press Release incorporated defendant Van der Hoeven’s
materially false and misleading statements and/or omitted material facts concerning the Company’s
results:
Record sales and results expected for 4th Quarter . . . Once again we have delivered strong results this quarter, particularly taking seasonality into account. They are in line with our projection for full-year 2000. Our retail chains and foodservice operations turned in an improved performance, reinforcing our market positions. Our strategy to reach consumers through food retail, foodservice and e-commerce channels is proving highly effective. Our retail customer count is rising, and when they eat out, we play a role as well. At the same time, we are seeing interesting synergy benefits developing within and among our sales channels. We anticipate a record-breaking performance in the fourth quarter. Ahold is right on track to become the leading multi-channel food provider in the world.
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521. Ahold’s November 28, 2000 Press Release also contained the following materially false
and misleading statements concerning Ahold’s financial results:
In the United States, sales rose 52.6%. This increase mainly reflects the acquisition of U.S. Foodservice and, to a lesser degree, the acquisition of Golden Gallon and Sugar Creek. Strong identical sales at Stop & Shop, Giant-Landover, Giant-Carlisle and BI-LO also contributed to sales growth. Identical growth in the U.S. this quarter amounted to 2.2%. Internet grocer Peapod was consolidated in this quarter for the first time. Operating results in the United States rose by 37.3%, largely reflecting the consolidation of U.S. Foodservice. The retail operating companies also contributed significantly to the higher operating results.
*** European sales rose 83.6%, mainly reflecting the consolidation of the ICA Group in Scandinavia. Sales increased in all other European trade areas. Poland and the Czech Republic generated considerable sales growth, primarily due to the newly-opened supermarkets and hypermarkets. Operating results rose 50.4%, largely reflecting the consolidation of the ICA Group. Results in Spain and the Czech Republic were positive as well, contributing to the rise. The costs attached to opening and developing new stores generated operating losses in Poland. In The Netherlands, operating results were again higher than last year. Operating results at the Portuguese joint venture with Jerónimo Martins were slightly lower. The lower average operating margin at ICA, currently being addressed, generated stronger sales growth than operating results. In Latin America, sales grew 49.2%, mainly reflecting the joint venture with La Fragua in Guatemala. The other retail chains, particularly Bompreço in Brazil and Disco in Argentina, also contributed to sales growth. Operating results rose by 118.0%, largely reflecting the joint venture with La Fragua. Bompreço and Disco also contributed significantly to the rise in operating results.
522. The November 28, 2000 Press Release was attached as an exhibit to a Form 6-K filed by
the Company with the SEC on December 15, 2000 and signed by Defendant Van der Hoeven.
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523. On December 4, 2000, the Company filed with the SEC its current report on Form 6-K
(the “December 4, 2000 Form 6-K”), signed by defendant Van de Hoeven. This filing repeated the
materially false and misleading financial results disclosed in the November 28, 2000 Press Release.
22. USF Completes Acquisition of PYA/Monarch
524. On December 5, 2000, the Company issued a press release (the “December 5, 2000 Press
Release”) entitled “Ahold U.S. Foodservice Completes Acquisition of PYA/Monarch.” Ahold’s
December 5, 2000 Press Release made the following materially false and misleading statements
concerning USF’s sales figures:
Royal Ahold, the international food provider, today announced that its foodservice distribution company in the United States, U.S. Foodservice, has completed its acquisition of PYA/Monarch. PYA/Monarch is a prominent foodservice operator, particularly in southeastern United States. The transaction involves a cash sum of USD 1.57 billion and includes a multi-year supply agreement between U.S. Foodservice and former owner Sara Lee Corporation. The acquisition of PYA/Monarch boosts Ahold’s foodservice sales in the U.S. to approximately USD 12 billion with overall projected sales of Ahold USA approaching USD 35 billion in 2001. It also considerably strengthens Ahold’s position in the away-from-home food consumption market. The reunion of the two former sister companies will better position the combined company to provide improving levels of customer service to institutions across America including restaurants, sports stadiums, hospitals and schools.
525. The December 5, 2000 Press Release also stated:
Over 60% of Ahold’s current worldwide sales are generated in the United States. U.S. Foodservice and PYA/Monarch have foodservice operations across America with combined sales of approximately USD 12 billion.
526. On January 9, 2001, the Company filed a Form 6-K with the SEC, signed by Van der
Hoeven, which attached as an exhibit the December 5, 2000 Press Release.
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23. Defendant Van der Hoeven’s Christmas Speech
527. On December 14, 2000, the Company filed a Form 6-K with the SEC, signed by Van der
Hoeven, which attached as an exhibit to the November 28, 2000 Press Release.
528. Also, on December 15, 2000, the Company issued a press release (the “December 15,
2000 Press Release”) entitled “President & CEO Cees Van der Hoeven During Christmas Speech:
‘Ahold on Track for Record Performance.’” In the December 15, 2000 Press Release, the Company
stated in pertinent part:
Royal Ahold (NYSE: AHO), the international food provider, is once again on track to achieve record sales and earnings this year.
529. According to the December 15, 2000 Press Release, defendant Van der Hoeven stated
during the Christmas speech:
“We intend to double the 1999 size of our company expressed in Euro sales in 2002. This looks very doable indeed. Each of our 400,000 Ahold associates in 25 countries may justifiably take pride in their accomplishments this year and have every reason to look forward to a record sales and earnings performance.”
530. The December 15, 2000 Press Release further set forth defendant Van der Hoeven’s
materially false and misleading statements concerning Ahold’s rapid expansion:
In festive mood, [defendant Van der Hoeven] noted the consistent autonomous sales growth of 7% per year achieved by Ahold companies and ran through the list of 14 acquisitions so far this year in the United States, Spain, the Netherlands, Belgium, Brazil, Argentina and Chile, with combined sales of approximately Euro 15 billion. [Defendant Van der Hoeven further stated:] ‘The limiting factors to growth, both organic and through acquisitions, are very manageable. Central to this process, however, is our transfer of knowledge and best practice among key associates and the application of the guiding principles of our business. Our multi-channel strategy is to reach consumers through food retail for home consumption, through foodservice when eating out and through an e-commerce service linked to home delivery when ordering. This strategy is consistent with our desire to align the best aspects of each channel and add value. Although at Ahold the customer comes first and foremost, you -our associates- are our
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ambassadors in all we do. It is therefore gratifying to see how the Ahold family is turning many autonomous local activities into effective multi-local operations and generating substantial synergies within and among our food retail, foodservice and e-commerce channels. We are motivated, ambitious and well aware of the high expectations placed on us to deliver an excellent performance not only this year but also in the years ahead! Our goal is clear and consistent: to be the best and most successful food provider in the world!’
531. On January 9, 2001, the Company filed a Form 6-K with the SEC, signed by defendant
Van der Hoeven, which attached as an exhibit to the December 15, 2000 Press Release.
24. Analysts Embrace The Defendants’ False and Misleading Statements
532. During the time period from January 1, 2000 through December 31, 2000, analysts
followed Defendants’ public statements and announcements closely in connection with reporting
Company developments to investors. Analysts routinely repeated defendant’ materially false and
misleading statements, using such statements as the basis for their reports:
• On March 8, 2000, Société Générale issued a report on Royal Ahold. It
rated Royal Ahold a “Buy,” and discussed the Company’s FY 1999
results. The report stated:
As expected, very good results in 1999; acquisition of U.S. Foodservice for USD 3.6bn
1999 attributable net earnings rose 37.5%, 1999 EPS up 25.5% The make-up of the group’s 1999 accounts were in line with our expectations, though figures at the operating level were slightly higher than we had forecasted (EBIT up 39.1% compared to our estimate of 36.6% growth). Attributable net earnings also came in slightly above our expectations, increasing 37.5% compared to our estimate of 36.2%.
• On May 22, 2000, Dresdner Kleinwort Benson issued a report on Royal
Ahold. It rated Royal Ahold a “Buy,” with a price target of €36.00. The
report provided in pertinent part:
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The integration of ICA and US Foodservice, coupled with the strength of the US dollar, underwrites Ahold’s medium-term growth. Improving returns suggest the discount to its European food retail peers should disappear. This delivers a 12-month share price target of €36. We have upgraded our recommendation to Buy.
• On June 8, 2000, Morgan Stanley Dean Witter issued a report on Royal
Ahold. It rated Royal Ahold an “Outperform,” with a price target of
€31.00. It further provided:
We are maintaining our outperform rating on shares of Ahold following strong 1Q00 results, a solid growth outlook and our outperform weighting on the sector. At €0.35, Ahold’s 1Q00 results increased 31.5% and were ahead of our €0.34 estimate, and benefited from strong sales (up 18%), and improved operating margin. Results also benefited from a higher dollar. Excluding changes in currency, earnings advanced a strong 19%. Given no major consolidated acquisitions in the past twelve months earnings growth was generated almost entirely from AHO’s own autonomous efforts. We expect both ICA and USF will be consolidated as of 2Q00 in fact, further acquisitions by USF are likely in our view: Jim Miller, head of USF indicated on the company sponsored conference call that USF was close to making an acquisition.
• On August 17, 2000, Lehman Brothers issued a report on Royal Ahold. It
rated Royal Ahold a “Buy,” with a generous price target of €43, and
placed the Company on its “Recommended List.” The report also stated:
ACQUISITION OF PYA/MONARCH GENERATES SYNERGIES GALORE
Ahold announced yesterday that its wholly owned subsidiary U.S. Foodservice would acquire PYA/Monarch, a major foodservice distributor in the southeast of the United States. The acquisition will generate further growth to the levels we are looking for through synergies granted via a nationwide US network.
EPS estimates increase by 3% We have factored the acquisition of PYA/Monarch into our 2001 estimates and we are now estimating EPS for 2001 of 1.88 (a 3% increase of our previous estimate of 1.82).
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• On September 7, 2000, Lehman Brothers issued a report on Royal Ahold.
It rated Royal Ahold a “Buy,” and reported on the Company’s 2nd Quarter
2000 results, stating that it expects a 36% increase in EPS. The report also
provided:
We are expecting a strong quarter driven by the consolidation of USFS and ICA group in Scandinavia. Our 2Q00 EPS estimate is EUR 0.36 versus EUR 0.27 a year ago at this time; a 36% increase. Consensus estimates are at EUR 0.34 and our estimates are at the very top of the analysts covering the company. Expecting Sales growth of 64%….
• On December 5, 2000, Dresdner Kleinwort Benson issued a report on
Royal Ahold. It rated Royal Ahold a “Buy,” and significantly increased
its price target to €44 from €36. The report also stated:
The acquisitions in US foodservice and European food retailing secure medium-term growth. After the Q3 results we have upgraded our 2000 forecast by 4% and 2001 by 8%. On both growth and returns, Ahold’s discount to its peers looks too wide.
533. On December 28, 2000 the Company, filed with the SEC a form 6-K, signed by
Defendant Meurs, which detailed Ahold’s financial performance for the first three quarters of 2000.
25. Additional SEC Filings That Certain Individual Defendants Signed
534. In addition to the foregoing 2000 statements, certain Individual Defendants signed the
following documents that were filed with the SEC and incorporated, either directly or by reference,
various materially false and misleading statements relating to the Company’s financial performance
during the Class Period:
4/9/00 Form 6-K (containing false and misleading 1999 financial results for Ahold), signed by Van der Hoeven;
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4/11/00 Form 6-K (containing false and misleading 1999 financial results for Ahold), signed by Van der Hoeven; 6/2/00 Form 6-K (containing false and misleading 1999 financial results for Ahold), signed by Van der Hoeven; 10/12/00 Form 6-K (containing false and misleading 2000 financial results for Ahold), signed by Van der Hoeven; 11/29/00 Form 6-K (containing false and misleading 2000 financial results for Ahold), signed by Van der Hoeven; 12/28/00 Form 6-K (containing false and misleading 2000 financial results for Ahold), signed by Meurs; 12/29/00 Form F-3 and Form S-3 (containing false and misleading 2000 financial results for Ahold), signed by Van der Hoeven, Meurs, and Tobin.
535. Each of the statements made from October 2000 through December 2000 concerning
and/or the Company’s internal controls, was false and misleading when issued. The true but concealed
and/or misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2000 was artificially inflated by EUR 103 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. This improper recognition of net income was directly contrary to the representations in Ahold’s 2000 Form 20-F that the Company adhered to a policy to ensure that “vendor allowances and credits that relate to the Company’s buying and merchandising activity are recognized as earned.” As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned.”
b. Ahold’s reported revenues during fiscal 2000 were materially overstated by EUR 44 million due to the failure to attribute appropriately earned vendor allowances to the “cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. Ahold’s net assets reported during fiscal 2000 were also materially overstated in the amount of EUR 70 million commencing with the second quarter of fiscal 2000 because receivables from vendors as of the April 2000 acquisition of USF were fictitious, as admitted by Ahold in its 2002 Form 20-F, at F-27;
d. The USF net income that Ahold reported during fiscal 2000 was materially overstated by $110 million by virtue of deliberate fraud. The $110 million restatement for fiscal
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2000 includes amounts allocable to pre-acquisition periods at USF since , as Ahold stated in a press release that the Company issued on May 8, 2003, “inappropriate vendor allowance accounting had existed at the date of the acquisition of USF.” Ahold has admitted in the Company’s 2002 Form 20-F, that the $110 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
e. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards.”
f. Defendants’ statements during fiscal 2000 regarding integration, recognition of synergies, and recognition of economies of scale, made in connection with, among other things: Ahold’s acquisition of USF; USF’s acquisition of PYA/Monarch; and Van der Hoeven’s statements at set forth in the Company’s Second September 7, 2000 Press Release -- in which he said: “Our record of generating synergies, exchanging best practices and sharing knowledge speaks for itself and we have never failed to deliver on our promises in this regard;” were materially false and misleading because, inter alia:
(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii)Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to
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understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F.
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls.”
g. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management.”
h. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2000 were overstated by $10.58 billion due to the improper consolidation of these joint ventures;
i. By virtue of the improper consolidation of JMR, Bompreco (for the first and second quarters of fiscal 2000 only), ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 1999 and/or fiscal 2000 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures.
j. Ahold’s improper consolidation of ICA, also artificially inflated Ahold’s net income. Specifically, Ahold’s net income was overstated by EUR 10 million in fiscal 2000 because restructuring costs associated with Ahold’s acquisition of its 50 percent interest in ICA in April 2000 were improperly accrued rather than expensed in the periods in which they were incurred. As Ahold admits in its 2002 Form 20-F, and as explained in detail below, the failure to treat these costs in the periods in which they were incurred violated Dutch and U.S. GAAP because Ahold lacked control over ICA during fiscal 2000;
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k. At no time during fiscal 2000 did Ahold own the requisite interest in JMR, Bompreco (until its acquisition in July 2000), DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
l. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
D. 2001 Events And False And Misleading Statements
536. In 2001, the defendants made and/or caused to be issued numerous materially false and
misleading statements and/or omissions of material facts, some of which were made in connection with
the events depicted on the following graph:
537. Starting off the new year with yet another acquisition, Ahold issued a press release on
January 2, 2001 announcing that the Company had successfully completed its tender offer to acquire
Jan. 2, 2001 - Ahold announces that it has successfully completed its tender offer to acquire Superdiplo in Spain.
Jan. 5, 2001 - Ahold announces that its 2000 sales surged 55.7% to Euro 52.2 billion.
Feb. 2, 2001 - Ahold announces that it has acquired 56 supermarkets and 8 sites from Grand Union.
Feb. 6, 2001 - Ahold announces that it has acquired 100% of the shares of Parkway Food Service, a broadline distributor in western Florida.
Aug. 30, 2001 - Ahold announces that its secondquarter 2001 net earnings surged 37.2% to Euro 351.6 million. In addition, defendant Van der Hoeven noted the company's ability to excel in distressed economic conditions.
Nov. 2, 2001 - Ahold announces that its 50/50 joint venture between La Fragua and Ahold in Guatemala, El Salvador and Honduras has signed an agreement with Costa Rican supermarket and hypermarket company CSU to form a new joint venture. Ahold will have one-third stake in the new venture.
Nov. 27, 2001 Ahold announces that its third quarter net earnings rose 28.3% to Euro 333.1 million, and sales rose 12.6% to Euro 15.5 billion.
Mar. 2, 2001 - Ahold announces that it intends to acquire Mutual Distributors, Inc.
Mar. 6, 2001 - Ahold announces that its net earnings surged 48% to Euro 1.1 billion for the full-year 2000.
May 15, 2001 - Ahold announces that its 2001 first quarter sales surge 65.8% to Euro 18.2 billion.
June 7, 2001 - Ahold announces that its first quarter earnings r ose 50.6% to Euro 346.6 million.
Sept. 4, 2001 - Ahold announces that it has entered into an agreement to purchase all of the outstanding shares of Bruno's.
Sept. 4, 2001 - Ahold announces that it has entered into an agreement to purchase all outstanding shares of Alliant Foodservice, Inc. Dec. 3, 2001 - Ahold announces
that it has completed the acquisition of Alliant.
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Superdiplo in Spain. In this press release, Ahold informed investors that it was using company stock as
currency in connection with the acquisition:
Royal Ahold, the international food provider, today announced that the Spanish Stock Exchange Authorities (‘Comisión Nacional del Mercado de Valores’) have declared a positive result of Ahold’s public tender offer for the outstanding shares of Superdiplo S.A. Superdiplo shareholders tendered 49,797,129 of the 51,000,000 outstanding Superdiplo shares in connection with the tender offer which closed at midnight on December 27, 2000. This amount represents 97.64% of Superdiplo’s share capital. Ahold has issued a total of 36,849,875 new common shares in connection with the public tender offer. This represents 0.74 Ahold shares for every Superdiplo share tendered. The new Ahold shares are expected to begin trading on the Amsterdam Exchanges (Euronext) as of January 3, 2001. Including Superdiplo with over 300 stores, Ahold now operates approximately 530 stores in Spain with annualized sales of Euro 2 billion. 1. Ahold Announces Year 2000 Financial Results
538. On January 5, 2001, the Company issued a press release (the “January 5, 2001 Press
Release”) entitled “Ahold 2000 Sales Surge 55.7 Percent to Euro 52.2 Billion; Strong Sales Growth in
Fourth Quarter,” reporting Ahold’s financial results for the year 2000. In this press release, Ahold made
materially false and misleading statements:
Royal Ahold (NYSE: AHO), the international food provider, today reported 2000 consolidated sales of Euro 52.2 billion, a 55.7% rise over the Euro 33.6 billion sales generated in 1999. Organic(a) sales growth, at constant currency rates, was 6.3% higher for the year. In the United States, sales rose 35.4% to USD 27.5 billion. This increase includes the acquisition of U.S. Foodservice. Ahold achieved strong organic sales growth in both its food retail and foodservice activities in the U.S. In Europe, sales surged 59.6% to Euro 16.7 billion, partially reflecting the consolidation of the ICA Group in Scandinavia. All other European trade areas achieved substantial sales growth, supported by the opening of new supermarkets and hypermarkets.
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In Latin America, sales increased by 43.7% to Euro 5.0 billion. This considerable increase is a reflection of the new partnership with La Fragua in Central America and of strong sales growth in Brazil and Argentina.
539. According to the January 5, 2001 Press Release, defendant Van der Hoeven made the
following remarks:
We are very pleased with this sharp growth in sales. Sales during the fourth quarter -- and specifically during the Christmas period -- were very strong in all operating areas. In the United States, fourth quarter identical(a) sales were up 3.2%, which translates into comparable(a) sales growth of 4.1%. This underlines the overall strength of our competitive position.
540. As to the 2000 Earnings Outlook, the Company stated as follows in the January 5, 2001
Press Release:
Ahold reconfirms its outlook that operating earnings in 2000 in all regions will increase over 1999. Net earnings will be sharply higher and earnings per share, at constant currency rates, are expected to rise by 17-20% compared to 1999.
541. The January 5, 2001 Press Release was attached as an exhibit to a Form 6-K filed by the
Company with the SEC on January 26, 2001.
542. On January 25, 2001, the Company issued a press release (the “January 25, 2001 Press
Release”) entitled “Appointments Management ICA Aho ld AB.” In the January 25, 2001 Press Release,
the Company stated in pertinent part:
Royal Ahold, the international food provider, today announced that the Board of its Scandinavian joint venture ICA Ahold AB has made the following appointments: Effective February 1, 2001, Dirk Anbeek, Chief Financial Officer of Ahold´s European Competence Center, has been appointed Chief Financial Officer of the 50/50 joint venture ICA Ahold AB. Anbeek, 37, will be succeeded by Maarten Dorhout Mees, who has been appointed Chief Financial Officer Ahold Europe. Dorhout Mees, 43, will combine
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this position with his current duties as Executive Vice President European Business Development.
***
ICA is the biggest retailing group in the Nordic region with a total of 4,600 stores, mainly in Sweden and Norway but also in Denmark and the Baltic countries with sales of over Euro 7 billion. In April 2000 Royal Ahold and the Scandinavian market leader established the 50/50 joint venture company ICA Ahold AB, making ICA part of Ahold´s global network. ICA employs 47,000 associates. 2. Ahold Acquires Grand Union Supermarkets in the United States
543. On February 2, 2001, the Company issued a press release (the “February 2, 2001 Press
Release”) entitled, “Ahold USA Acquires 56 supermarkets and 8 sites from Grand Union.” In the
February 2, 2001 Press Release, Ahold made the following materially false and misleading statements
concerning its operations in the United States:
Royal Ahold, the international food provider, today announced it has obtained the green light from the U.S. Federal Trade Commission (FTC) to acquire 56 supermarkets and eight sites from Grand Union. The stores and sites will be integrated into two of its U.S. operating companies, Stop & Shop and Tops.
* * * Ahold USA: strengthening its position along U.S. eastern seaboard Ahold operates five prominent retail operating companies along the U.S. eastern seaboard with combined sales of more than USD 22 billion. In addition, Ahold will generate projected sales from its U.S. foodservice activities approaching USD 12 billion this year, boosting sales from its U.S. operations to close to USD 34 billion through its multi-channel activities of food retail and foodservice. Ahold also has a majority stake in Peapod, the leading U.S. internet grocer.
544. On February 26, 2001, the Company filed a Form 6-K with the SEC, signed by defendant
Van der Hoeven, which attached as an exhibit the February 2, 2001 Press Release.
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3. USF Acquires Parkway Foods in the United States
545. On February 6, 2001, the Company issued a press release (the “February 6, 2001 Press
Release”) entitled “New Ahold Acquisition in U.S. Foodservice Sector.” In the February 6, 2001 Press
Release, Ahold stated in pertinent part:
Ahold, the international food provider (NYSE: AHO) today announced that U.S. Foodservice, its wholly-owned foodservice company in the United States, has acquired 100% of the shares of Parkway Food Service, a broadline distributor in western Florida.
546. The February 6, 2001 Press Release further stated:
U.S. Foodservice U.S. Foodservice is the second-largest food distributor in the United States with annualized sales of approximately USD 12 billion and a nationwide reach through its 55 business centers. The company markets and distributes a wide range of national and proprietary brand items to over 200,000 foodservice customers, including restaurants, hotels, healthcare facilities, cafeterias and schools. U.S. Foodservice was acquired by Ahold in April 2000. Ahold in United States and worldwide In addition to U.S. Foodservice, Ahold operates over 1,300 supermarkets in the United States through five retail operating companies: Stop & Shop, Giant Food Stores, Giant, Tops and BI-LO. Ahold 2000 sales in the U.S. amounted to USD 27.5 billion. Elsewhere in the world, Ahold also has operations in Europe, Latin America and Asia. Worldwide sales for 2000 were in excess of USD 50 billion.
547. On March 2, 2001, the Company issued a press release (the “March 2, 2001 Press
Releases”) entitled “U.S. Foodservice Acquires Mutual Distributors.” According to the March 2, 2001
Press Release, defendant Miller issued the following remarks:
We look forward to welcoming Mutual into the U.S. Foodservice family. . . ‘Mutual has a strong tradition and history as a family-owned business and we intend to maintain its unique presence in its current markets.
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548. The March 2, 2001 Press Release contained the following materially false and misleading
statements:
U.S. Foodservice U.S. Foodservice is the second-largest food distributor in the United States with annualized sales of approximately USD 12 billion and a nationwide reach through its 57 business centers. The company markets and distributes a wide range of national and proprietary brand items to over 200,000 foodservice customers, including restaurants, hotels, healthcare facilities, cafeterias and schools.
549. Also on March 6, 2001, the Company issued a press release (the “March 6, 2001 Press
Release”) entitled “Ahold Net Earnings Surge 48% to Euro 1.1 Billion,” reporting Ahold’s financial
results for the fourth quarter and full year ended 2000. In this press release Ahold falsely stated:
Royal Ahold, the international food provider, achieved net earnings for the full-year 2000 (52 weeks) of Euro 1.1 billion (1999: Euro 752 million), a rise of 48%. Operating results increased by 61% to Euro 2.3 billion (1999: Euro 1.4 billion) and rose to 4.3% of net sales (1999: 4.2%). Earnings per common share rose 32% to Euro 1.51 (1999: Euro 1.14). Excluding currency fluctuations, primarily the impact of the higher average exchange rate of the U.S. dollar, earnings per common share rose 19%.
Consolidated sales in 2000 rose 56% to Euro 52.5 billion (1999: 33.6 billion). Operating cash flow (EBITDA) increased by 51% to Euro 3.5 billion (1999: Euro 2.3 billion). EBITDA amounted to 6.6% of net sales (1999: 6.8%). Net earnings after deduction of preferred dividend totaled Euro 1.1 billion (1999: Euro 740 million).
550. The March 6, 2001 Press Release, made following materially false and misleading
statements and omissions of material fact:
This is the 13th consecutive year in which our net earnings have grown significantly. Ahold has always met or exceeded expectations during this 13 year period and we intend to continue to do so. Results for the year 2000 indicate that we are on the right track with our multi-channel strategy. We have seen strong organic sales (6.6%) and organic earnings (13.6%) growth, while all new acquisitions have performed very well. We planned to double the size of our company between 1999 and 2002, but it now looks as if we will almost reach that goal by the end of 2001, with
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sales expected to be about Euro 65 billion. We look forward to the future with confidence and excitement.
551. In addition, the March 6, 2001 Press Release contained the following materially false and
misleading statements and omissions of material fact:
Sales in the United States rose 36% to USD 27.8 billion. This substantial increase partially reflects the acquisition in April of U.S. Foodservice. Sales were higher at all retail operating companies, particularly at Stop & Shop and Giant-Landover. Identical sales growth was 2.1% and comparable sales grew by 2.8%.
U.S. operating results rose 34% to USD 1.3 billion, partially reflecting the consolidation of U.S. Foodservice. Results at U.S. Foodservice exceeded expectations at the time of acquisition. Excluding Edwards, all supermarket chains showed market share gains, improved operating margins, significant synergy benefits and ongoing cost control. During the second half of the year, 63 Edwards stores were converted to the successful Stop & Shop format. Approximately USD 30 million for this conversion was charged to operating results. The operating losses of internet grocer Peapod amounted to USD 32 million.
In Europe, sales rose 59% to Euro 16.6 billion. This sharp increase partially reflects consolidation of the ICA Group effective the second quarter. In Spain, the sales rise was largely due to the acquisition of the Kampio supermarket chain. In Portugal, sales also increased. In the Czech Republic and Poland, the sales increase was mainly attributable to the opening of new supermarkets and hypermarkets. In The Netherlands, Albert Heijn, Schuitema and Deli XL achieved marked sales growth. Operating results in Europe rose 46% to Euro 670 million, partly reflecting the consolidation of the ICA Group, which performed according to expectation. Operating results in The Netherlands, the Czech Republic and Spain also contributed to this increase. Operating results in Portugal were lower than last year, partially reflecting the costs of implementation of a new logistics system. The operating loss in Poland is due to the high cost of opening a large number of new stores. Latin America In Latin America, sales rose 45% to Euro 5.1 billion, reflecting in part the consolidation of La Fragua in Guatemala. Food retailer Bompreço in Brazil and the supermarket chains Disco in Argentina and Santa Isabel in Chile also contributed to the increased sales.
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Operating results in Latin America increased by 111% to Euro 204 million, partly attributable to La Fragua, where results exceeded expectation. Substantially higher operating results at Bompreço and Disco also contributed to the rise. Operating results at Santa Isabel were positive for the fourth quarter, although a slight loss was recorded for the year as a whole.
* * *
Fourth Quarter 2000 net earnings rise 56% to Euro 370 million
In the fourth quarter of 2000, net earnings rose 56% to Euro 370 million (1999: Euro 237 million). Earnings per common share rose 29% to Euro 0.46 (1999: Euro 0.36). Earnings in Euro in this quarter were impacted by the higher average exchange rate of the U.S. dollar. At a constant U.S. dollar exchange rate, earnings per share rose 15%. Fourth-quarter consolidated sales rose 78% to Euro 15.3 billion (1999: Euro 8.6 billion), partly reflecting the consolidation of the ICA Group and U.S. Foodservice. Organic sales growth for the quarter was 6.9%.
Operating results rose 75% to Euro 734 million (1999: Euro 420 million) and amounted to 4.8% of net sales (1999: 4.9%). Operating cash flow (EBITDA) rose 66% to Euro 1.1 billion (1999: Euro 641 million), 7.0% of net sales (1999: 7.5%).
In the United States, sales rose 54% to USD 7.6 billion (1999: USD 4.9 billion), partly due to the consolidation of U.S. Foodservice, Golden Gallon and Sugar Creek. The retail operating companies generated strong identical sales growth (3.2%) and comparable sales growth (4.1%). Operating results rose 35% to USD 361 million (1999: USD 267 million), which includes the consolidation of U.S. Foodservice. The transition of the Edwards stores to the Stop & Shop format was completed in the fourth quarter and approximately USD 15 million was charged to operating results. Internet grocer Peapod recorded operating losses of USD 22 million. In Europe, sales rose 85% to Euro 5.0 billion (1999: Euro 2.7 billion), reflecting in part the consolidation of the ICA Group in Scandinavia and the acquisition by Schuitema of A&P in The Netherlands. Operating results rose 66% to Euro 243 million (1999: Euro 147 million), in part due to the ICA Group. In The Netherlands, Albert Heijn had a strong fourth quarter. In the Czech Republic, operating results improved sharply. Portugal recorded lower results than last year. In Poland, operating losses are attributed to the high cost of supermarket and
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hypermarket openings. In Latin America, sales rose 47% to Euro 1.4 billion (1999: Euro 981 million), partially reflecting the consolidation of La Fragua in Guatemala. All operating companies generated higher sales, specifically Bompreço in Brazil and Disco in Argentina. Operating results rose 178% to Euro 90 million (1999: Euro 33 million), partly due to the consolidation of La Fragua. Operating results at Bompreço and Disco were sharply higher. Santa Isabel achieved positive operating results for the fourth quarter. Outlook for 2001 The Corporate Executive Board expects that sales and operating results will improve in all trade areas in 2001, reflecting healthy organic growth as well as the contribution of recent acquisitions. It is anticipated that net earnings will be strongly higher. Earnings per share, excluding currency fluctuations, extraordinary items and goodwill amortization are expected to be 15% higher than in 2000.
552. On March 6, 2001, Ahold issued an additional press release containing remarks that
defendant Van der Hoeven made to the Company’s current and prospective shareholders concerning
Ahold’s Year 2000 results. In this press release, defendant Van der Hoeven made the following
materially false and misleading statements and omissions of material fact:
All of us at Ahold are proud that once again we can announce excellent quarterly and annual results. Our sales for the year increased by 56%, our operating earnings by 61%, our net earnings by 48% and earnings per share went up by 32%. Even after allowing for the favorable impact of currencies our net earnings per share increased by 19%, in line with our target. In general, our ongoing business performed very well. Almost without exception we strengthened our market position and improved operating margins. Our competitive strength in existing markets is clearly evident as we leverage economies of scale, exchange best practice and focus on our local customers. We are equally pleased with the integration of newly acquired companies. U.S. Foodservice already proves to be a major contributor, exceeding our expectations. The multi-channel strategy is taking shape and we are on the right track to generate substantial
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benefits in and between the two channels, food retailing and food service. Also, our newly formed joint venture with ICA in Scandinavia performed very well as did the joint venture with La Fragua in Central America. In both instances we clearly see our ability to contribute to profitable growth of these two well-managed companies. We also look forward to working with our two most recent acquisitions PYA/Monarch and Superdiplo. The early signs for successful integration are excellent. Ladies and Gentlemen, this is the 13th consecutive year of net earnings growth and I am particularly pleased to say that never during this period did we underperform against market expectation. Few of you may realize that during the past ten years Ahold sales increased six-fold, net earnings nine-fold and market capitalization eighteen-fold. You may recall that we were seen as very ambitious when in 1995 we set a goal for 2000 of NLG 50 billion sales and NLG 1 billion net earnings. We have exceeded those numbers last year, be it in Euros rather than guilders. I realize that making these statements may sound as if it’s all over, but I can assure you that this is certainly not the case. We have a great future ahead of us and that’s why I would like to share our vision and strategy with you today. But first, let me address the food retail environment. The general trend of a declining share of food retail expenditure of gross national product continues everywhere. Food inflation continues to be lower than general price inflation. Also, total expenditure on food continues to grow twice as fast outside than inside the home. Against the background of slowing economic growth, this is not very encouraging. However, from our perspective there is very clear silver lining to the clouds. First, as a consequence of our multi-channel strategy, we participate in every meal occasion: at home, in a restaurant, at work, in a hospital, while on the move or just out in the street. Second, in retail as well as in food service we see unprecedented opportunities to improve market share and do new acquisitions. As competition continues unabated it is quite clear that many companies are better off teaming up with a strong, well-organized partner than to pursue long-term independence. The Ahold advantage is that we have a superb track record of integrating companies very successfully. We preserve the brand name, the heritage, keep management in place and provide all the necessary ingredients for faster profitable growth. Therefore, you will see further acquisitions, but there is none to be announced today.
***
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Ladies and Gentlemen, we are proud of our accomplishments and excited about our future. Ahold is in excellent shape and ready to make another leap forward. I have told you before that we intended to double the size of our company between 1999 and 2002. It now looks as if we will almost do that already in 2001, this year. Our sales this year are projected around Euro 65 billion, excluding further acquisitions and of course allowing for currency exchange fluctuations. Once again, we expect that sales and operating results will improve in all trade areas in 2001, reflecting healthy organic growth as well as the contribution of recent acquisitions. It is anticipated that net earnings will be strongly higher. Earnings per share, excluding currency fluctuations, extraordinary items and goodwill amortization are expected to be 15% than in 2000.
553. Also, on April 9, 2001, the Company filed with the SEC, its current report on Form 6-K
(the “April 9, 2001 Form 6-K”), signed by defendant Van der Hoeven, announcing its financial results
for the fourth quarter and full year ended 2000, repeating the financial results disclosed in the March 6,
2001 Press Release.
4. Ahold Issues 2000 Annual Report
554. Also on April 9, 2001, Ahold issued a second press release (the “Second April 9, 2001
Press Release”) announcing that it had published its 2000 Annual Report and containing the following
materially false and misleading statements and/or omissions of material fact:
Zaandam, The Netherlands, April 9, 2001 - Royal Ahold, the international food retail and foodservice company, today announced it will significantly boost organic growth in 2001 by opening approximately 1,250 new or remodeled stores around its global network. The total store count at 2001 year-end is expected to reach approximately 9,000. Total sales, excluding currency impact and any eventual acquisitions, are expected to amount to approximately Euro 65 billion in 2001. This was evident from the Royal Ahold Annual Report over the year 2000, which was published today, and will be discussed by the Annual General Meeting of Stockholders in The Hague on May 15, 2001. In its message to stockholders, the Ahold Corporate Executive Board anticipates that sales and operating results will improve in all trade areas in 2001, reflecting healthy organic growth alongside the contribution of recent acquisitions. Ahold expects net earnings to be strongly higher and that earnings per share, excluding currency
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fluctuations, extraordinary items and goodwill amortization, will be 15% higher than in 2000.
555. The Second April 9, 2001 Press Release contained the following materially false and
misleading statements made by defendant Van der Hoeven:
Our strength lies in our ability to achieve significant organic growth while acquiring and successfully integrating world-class companies into our group, says Ahold President-CEO Cees Van der Hoeven in the Annual Report. Last year Ahold achieved organic sales growth of 6.6% and organic operating results of 13.6%, both substantially above the industry average. ‘We have developed a global network of best-of-breed regional market leaders in food retail and foodservice. Our growth potential as a company has increased considerably, reflecting the linkage of our food retail and foodservice activities. By adding foodservice to our business portfolio, we are able to serve our customers at every meal occasion. Sustaining and nurturing this multi-channel strategy and focusing strongly on organic growth will again lead to a surge in our worldwide sales. We intend to double the size of our company in the 1999 - 2002 period, although this now looks almost doable by the end of this year.’
556. Ahold’s Annual Report to investors announced the Company’s financial results for 2000
(the “2000 Annual Report”). Concerning Ahold’s sales performance, the 2000 Annual Report contained
the following materially false and misleading statements:
In 2000, consolidated sales rose 56% to € 52.5 billion. Net earnings increased by 48% to € 1.1 billion. After deduction of the preferred dividend, earnings per common share rose 32% to € 1.51. Sales and earnings benefited from the higher average exchange rate of the U.S. dollar. Sales would have risen 42% and net earnings by 33% at a constant dollar rate. Earnings per share, excluding currency fluctuations, rose 19%.
557. Ahold’s 2000 Annual Report further materially misstated the Company’s sales figures
when it stated:
Once again Royal Ahold had an excellent year, achieving record performances in all trade areas. Sales in 2000 rose 56% to Euro 52.5 billion and operating results increased by 61% to Euro 2.3 billion. Net earnings surged 48% to Euro 1.1 billion, the 13th consecutive year of growth. Earnings per share grew by 32% (19% excluding currency impact).
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We are delighted with these results. The strong numbers and positive outlook confirm our company is in excellent shape and well placed to strengthen our position as the best and most successful food provider in the world.
558. Ahold’s 2000 Annual Report made, among others, the following false representations
concerning the Company’s ability to integrate the large number of acquisitions the Company made in
2000:
Organically and through acquisitions, we are experiencing the fastest growth we have ever had in such a short period. Store openings, renovations and new enlargements as well as the addition of numerous stores from acquisitions have impacted positively and substantially on the growth of sales and results.
Another way we distinguish ourselves is through our thoroughbred strategy. We acquire or join forces with top regional companies and integrate them into our group. We are seen as the acquirer of choice who understands the art of making good companies better. These are companies with strong brand names, well managed, innovative and highly quality-oriented. We can help them plan their future, so long as they pass our ‘cultural due diligence’ test and their operations are consistent with our firm strategic, financial and geographic criteria.
559. Ahold’s 2000 Annual Report made, among others, the following materially false and
misleading representations and/or omissions of material fact concerning the Company’s overall sales
figures in Europe. In this regard, the Company stated:
In Europe, sales rose 59% to € 16.6 billion. This sharp increase partially reflects consolidation of the ICA/Hakon Group effective the second quarter. In Spain, the sales rise was largely due to the acquisition of the Kampio supermarket chain. In Portugal, sales also increased. In the Czech Republic and Poland, the sales increase was mainly attributable to the opening of new supermarkets and hypermarkets. In The Netherlands, Albert Heijn, Schuitema and Deli XL achieved marked sales growth. Operating results in Europe rose 46% to € 670 million, partly reflecting the consolidation of the ICA/Hakon Group, which performed according to expectations.
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560. Ahold’s 2000 Annual Report made, among others, the following materially false and
misleading statements and/or omissions of material fact concerning the Company’s overall sales figures
in Latin America. In this regard, the Company stated:
In Latin America, sales rose 45% to € 5.1 billion, reflecting in part the consolidation of La Fragua in Guatemala. Food retailer Bompreço in Brazil and the supermarket chains Disco in Argentina and Santa Isabel in Chile also contributed to the increased sales.
561. Ahold’s 2000 Annual Report made, among others, the following false representations
concerning operations in Portugal:
In Portugal, Ahold co-owned 210 stores at year-end with partner Jeronimo Martins, including Pingo Doce, a chain of 175 full-service supermarkets, and Feira Nova, a chain of 23 hypermarkets. The partnership, formed in 1992, generated 2000 sales of € 1.5 billion, a rise of 9%.
562. Ahold’s 2000 Annual Report made, among others, the following materially false and
misleading statements and omissions concerning operations in Brazil:
The year 2000 was a significant one for Ahold’s operations in Brazil. In June, Ahold acquired the remaining 50% of the voting shares as well as the outstanding common stock of Bompreço, with whom Ahold joined forces in 1996. Sales in 2000 rose 30% to € 1.5 billion through 106 supermarkets, hypermarkets and other store formats at year-end.
563. Ahold’s 2000 Annual Report made, among others, the following materially false and
misleading statements omissions concerning operations in Argentina:
In Argentina, Disco Ahold International Holdings, the partnership between Ahold and Velox Retail Holdings formed in 1998, put in another strong performance in 2000. At year-end, the joint venture owned 98% of Disco and operated 235 Disco supermarkets with sales of € 2.2 billion, a rise of 32%.
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5. Ahold Files Its 2000 Form 20-F
564. Also on April 9, 2001, Ahold filed its year-end report on Form 20-F for the fourth quarter
and year ended January 2, 2001 (the “2000 Form 20-F”). Defendant Van der Hoeven signed the 2000
Form 20-F.
565. The 2000 Form 20-F contained the following materially false and misleading statements
and/or omissions of material facts concerning the consolidated sales figures for Ahold’s 2000 fiscal
year:
Net sales in fiscal 2000 increased by EUR 18,911 million, or 56%, to EUR 52,471 million, from EUR 33,560 million in 1999. At constant exchange rates, consolidated net sales growth was 42% in fiscal 2000 compared to fiscal 1999. The major reasons for the increase in net sales were, in addition to organic growth, the acquisition of U.S. Foodservice, consolidated starting April 2000 and the acquisition of the 50% partnership interest in ICA, consolidated starting May 2000. The other acquisitions mentioned elsewhere in this document also contributed to net sales growth. Organic sales growth, which excludes the net sales from acquisitions consolidated for less than four quarters, for 2000 was 6.6%. Net sales in fiscal 1999 increased by EUR 7,076 million, or 27%, to EUR 33,560 million from EUR 26,484 million in fiscal 1998. At constant exchange rates, consolidated sales growth was 25% in fiscal 1999 compared to fiscal 1998. The major reasons for the increase in net sales were, in addition to organic growth, the full-year consolidation of Giant-Landover, Disco and Santa Isabel and the July 1999 acquisition of Gastronoom. These increases were partly offset by the additional week in fiscal 1998 for our operations in The Netherlands and the United States.
566. In the 2000 Form 20-F, the Company also made the following materially false and
misleading statements and/or material omissions concerning net earnings for fiscal year 2000:
Net Earnings
Net earnings in fiscal 2000 were EUR 1,116 million, representing an increase of 48% compared to fiscal 1999. Net earnings per common share rose 32% in fiscal 2000 to EUR 1.51. At constant exchange rates, net earnings increased 36% in fiscal 2000 compared to fiscal 1999, resulting in a 19% increase in earnings per share. Net earnings in fiscal 1999 were 752 million, representing a 37% increase over fiscal 1998, resulting in an 25% increase in net earnings per common share to EUR 1.15.
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Net earnings available to common shareholders as determined in accordance with U.S. GAAP would have been EUR 794 million in fiscal 2000, compared to EUR 573 million in fiscal 1999 and EUR 388 million in fiscal 1998.
567. The 2000 Form 20-F contained the following egregiously and materially false and
misleading statements regarding Ahold’s accounting for vendor rebates:
Revenue recognition
Royal Ahold recognizes retail sales at the point of sale. Sales to franchise and associated stores and food supply revenues are recognized when goods are delivered. Vendor allowances and credits that relate to the company’s buying and merchandising activity are recognized as earned.
568. The 2000 Form 20-F contained the following materially false and misleading statement
and omissions of material facts regarding the Company’s policy for consolidating the financial results of
its joint ventures:
Consolidation
The financial statements of Royal Ahold presented herein, and the notes thereto, are prepared on a consolidated basis in conformity with Dutch GAAP. Generally, all companies in which Royal Ahold can exercise control or where Royal Ahold has a direct or indirect interest of more than 50% are included in the consolidation. All significant intercompany transactions and accounts are eliminated in consolidation.
***
Investments in unconsolidated companies
Royal Ahold participates in certain joint ventures and partnerships, as well as maintains investments in other companies. Royal Ahold consolidates all companies over which it exercises control, as evidenced by majority ownership or through control of management. Companies over which Royal Ahold can exercise considerable influence in terms of business and financial policy, and where Royal Ahold owns more than a 20% interest, are accounted for using the equity method. Other unconsolidated companies are stated at historical cost unless there is a permanent decline in value.
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569. In the 2000 Form 20-F, Deloitte made the following statement, which the Company’s
adjustment of financial results relating to accounting for joint ventures has proven to be materially false
and misleading when made:
Independent Auditors’ Report
To the Supervisory Board and Shareholders of Koninklijke Ahold N.V.:
In our opinion, the Consolidated financial statements referred to above present fairly, in all material respects, the Consolidated financial position of Koninklijke Ahold N.V. as of December 31, 2000 and January 2, 2000 and the results of its operations, changes in its equity and its cash flows for each of the three fiscal years in the period ended December 31, 2000, in conformity with generally accepted accounting principles in The Netherlands.
* * *
Deloitte & Touche Accountants
570. Each of the statements made from January 2001 through March 2001 concerning Ahold’s
fiscal 2000 and/or fiscal 2001 financial results, success at integrating acquired companies, and/or the
Company’s internal controls, was false and misleading when issued. The true but concealed and/or
misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2001 was artificially inflated by EUR 215 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned.”
b. Ahold’s reported revenues during fiscal 2001 were materially overstated by EUR 80 million due to the failure to attribute appropriately earned vendor allowances to the “cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. The USF net income that Ahold reported during fiscal 2001 was materially overstated by $260 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $260 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor
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allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
d. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2000 and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards.”
e. Defendants’ statements during fiscal 2001 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, among other things: Ahold’s 2000 Annual Report; the March 6, 2001 Press Release -- in which Van der Hoeven stated: “[t]he Ahold advantage is that we have a superb track record of integrating companies very successful;” and the Second April 9, 2001 Press Release; were materially false and misleading because, inter alia:
(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii) Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but
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failed to integrate at t he same pace, and failed to have adequate financial controls;”
f. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
g. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2001 were overstated by $12.20 billion due to the improper consolidation of these joint ventures;
h. By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
i. At no time during fiscal 2001 did Ahold own the requisite interest in JMR, DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
j. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
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6. Defendants Miller and Grize Are Appointed To Ahold’s Executive Borad
571. On April 9, 2001, the Company issued a press release (the “First April 9, 2001 Press
Release”) entitled “Appointment Two New Ahold Executive Board Members.” The First April 9, 2001
Press Release stated in pertinent part:
Royal Ahold, the international food retail and foodservice company, will seek approval from shareholders at its Annual General Meeting to be held May 15 in The Netherlands, to appoint two new members to the Ahold Corporate Executive Board, William J. Grize, President/CEO Ahold USA-Retail and James L. Miller, President/CEO U.S. Foodservice.
* * * As announced earlier, Robert G. Tobin (62), will retire from Ahold’s Corporate Executive Board. It is proposed that he becomes a member of the Supervisory Board. Roland Fahlin (62), who recently stepped down as Chairman of the ICA Group, has also been proposed as a new member of the Supervisory Board. After approval by shareholders, Ahold’s Corporate Executive Board from September 1, 2001 will consist of the following members: Cees Van der Hoeven (President/CEO), Michiel Meurs (CFO), Jan Andreae (Europe), Bill Grize (US-retail), Jim Miller (US-foodservice), Allan Noddle (Latin America/Asia) and Theo de Raad (special projects). It is expected that Allan Noddle will retire early 2002 as an Ahold Corporate Executive Board member. His responsibilities will be transferred to Theo de Raad. Following approval of shareholders, the Ahold Supervisory Board, as of September 1, 2001 will consist of the following members: Henny de Ruiter (Chairman), Cor Boonstra, Roland Fahlin, Jos A. van Kemenade, Sir Michael Perry, Robert G. Tobin and Lodewijk J. R. de Vink. 7. Ahold Announces First Quarter 2001 Financial Results
572. On May 15, 2001, Ahold issued a press release (the “May 15, 2001 Press Release”),
entitled “Ahold 2001 First Quarter Sales Surge 65.8% to Euro 18.2 billion.” The May 15, 2001 Press
Release set forth the following materially false and misleading statements and/or omissions of material
fact:
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Zaandam, The Netherlands, May 15, 2001 – Royal Ahold, the food retail and foodservice company, generated consolidated sales (excluding VAT) over the first quarter (16 weeks through April 22, 2001) of Euro 18.2 billion, a rise of 65.8%. Worldwide organic sales grew by 7.4%. United States: sales up 60.0% to USD 10.2 billion In the United States, sales increased 60.0% to USD 10.2 billion. The numbers include 16 weeks of sales of U.S. Foodservice, not included in the consolidation in the first quarter of 2000. Sales from Ahold’s retail operations in the U.S. grew to USD 6.8 billion. Organic retail sales grew 7.2%, comparable retail sales 3.3% and identical retail sales 2.9%. All five Ahold USA supermarket companies (Stop & Shop, Giant-Landover, Giant-Carlisle, Tops and BI-LO) contributed to sales growth. Organic sales growth at U.S. Foodservice was 16%. Europe: sales increase by 77.5% to Euro 5.7 billion In Europe, sales rose 77.5% to Euro 5.7 billion. The numbers include three months of sales of ICA Ahold and Superdiplo, not included in the consolidation in the first quarter of 2000. Organic retail sales grew by 8.0%. In The Netherlands, sales were 14.5% higher, partly due to the consolidation of the A&P stores and strong sales growth at Albert Heijn and Schuitema. Operations in other European countries (Portugal, Spain, Sweden, Norway, the Czech Republic and Poland) all contributed to the significant sales rise. Latin America: sales rise 8.8% to Euro 1.2 billion In Latin America, sales increased 8.8% to Euro 1.2 billion. Organic retail sales increased by 6.5%. Both Bompreço in Brazil and Disco in Argentina grew sales and gained further market share, despite challenging economic circumstances. Also La Fragua (Guatemala, El Salvador and Honduras) achieved considerable sales growth.
573. According to the May 15, 2001 Press Release, defendant Van der Hoeven made the
following statements:
Ahold continues to post solid sales growth,… Our multi-channel strategy, which incorporates food retail operations as well as foodservice operations, is working well. The very significant increase in organic sales growth at U.S. Foodservice substantiates this. We are also pleased with the strong organic retail sales growth over the first 16 weeks, reflecting strong customer appreciation for our formats and our broad product offering and other services. These increases have been achieved by virtually all our operating companies and continue into the next months. The way our business is developing makes us confident that we will again meet our targets in full-year 2001.
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574. The Company further stated in the May 15, 2001 Press Release:
Outlook full-year 2001 The Corporate Executive Board confirms it expects sales and operating results to further improve in all trade areas in 2001, reflecting healthy organic growth as well as the contribution of recent acquisitions. Earnings per share for full-year 2001 are expected to be 15% higher than in full-year 2000, excluding currency fluctuations, extraordinary items and goodwill amortization.
575. The May 15, 2001 Press Release was attached as an exhibit to a Form 6-K filed by the
Company on May 24, 2001 and signed by defendant Van der Hoeven.
576. On May 15, 2001, the Company issued another press release, entitled “Annual
Shareholders’ Meeting – Speech: Address by Cees Van der Hoeven, President & CEO Royal Ahold.” In
pertinent part, this release contained the following materially false and misleading statements and/or
omissions of material fact made by defendant Van der Hoeven:
For Ahold, the year 2000 was the 13th consecutive year in which our net earnings showed strong growth. During this period, Ahold has always met its earnings objectives. Last year, sales rose 56%, operating results surged 61%, net earnings climbed 48% and earnings per share increased by 32%. Even if we discount the favorable currency impact, earnings per share last year rose by 19%, fully in line with our projection. Ahold was again one of the best performers in our sector.
***
This has been our strategy for years, and has paid off in more than one respect for both Ahold and you as shareholder. Permit me to mention a few numbers that are perhaps not widely known. During the last decade, our sales grew sixfold, our net earnings ninefold and our market capitalization 15 times. You probably recall that in 1995 we sounded very ambitious when we set the goal of reaching sales of 50 billion guilders and net earnings of one billion guilders for the year 2000. We met that goal last year - not in guilders, but in Euros! Over the last five years, sales have risen from Euro 16.5 billion to Euro 52.5 billion. Operating margin over this period rose from 3.4% to 4.3%. Operating results increased from Euro 564 million to Euro 2.3 billion.
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Net earnings grew from Euro 287 million to Euro 1.1 billion and earnings per share from Euro 0.61 to Euro 1.51.
*** Our food retail and foodservice activities offer unprecedented opportunities for growing our market share, both organically and externally. Competition is intensifying and it is clear that many companies see themselves better off teaming up with a strong, well-organized partner such as Ahold instead of remaining independent in the long-term. Ahold has the advantage here because we have an excellent record in successfully integrating companies. We retain the brand name of the acquired company, its culture and management and at the same time also provide what is needed for faster earnings growth.
*** Last year we were able to acquire U.S. Foodservice, a truly first-class company with sales this year exceeding USD 12 billion. We’re working hard on developing synergy between U.S. Foodservice and our American supermarket chains. They are now sourcing an increasing number of products collectively. U.S. Foodservice also supplies salad bar ingredients for over 60 Stop & Shop and Giant-Landover stores. And this is just the beginning. Transferring know-how and exchanging best practice is now an ongoing phenomenon, not only in the United States, but also among U.S. Foodservice, Deli XL in The Netherlands and ICA Menu in Scandinavia. The number of Ahold stores in the United States is also growing in leaps and bounds. Last year 340 stores were added, partly reflecting the acquisition of the Golden Gallon and Sugar Creek convenience chains. Ahold expects to open almost 200 new or remodeled stores in the U.S. this year. These numbers do not include the 65 stores we were able to acquire earlier this year when Grand Union went bankrupt. These are currently being converted to the Stop & Shop and Tops formats. Today, we’re already more than three-quarters of the way there. At the end of this year, Ahold will operate over 1,400 modern stores in the United States, where some 15 million customers shop every week. In Europe, we’re also gaining ground quickly. I introduced you to our Scandinavian partner ICA at last year’s meeting. This Scandinavian
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market leader is doing very well indeed. For ICA, the year 2000 was one of the best in its long history. Last month, we introduced a new business model in Scandinavia which will further strengthen ICA’s purchasing power and market position. Today I’d like to take you to Spain and its sunny Canary Islands, home to our successful Spanish supermarket chain Superdiplo acquired in the second half of last year. Superdiplo has over 300 stores and sales of approximately Euro 1.5 billion. This prominent chain grew swiftly by opening new stores and acquiring supermarkets and hypermarkets. Superdiplo has many new sites. All our Spanish supermarkets will trade under the Supersol brand name. Ahold is flourishing in Latin America as well. We have become a prominent player with sales of more than Euro 5 billion. That makes us the number 2 on the continent, but we’re not done yet. Last year, we were able to acquire the remaining 50% of the voting rights of our Brazilian joint venture partner Bompreço - a classic example of how a partnership can develop into a wholly-owned operation. Bompreço’s sales rose a good 30% to Euro 1.5 billion last year.
*** Ladies and Gentlemen, your company is in great shape and the future is looking good. I have said on previous occasions that we were planning to double company sales between 1999 and 2002. It appears that this is already the case this year. Sales for this year are expected to amount to approximately Euro 65 billion, excluding further acquisitions and, of course, depending on exchange rate fluctuations. The Corporate Executive Board expects sales and operating results for 2001 will continue to grow in all trade areas reflecting healthy organic growth and the contribution of recent acquisitions. Net earnings are expected to grow strongly. Earnings per share, excluding currency impact, extraordinary items and goodwill amortization, are expected to rise 15%. Finally, I would like to disclose our sales for the first 16 weeks of the current year. Consolidated sales surged 65.8% to Euro 18.2 billion. Organic sales grew 7.4%. In the United States, sales increased 60.0% to USD 10.2 billion. All U.S. retail operations generated higher sales. In Europe, sales soared by 77.5% to Euro 5.7 billion.
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In Latin America, sales climbed to Euro 1.2 billion, some 8.8% above the first quarter of last year.
577. On June 4, 2001, the Company filed a Form 6-K (the “June 4, 2001 Form 6-K”) which
attached as an exhibit the May 15, 2001 Press Release which included the defendant Van der Hoeven’s
speech at the Annual Shareholder’s Meeting. Defendant Van der Hoeven signed the June 4, 2001 Form
6-K.
578. On June 7, 2001 the Company issued a press release (the “June 7, 2001 Press Release”),
entitled “Ahold 1st Quarter Earnings Rise 50.6% to Euro 346.6 Million.” In this press release Ahold
made the following materially false and misleading statements and/or omissions of material fact:
First Quarter Highlights: Earnings surge 50.6% to Euro 346.6 million Operating earnings climb 57.2% to Euro 711.0 million Earnings per share increase by 18.3% to Euro 0.41 Sales rise 65.9% to Euro 18.2 billion Earnings per share growth for full-year 2001, excluding currency fluctuations, expected at 15% Zaandam, The Netherlands, June 7, 2001 - Royal Ahold, the food retail and foodservice company, today announced a 50.6% rise in first quarter 2001 earnings (first 16 weeks of the year through April 22, 2001) before goodwill amortization to Euro 346.6 million (2000: Euro 230.2 million). After goodwill amortization as of first quarter 2001, earnings total Euro 316.0 million. Earnings per common share before goodwill amortization rose 18.3% to Euro 0.41 (2000: Euro 0.35). Excluding currency fluctuations, mainly the higher average exchange rate of the U.S. dollar, earnings per share increased by 13.2%.
579. According to the June 7, 2001 Press Release, defendant Van der Hoeven made the
following remarks:
Once again our operating companies generated excellent results in the first quarter. In the United States, both our food retail and foodservice activities boosted earnings substantially. The costs of remodeling the Grand Union stores to the Stop & Shop and Tops format are incorporated in these results. In addition, operating losses at Peapod were smaller than
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anticipated. The integration of ICA in Scandinavia and Superdiplo in Spain strengthened our position in Europe, to which our Dutch operations also contributed significantly. Our Latin American activities had outstanding performance, certainly in the light of the economic circumstances in the region. Ahold is on track to deliver on its objectives for full-year 2001.
580. The June 7, 2001 Press Release further stated:
Ahold 1st quarter 2001 results, compared to last year Sales and results in the first quarter were positively impacted by the higher average exchange rate of the U.S. dollar (0.92 vs 0.98). Consolidated sales rose 65.9% to Euro 18.2 billion (2000: Euro 11.0 billion). Excluding currency fluctuations, organic sales growth amounted to 7.4% and organic earnings growth to 15.8%. Operational cash flow (EBITDA) rose 49.9% to Euro 1,114.7 million. Operating earnings before goodwill amortization (EBITA) increased by 57.2% to Euro 711.0 million (2000: Euro 452.4 million). Earnings after goodwill amortization (EBIT) amounted to Euro 671.2 million. Earnings per share before goodwill amortization amounted to Euro 0.41, a rise of 18.3%. Excluding currency impact, the rise amounted to 13.2%. United States Sales in the United States rose 60% to USD 10.2 billion, mainly reflecting the consolidation of U.S. Foodservice and PYA/Monarch. Sales from Ahold’s retail operations in the U.S. grew to USD 6.8 billion. Organic retail sales rose 7.2%, comparable retail sales 3.3% and identical retail sal es 2.9%. All five Ahold USA retail operating companies contributed to sales growth. U.S. Foodservice had sales of USD 3.4 billion and organic sales growth amounted to 16.0%. Operating earnings rose 44.9% to USD 454.4 million, partially reflecting the consolidation of U.S. Foodservice and PYA/Monarch. Operating earnings for retail amounted to USD 331.8 million. The costs of remodeling the Grand Union stores (USD 13.9 million) were charged to operating results. The operating loss of internet grocer Peapod amounted to USD 14.4 million. Operating earnings for foodservice amounted to USD 122.6 million. Europe In Europe, sales rose 77.9 % to Euro 5.7 billion, mainly reflecting the consolidation of the ICA Group in Scandinavia and Superdiplo in Spain. In The Netherlands, sales were positively impacted by Schuitema’s
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acquisition of the A&P stores. Albert Heijn also had excellent sales growth. All European operating units generated higher sales. Organic retail sales growth amounted to 8.0%. Operating earnings rose 53.8% to Euro 188.3 million, partly reflecting the consolidation of the ICA Group and Superdiplo. In The Netherlands, Albert Heijn, Schuitema and Deli XL were the main contributors to the increase in operating earnings. In the Czech Republic, results improved over last year. The operating loss in Poland is partially due to the cost of opening new hypermarkets. In Portugal, operating earnings were virtually unchanged. Latin America In Latin America, sales rose 9.2% to Euro 1.2 billion. Despite difficult economic circumstances, all operating units achieved higher sales. Organic retail sales growth amounted to 6.5%. Operating earnings increased by 64.5% to Euro 47.2 million. All operating units, particularly Bompreço in Brazil and Disco in Argentina, contributed to the further increase in operating results
581. On June 19, 2001, the Company filed a Form 6-K (the “June 19, 2001 Form 6-K”) which
attached as an exhibit the June 7, 2001 Press Release. Defendant Van der Hoeven signed the June 19,
2001 Form 6-K.
8. Ahold Announces Second Quarter 2001 Financial Results
582. On August 30, 2001, the Company issued a press release (the “August 30, 2001 Press
Release”), entitled “Ahold 2nd Quarter 2001 Net Earnings Surge 37.2% to Euro 351.6 Million” in which
defendant Van der Hoeven touted the Company’s earnings and noted Ahold’s ability to excel in
distressed economic conditions. The August 30, 2001 Press Release contained materially false and
misleading statements and/or omissions of material fact:
2nd Quarter Highlights: Net earnings rise 37.2% to Euro 351.6 million Sales increase 29.3% to Euro 16.1 billion, operating earnings increase 28.7% to Euro 694.9 million Strong organic sales (+8.4%) and earnings (+18.3%) growth Earnings per share rise 20.8% to Euro 0.41 (+15.5% excluding
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currency impact) Interim dividend rises 22% to Euro 0.22 Confirmation anticipated earnings per share growth for full-year 2001: 15%, excluding currency impact and before goodwill amortization Zaandam, The Netherlands, August 30, 2001 – Ahold, the international food retail and foodservice company, achieved second quarter 2001 net earnings before goodwill amortization of Euro 351.6 million (2000: Euro 256.2 million), a 37.2% increase. After amortization of goodwill, net earnings amounted to Euro 323.8 million. Earnings per share, before amortization of goodwill, rose 20.8% to Euro 0.41 (2000: Euro 0.34). Excluding currency fluctuations, specifically the higher average exchange rate of the U.S. dollar, earnings per common share grew 15.5%. For the first half year, sales increased by 46.4% to Euro 34.3 billion, operating earnings (EBITA) grew 41.7% to Euro 1.4 billion and earnings per share rose 18.7% to Euro 0.82 (excluding currency fluctuations +13.5%).
583. According to the August 30, 2001 Press Release defendant Van der Hoeven commented
that:
We are pleased with the strong growth in organic sales (+8.4%) and organic operating earnings (+18.3%) during the 2nd quarter. In the United States, our organic sales growth numbers were very good, both in retail activities as well as in foodservice. Earnings at U.S. Foodservice, in particular, were extremely strong and confirm our vision to pursue further growth in this sector. The fact that earnings are on target whilst we consummated the impact of adverse economic conditions in Latin America as well as the conversion costs of Grand Union stores and start-up losses of Peapod, shows the underlying strength of our company. The outlook remains bright for the remainder of the year and we reconfirm that our net earnings will be sharply higher.
584. The August 30, 2001 Press Release also contained materially false and misleading
statements and omissions of material facts including:
In the second quarter, sales and earnings were positively influenced by the higher average exchange rate of the U.S. dollar (Euro 0.86 vs Euro 0.93). Consolidated sales rose 29.3% to Euro 16.1 billion (2000: Euro 12.4 billion). Operational cash flow (EBITDA) also surged by 29.3% to Euro 1,053.9 million. Operating earnings before goodwill amortization (EBITA) increased by 28.7% to Euro 694.9 million (2000: Euro 539.9
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million). Excluding currency impact, organic sales growth amounted to 8.4% and organic operating earnings growth totaled 18.3%. Earnings per share before goodwill amortization grew 20.8% to Euro 0.41. Excluding currency impact, earnings per share rose 15.5%. United States (food retail)
2nd quarter 1st half USD 1 million 2001 2000 Change
In the United States, food retail sales rose 8.0% to USD 5.4 billion. As of January 1, 2001, U.S. food retail adapted its definition of net sales. Based on the former definition, net sales growth would have been 12.0%. All five retail operating companies contributed to sales growth. Organic retail sales grew 8.5%. Comparable sales rose 5.5% and identical sales increased by 5.1%. The remodeling of the 56 Grand Union stores was completed in the 2nd quarter. Costs incurred through the remodeling amounted to USD 13.8 million in the 2nd quarter and were charged to operating results. The results of these remodeled stores were positive at the end of the 2nd quarter. Internet grocer Peapod sustained an operating loss of USD 11.4 million. Excluding Grand Union and Peapod, operating earnings were 6% of sales. United States (foodservice)
2nd quarter 1st half USD 1 million 2001 2000 Change
Sales at U.S. Foodservice surged 59.1% to USD 2.8 billion. This increase mainly reflects the consolidation of PYA/Monarch at year-end 2000. The acquisition of Mutual and Parkway earlier this year also contributed to sales growth. Organic sales growth amounted to 11.1%. Operating earnings at U.S. Foodservice rose 60.3% to USD 122.6 million. This increase reflects the consolidation of three acquisitions, but synergy benefits and cost savings also contributed significantly to enhanced earnings. Europe
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2nd quarter 1st half Euro 1 million 2001 2000 Change
European sales rose 36.5% to Euro 5.3 billion, mainly reflecting the consolidation of Superdiplo in Spain and the ICA Group in Scandinavia. All Ahold companies in other European countries also generated higher sales. Organic growth of retail sales was 9.2%. In The Netherlands, sales growth partially reflects Schuitema’s acquisition of the A & P stores and sales increases at its C1000 stores. Albert Heijn, Deli XL and the specialty stores also generated higher sales. Sales also grew in Poland, partly reflecting the new stores opened last year. In the Czech Republic, the hypermarkets and newly-opened stores contributed to sales growth. Portugal experienced satisfactory sales growth. Operating earnings increased by 34.9% to Euro 191.7 million, attributable in part to the consolidation of Superdiplo and the ICA Group, where results were in line with expectations. In The Netherlands, Albert Heijn, Schuitema, Deli XL and the specialty stores contributed to the earnings increase. Activities in Poland and the Czech Republic sustained operating losses. Earnings in Portugal were lower as a result of lower gross margin. Latin America
2nd quarter 1st half Euro 1 million 2001 2000 Change
Latin American sales rose 1.8% to Euro 1.2 billion. Despite difficult economic conditions, Bompreço in Brazil, Santa Isabel in Chile and La Fragua in Guatemala all achieved higher sales, while at Disco in Argentina, sales lagged slightly. Organic retail sales grew 2.0%. Operating earnings amounted to Euro 34.8 million and were almost identical to last year. Due to weak economic conditions, growth of operating earnings slowed down. La Fragua realized higher operating earnings.
585. The August 30, 2001 Press Release was attached as an exhibit to a Form 6-K filed by the
Company with the SEC on September 4, 2001, and signed by defendant Van der Hoeven.
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586. On August 30, 2001, the Company issued another press release incorporating defendant
Van der Hoeven’s speech at the presentation of the second quarter/1st half 2001 results in Zaandam, The
Netherlands. During the foregoing speech, defendant Van der Hoeven made the following materially
false and misleading statements and omissions of material fact:
As you have seen from our press release, once again the Ahold results for the 2nd Quarter and half-year 2001 were superb. Despite the slowdown in most economies and adverse conditions in several Latin American countries, we were able to comfortably meet the targets we had set ourselves earlier this year. We are particularly pleased with the organic growth numbers, which have clearly accelerated. Organic sales growth was 8.4% for the 2nd Quarter and organic earnings growth was impressive at 18.3%.
Although we saw healthy sales growth almost everywhere and practically all our companies gained market share, it will be clear that our U.S. operations were the main engine behind these numbers. During the 2nd quarter, U.S. retail saw organic sales growth of 8.5% and 5.1% identical growth. This latter number is particularly strong as it excludes any new stores or major remodels. U.S. retail was able to absorb the USD 14 million cost of converting the Grand Union stores as well as Peapod’s quarterly loss of USD 11 million. Excluding these, we achieved our goal of a 6% operating result, a target we had communicated for next year. U.S. retail operations All our U.S. retail operations performed well, driving sales and controlling expenses. The benefits derived from Ahold Networking – our internal knowledge sharing and best practice exchange initiative – the synergy projects and the common platform for support services are starting to become very apparent. Our model to be as local as possible in the marketplace while carefully coordina ting our activities behind the scene is proving to be beneficial to customers as well as shareholders. U.S. Foodservice We are equally pleased with the performance of U.S. Foodservice, which clearly exceeds the expectations we expressed when we announced the acquisition last year. During the 2nd quarter, U.S. Foodservice, including PYA/Monarch, achieved 4.4% operating earnings, ahead of our earlier targets. Organic sales growth continues to be strong at 11%, underlining significant gains in market share. The integration process of PYA/Monarch has been swift and successful. We have exceeded the synergies predicted at closing. It shows the ability of U.S. Foodservice to
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integrate new businesses flawlessly. We are excited about this part of our business which was non-existent two years ago but is now one of our main growth engines. As an added benefit, we have seen some very successful introductions of U.S. Foodservice concepts in our retail stores and we will continue to pursue this path vigorously.
* * *
Europe In Europe we saw strong organic sales growth at 9.2%. This has been evidenced throughout the entire region. In The Netherlands, all operating companies performed very well. Contrary to erroneous reports in the press, Albert Heijn held its market share despite the loss of business in Shell gasoline stations. Schuitema gained significant market share with its successful C-1000 stores. Earnings were strong at all Dutch companies, including Deli XL and the specialty stores. In Scandinavia, results met expectation, with excellent sales and earnings growth, particularly in Sweden. The Portuguese activities generated lower results as a consequence of a lower gross margin. We are pleased we will continue as partners of Jeronimo Martins in the successful joint venture. In Spain, the integration of Superdiplo with several earlier acquisitions is on target and the results are also in line with expectations. In Central Europe, we saw improvements although we were still showing a loss in Poland. Due to the la rge share of hypermarkets, results in the Czech Republic are backloaded towards the 2nd half of this year. Latin America & Asia Adverse conditions in several Latin American countries slowed our growth in the region. Under the circumstances, our companies and joint ventures, particularly Disco in Argentina and Bompreço in Brazil, performed extremely well. The joint venture in La Fragua, Guatemala, continues to deliver improved earnings. Fortunately we are blessed with strong management teams and joint venture partners, so that together we can weather difficult economic conditions. We saw some improvement in Asia and we are pleased that our Thai operation continues to be profitable. Overall, Ahold is in excellent shape and we can look forward to the future with great confidence. It is particularly good to see that the vision
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and strategy are paying off. Our multi-channel approach is a great strength since we are able to fulfill more of our customers’ needs in ways that best fit their busy lifestyles. Moreover, we see increasing synergies developing between the channels.
*** In conclusion we are in excellent shape and would like to confirm our expectation that sales and operating results for the year 2001 will continue to increase. We expect that net earnings will be sharply higher than last year. For full year 2001, earnings per common share excluding currency impact and before goodwill amortization are expected to rise by at least 15%. 9. Defendant Boonstra Is Forced To Resign
587. On September 3, 2001, news emerged that Ahold Supervisory Board member, defendant
Cor Boonstra, resigned from his position with the Company. Defendant Boonstra voluntarily resigned
from his position after it became publicly known that Boonstra sold Ahold shares shortly before the
Company issued its financial results for the second quarter of 2000. At the time that he sold
approximately $289,603 worth of Ahold shares, Boonstra was a member of the Company’s Supervisory
Board. In connection with Boonstra’s resignation, Ahold spokesperson, Hans Gobes, stated: “It was
against the rules if you trade as a member of the Supervisory Board. He was supposed to know the
rules, and yet he did this trade.”
588. On September 21, 2001, the Company filed a Form 6-K with the SEC, signed by
defendant Meurs, which attached as an exhibit to the September 3, 2001 Press Release announcing the
resignation of Boonstra.
10. Ahold Announces Acquisition of Bruno’s
589. Continuing with its goal to be the leading supermarket company in the United States, on
September 4, 2001, Ahold announced that the Company had entered into an agreement to purchase all of
the outstanding shares of Bruno’s. In pertinent part, in the Company’s First September 4, 2001 Press
Release (the “First September 4, 2001 Press Release”) stated:
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Zaandam, The Netherlands, September 4, 2001 – Ahold, the food retail and foodservice company, today announced it has entered into an agreement to acquire all the outstanding shares of Bruno’s Supermarkets, Inc. (“Bruno’s Supermarkets”). Bruno’s Supermarkets is a prominent food retailer in the Southeastern USA with 184 stores (of which 169 are supermarkets) operating under various banners in Alabama, Florida, Mississippi, and Georgia. Ahold will also be acquiring an affiliated company, Bruno’s, Inc., which holds seven parcels of property that are leased to Bruno’s Supermarkets. Bruno’s Supermarkets fiscal 2000 net sales amounted to approximately USD 1.65 billion. On a combined basis with Bruno’s, Inc., its fiscal 2000 EBITDA totaled approximately USD 60 million.
*** Financial details of transactions To acquire Bruno’s Supermarkets and Bruno’s, Inc., Ahold will pay USD 500 million, although the purchase price is subject to adjustments based on the stockholders’ equity of Bruno’s Supermarkets and Bruno’s, Inc. at the time of closing.
*** Ahold in the United States Overall sales in 2000 from Ahold’s food retail and foodservice activities in the United States amounted to approximately USD 27.8 billion. 11. USF Announces Acquisition of Alliant Foods
590. On September 4, 2001, Ahold issued a second press release (the “Second September 4,
2001 Press Release”), announcing the Company’s agreement to purchase Alliant Foodservice through
USF. In pertinent part, Ahold stated:
Zaandam, The Netherlands, September 4, 2001 – Ahold, the food retail and foodservice company, today announced it has entered into an agreement through its wholly-owned subsidiary U.S. Foodservice to acquire all outstanding shares of Alliant Exchange, Inc., the parent company of Alliant Foodservice Inc. (“Alliant”). Alliant is a leading foodservice operator in the United States with fiscal 2000 net sales of approximately USD 6.6 billion and EBITDA of approximately USD 174 million.
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The acquisition of Alliant will add 17 large U.S. cities to Ahold’s current service range. After completion of the transaction, Ahold’s foodservice activities should be able to serve approximately 95% of the U.S. population. Significant synergy benefits Ahold expects that synergies and cost savings in the year following closing of the transaction will amount to USD 70 million increasing to USD 120 million in the third year of full operation. Ahold anticipates achieving operational synergies in a number of areas including procurement, marketing, IT, private label development, logistics and distribution.
591. According to the Second September 4, 2001 Press Release, defendant Miller stated:
The planned acquisition of Alliant goes hand- in-glove with our growth strategy … Alliant’s position in the healthcare and lodging sectors and its advanced distribution network strategy complements the place U.S. Foodservice holds in institutional and restaurant distribution. By expanding our geographic scope, we should become a key player in 15 new states. Furthermore, Alliant’s business-to-business e-commerce platform complements other ongoing initiatives within U.S. Foodservice.
592. The Second September 4, 2001 Press Release contained the following materially false
and misleading statements and omissions of material fact:
Ahold in the United States Ahold has been active in the United States since 1977. With five retail operating companies – Stop & Shop, Giant-Landover, Giant-Carlisle, Tops and BI-LO – Ahold currently operates almost 1,400 stores, of which 1,050 are supermarkets, along the eastern seaboard. In 2000, Ahold put its multi-channel strategy into practice by acquiring U.S. Foodservice and its former sister company PYA/Monarch. Overall sales in 2000 from Ahold’s food retail and foodservice activities in the United States amounted to approximately USD 27.8 billion.
593. On September 4, 2001 the Company filed a Form 6-K with the SEC, signed by defendant
Van der Hoeven, which attached as an exhibit the First and Second September 4, 2001 Press Releases
concerning Ahold’s acquisition of Bruno’s and Alliant Foods.
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594. Each of the statements made from April 2001 through September 2001 concerning
and/or the Company’s internal controls, was false and misleading when issued. The true but concealed
and/or misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2001 was artificially inflated by EUR 215 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
b. Ahold’s reported revenues during fiscal 2001 were materially overstated by EUR 80 million due to the failure to attribute appropriately earned vendor allowances to the “cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. The USF net income that Ahold reported during fiscal 2001 was materially overstated by $260 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $260 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
d. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2000 and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
e. Defendants’ statements during fiscal 2001 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, among other things: Ahold’s 2000 Annual Report; the March 6, 2001 Press Release -- in which Van der Hoeven stated: “[t]he Ahold advantage is that we have a superb track record of integrating companies very successful;” and the Second April 9, 2001 Press Release; were materially false and misleading because, inter alia:
(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations
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conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii)Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
f. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
g. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2001 were overstated by $12.20 billion due to the improper consolidation of these joint ventures;
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h. By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
i. At no time during fiscal 2001 did Ahold own the requisite interest in JMR, DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures;
j. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
12. The September 2001 Global Offering
595. To finance USF’s acquisition of Alliant Foodservice, Inc. and Ahold’s acquisition of
Bruno’s Supermarket, on September 5, 2001, Ahold filed a supplemental prospectus (“the September
2001 Prospectus Supplement” or “2001 Global Offering Registration Statement”) with the SEC in
connection with the global offering of 70,000,000 common shares and American Depository Shares
(ADS”) (The “September 2001 Global Offering”).
596. In connection with the September 2001 Global Offering, each ADS represented the right
to receive one common share. The price for the common shares and ADSs offered in the September
2001 Global Offering was €31.90 per common share, which equated to $28.38 per ADS.
597. As set forth in the September 2001 Prospectus Supplement, the underwriters for the
September 2001 Global Offering and their respective allotment of shares was:
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Underwriter Number of Common Shares ABN AMRO Rothschild ................................ 21,000,010 Goldman Sachs International......................... 21,000,000 Merrill Lynch International............................ 21,000,000 ING Barings ................................................... 2,333,330 Kempen & Co. ............................................... 2,333,330 Rabo Securities .............................................. 2,333,330 Total ............................................................... 70,000,000
598. In connection with the September 2001 Global Offering, the Underwriters were entitled
to exercise, and in fact did exercise, a “green shoe” option entitling the Underwriter Defendants to
purchase up to 10,500,000 additional.
599. For their participation in the September 2001 Global Offering, the Underwriter
Defendants received an aggregate underwriting commission of €49,000,000.
600. The September 2001 Prospectus Supplement filed with the SEC in connection with the
September 2001 Global Offering incorporated the following documents by reference:
• Ahold’s annual report of Form 20-F for the fiscal year ended December 31, 2000 (which contained the Company’s financial statements audited by Deloitte and Deloitte’s aud it opinion assuring the veracity of the Company’s financial statements);
• Ahold’s reports on Form 6-K dated January 3, 2001 (announcing the acquisition of PYA/Monarch), January 25, 2001, January 26, 2001, February 21, 2001 (announcing the acquisition of supermarkets from Grand Union and the acquisition of Parkway Foodservice), April 3, 2001, April 4, 2001, April 9, 2001, June 13, 2001, July 2, 2001, July 9, 2001 July 16, 2001, August 24, 2001 and September 4, 2001 (two reports).
601. The September 2001 Prospectus Supplement disseminated in connection with the
September 2001 Global Offering contained the following untrue statement of material fact regarding the
results of Ahold’s operations:
We are one of the largest and most internationally diverse food providing groups worldwide, with net sales of EUR 34.3 billion in the first half of fiscal 2001, EUR 52.5 billion in fiscal 2000 and EUR 33.6 billion in fiscal 1999.
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602. Moreover, concerning Ahold’s net sales for certain geographic regions in 2000, 1999,
and 1998, the September 2001 Prospectus Supplement contained the following untrue statements and
omissions of material fact:
The following table sets out, for the periods indicated, our net sales by business segment and geographic region: Net Sales By Business Segment/Geographic Region
Fiscal Year 2000 1999 1998 (S) (EUR) (%) (EUR) (%) (EUR) (%) Retail trade: (in millions, except percentages) United States (including sales to franchise stores) (1)............................ 21,796 23,703 45 19,126 57 14,503 55 Europe (including sales to franchise and associated stores)......................... 14,576 15,466 29 9,867 30 9,051 34 Latin America .................................... 4,789 5,082 10 3,497 10 2,116 8 Asia Pacific ........................................ 378 402 1 476 1 410 2 Total retail trade ................................. 41,539 44,653 85 32,966 98 26,080 99 Foodservice: United States (1)................................. 5,952 6,649 13 Europe ................................................ 1,041 1,105 2 553 2 365 1 Total foodservice................................ 6,993 7,754 15 553 2 365 1 Other activities ................................... 60 64 41 39 Total ................................................... 48,592 52,471 100 33,560 100 26,484 100 (1) The dollar amount for fiscal 2000 represents the actual amount before conversion into euros and was $20,333 million in fiscal 1999 and $16,174 million in fiscal 1998 for retail trade.
603. In the September 2001 Prospectus Supplement disseminated in connection with the
September 2001 Global Offering, Ahold made the following untrue statements and /or omissions of
material facts concerning its overall retail trade operations:
Our retail trade operations had net sales of approximately EUR 26.7 billion in the first half of fiscal 2001, EUR 44.7 billion in fiscal 2000, EUR 33.0 billion in fiscal 1999 and EUR 26.1 billion in fiscal 1998 and operating results of approximately EUR 1.1 billion in the first half of
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fiscal 2001, EUR 1.8 billion in fiscal 2000, EUR 1.4 billion in fiscal 1999 and EUR 0.9 billion in fiscal 1998.
604. Furthermore, the September 2001 Prospectus Supplement contained the following untrue
statements of material fact concerning Ahold’s global foodservice operations:
Our foodservice operations had net sales of approximately EUR 7.6 billion in the first half of fiscal 2001. EUR 7.8 billion in fiscal 2000, EUR 0.6 billion in fiscal 1999 and EUR 0.4 billion in fiscal 1998, and operating results of approximately EUR 244.8 million in the first half of fiscal 2001, EUR 294 million in fiscal 2000, EUR 15 million in fiscal 1999 and EUR 8 million in fiscal 1998.
605. The September 2001 Prospectus Supplement also made the following untrue statement of
material fact: “[i]n fiscal 2000 U.S. Foodservice had net sales of approximately $7.8 billion, excluding
any net sales of PYA/Monarch.”
606. The September 2001 Prospectus Supplement disseminated in connection with the
September 2001 Global Offering contained a section entitled, “Selected Financial Information of Royal
Ahold,” the introductory paragraphs of which contained the following untrue statements and omissions
of material fact:
We derived the annual selected consolidated financial data presented below from our audited consolidated financial statements. We derived the selected consolidated financial data presented below for the first half of fiscal 2001 and the first half of fiscal 2000 from our unaudited interim financial information which, in the opinion or our management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. The operating results for the first half of fiscal 2001 are necessarily indicative of the operating results for the full fiscal year 2001. Our consolidated financial statements and the interim financial information have been prepared in accordance with Dutch GAAP.
*** You should read the following selected consolidated financial data presented below together with our audited consolidated financial statements and the related notes included in our annual report on Form 20-F for the fiscal year ended December 31, 2000 and our unaudited financial
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information included in our report on Form 6-K dated September 4, 2001, both of which are incorporated by reference in this prospectus supplement and the attached prospectus.
607. The September 2001 Prospectus Supplement section entitled, “Selected Financial
Information of Royal Ahold” contained the following table, which set forth untrue statements of
material fact concerning the Company’s net sales and net income:
Earnings per common share (ADS) (before goodwill amortization) (1) ................................. 0.75 0.82 0.69 1.38 1.50 1.14 0.91 0.76 0.61Diluted earnings per common share (ADS) (2)................................... 0.68 0.75 0.69 1.38 1.49 1.13 0.90 0.76 0.61Cash dividends per common share (ADS).................................................... 0.67 0.73 0.66 1.38 1.44 1.11 0.86 0.75 0.60Approximate amounts in accordance with U.S. GAAP ............ 0.20 0.22 0.18 0.57 0.63 0.49 0.39 0.33 0.26
Net earnings......................................... N/A N/A N/A 739 811 586 398 323 235 Earnings per common share (ADS) (1).............................................. N/A N/A N/A 0.99 1.09 0.88 0.65 0.58 0.50Diluted earnings per common share (2) ................................................ N/A N/A N/A 0.98 1.07 0.87 0.65 0.57 0.49
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608. Regarding the operative documents pursuant to which the September 2001 Global
Offering was made, the September 2001 Prospectus Supplement represented:
Offers and sales of common shares and ADSs in the United States are being made pursuant to this prospectus supplement and the attached prospectus which constitutes part of certain Registration Statements on Form F-3 that we filed with the United States Securities and Exchange Commission under the Securities Act. Offers and sales of common shares and ADSs outside the United States are being made pursuant to this prospectus supplement and the attached prospectus pursuant to Regulation S under the Securities Act and not pursuant to the Registration Statements. This prospectus supplement and the attached prospectus also may be used by underwriters and dealers in connection with offers and sales to persons located in the United States of such securities initially offered and sold outside the United States.
609. In addition, the September 2001 Prospectus Supplement informed investors that Deloitte
audited the financial information set forth therein:
Our consolidated financial statements as of December 31, 2000 and January 2, 2000 and for each of the fiscal years in the three-year period ended December 31, 200 incorporated in this prospectus supplement and the attached prospectus by reference from our annual report on From 20-F for the fiscal year ended December 31, 2000 have been audited by Deloitte & Touche, Accountants, independent auditors, as stated in their report, which is incorporated by reference in this prospectus supplement and the attached prospectus, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
610. The September 2001 Prospectus Supplement attached a prospectus dated December 29,
2000 (the “December 29, 2000 Prospectus”) that was part of a “shelf” registration statement that Ahold
filed with the SEC on December 29, 2000 (the “December 29, 2000 Registration Statement”).
611. The September 2001 Prospectus Supplement disseminated in connection with the
September 2001 Global Offering constituted the first supplement to the December 29, 2000 Prospectus
and the September 2001 Global Offering was the first offering of securities that Ahold made in
connection with the December 29, 2000 Registration Statement.
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612. The September 2001 Prospectus Supplement incorporated the December 29, 2000
Prospectus and the December 29, 2000 Registration Statement by reference such that the representations
made respectively therein were representations made in connection with the September 2001 Global
Offering. In this regard, the December 29, 2000 Prospectus stated:
This prospectus provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of the securities. The prospectus supplement may also add to our update or change information contained in this prospectus. You should read both this prospectus and any prospectus supplement together ….
613. Concerning the documents to be incorporated by reference into the December 29, 2000
Prospectus and the December 29, 2000 Registration Statement, the December 29, 2000 Prospectus,
stated, among other things that the following materials would be incorporated by reference:
any future Reports on Form 6-K that indicate they are incorporated into this registration statement and any future Annual Reports on Form 20-F that Royal Ahold may file with the SEC under the Securities Exchange Act of 1934 until Royal Ahold and Ahold Finance U.S.A., Inc. (“Ahold Finance”) sell all of the securities that may be offered through this prospectus.
614. Concerning information in the December 29, 2000 Prospectus and the September 2001
Prospectus Supplement, the December 29, 2000 Prospectus provided:
You should rely only on the information incorporated by reference or provided in this prospectus or in any prospectus supplement. We have not authorized anyone to provide you with different information. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents.
615. The December 29, 2000 Prospectus contained the following table which purportedly
depicted Ahold’s ratio of earning to fixed charges:
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616. The December 29, 2000 Prospectus informed investors that Deloitte audited the financial
information set forth therein:
Royal Ahold’s consolidated financial statements as of January 2, 2000 and January 3, 1999 and for each of the fiscal years in the three-year period ended January 2, 2000 incorporated by reference from Royal Ahold’s annual report on Form 20-F for the fiscal year ended January 2, 2000 have been audited by Deloitte & Touche, Accountants, independent auditors, as stated in their report, which is incorporated herein by reference and have been so incorporated in reliance upon the report of such firm given upon the authority of the firm as experts in auditing and accounting.
617. On September 13, 2001, Ahold filed a report on Form 6-K attaching a copy of the
Underwriting Agreement and a separate Terms Agreement dated September 5, 2001 in connection with
the September 2001 Global Offering. The stated purpose of the September 13, 2001 Form 6-K was to
place the Underwriting Agreement and the Terms Agreement on file as an exhibit to the December 29,
2000 Registration Statement.
618. Defendant Meurs signed the September 13, 2001 Form 6-K filed with the SEC, which
attached the September 5, 2001 Underwriting Agreement and Terms Agreement as an exhibit to the
December 29, 2000 Registration Statement.
619. Among other things, Section 2(a) of the Underwriting Agreement provided that any
exhibits or prospectuses filed after the December 29, 2000 Registration Statement became effective
would become part of the Registration Statement in connection with which the parties entered into the
September 5, 2001 Underwriting Agreement.
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620. Section 2(b) of the Underwriting Agreement, which was made an exhibit to the
December 29, 2000 Registration Statement, explicitly provided, among other things, that as of
September 5, 2001, the December 29, 2000 Registration Statement, the December 29, 2000 Prospectus,
and the September 2001 Prospectus Supplement would not include any untrue statement of a material
fact and would not omit to state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
621. The Terms Agreement, which was included as “Annex A” to the September 5, 2001
Underwriting Agreement, and thus was made an exhibit to the December 29, 2000 Registration
Statement pursuant to Ahold’s September 13, 2001 Form 6-K, contained a Schedule I, which set forth
the number of shares that each of the Underwriter Defendants would receive in connection with the
September 2001 Global Offering. As reflected in the September 2001 Prospectus Supplement, Schedule
I to the Terms Agreement provided:
Underwriter Number of Common Shares ABN AMRO Rothschild ................................ 21,000,010 Goldman Sachs International......................... 21,000,000 Merrill Lynch International............................ 21,000,000 ING Barings ................................................... 2,333,330 Kempen & Co. ............................................... 2,333,330 Rabo Securities .............................................. 2,333,330 Total ............................................................... 70,000,000
622. On September 6, 2001, the Company issued a press release entitled, “Issue Price of New
Ahold Shares Set at Euro 31.90.” In this press release Ahold stated:
Zaandam, The Netherlands, September 6, 2001 - Ahold, the international food retail and foodservice company, today announced that the subscription for the equity offering of its new common shares issue closed last night ahead of schedule. The total proceeds of the offering will amount to approximately Euro 2.2 billion, excluding the 15% option granted to the underwriter. Ahold will use the net proceeds to partially finance the proposed acquisitions of
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Alliant Foodservice, Inc. and Bruno’s Supermarkets, Inc. Price per common share set at Euro 31.90 The offering price per common share has been set at Euro 31.90 and per ADS at USD 28.38. The closing price of the Ahold shares on Euronext Amsterdam on September 5, 2001 was Euro 32.03 and the closing price of the Ahold ADSs on the NYSE was USD 28.52. Ahold will issue 70 million new common shares for a total value of approximately Euro 2.2 billion, excluding the underwriter’s option. Listing and prospectus supplement The new common shares are expected to be listed on the stock markets of Amsterdam, New York (in the form of ADSs) and Zurich effective September 11, 2001. After the offering, the company will have approximately 902 million common shares outstanding, excluding the underwriter’s option. For the purpose of the public offering of the ADSs in the United States, a prospectus supplement to the prospectus included in the shelf registration statement already on file with the U.S. Securities and Exchange Commission (“SEC”) is expected to be filed with the SEC on September 6, 2001. The prospectus supplement (including the documents incorporated by reference therein) and the related prospectus will be available at Ahold’s corporate headquarters in Zaandam, The Netherlands, and on the Ahold website (www.ahold.com), on or about the time of filing of the prospectus supplement with the SEC. ABN AMRO Rothschild, Goldman Sachs International and Merrill Lynch International were joint global coordinators and joint bookrunners for the offering. ING Barings, Kempen & Co. and Rabo Securities acted as co-managers.
623. The September 2001 Global Offering of Ahold common shares and ADRs was reportedly
more that two times oversubscribed. According to a September 6, 2001 article published by Dow Jones
International News, Ahold’s offering was so successful that “[w]ithin 24 hours, 70 million shares were
placed at €31.90 each [$28.38 USD], despite weak market conditions.” This article further reported that
during a press conference held in connection with the offering, defendant Meurs stated: “[w]e could
almost allocate the pricing ourselves. On the basis of Wednesday’s closing price we could determine
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ourselves the discount we wanted to give.” According to the Dow Jones International News story, 25%
of the shares in this offering were allocated to American investors, 25% to investors in the Netherlands,
25% to investors in the U.K., and 5% to investors located in Switzerland, France, and Germany,
respectively.
624. In connection with the September 2001 Global Offering, the Underwriter Defendants
exercised their “Green Shoe” option, which entitled these banks to request that Ahold issue another 15%
of the total shares offered. Based upon the demand for the shares in this offering, the Underwriter
Defendants exercised the “Green Shoe” the day after the offering was priced. According to the
Underwriting Agreement, the banks had a period of 30 days to determine whether to exercise the “Green
Shoe.”
625. The statements made in connection with the September 2001 Global Offering concerning
Ahold’s fiscal 1998, 1998, 2000 and/or 2001 financial results were materially false and misleading when
issued. The true but concealed and/or misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2001 was artificially inflated by EUR 215 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
b. Ahold’s reported revenues during fiscal 2001 were materially overstated by EUR 80 million due to the failure to attribute appropriately earned vendor allowances to the “cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. The USF net income that Ahold reported during 200 and 2001 was materially overstated by $110 million and $260 million, respectively by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $260 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated;”
d. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal
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2000 and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
e. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001;
f. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2001 were overstated by $12.20 billion due to the improper consolidation of these joint ventures;
g. By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
h. At no time during fiscal 2001 did Ahold own the requisite interest in JMR, DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
i. Ahold’s reported financ ial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
13. Paiz Ahold Expands
626. On November 2, 2001, Ahold issued a press release (the “November 2, 2001 Press
Release”) touting certain business developments involving the Company’s Paiz Ahold joint venture.
The Company stated in pertinent part:
Guatemala, Costa Rica, The Netherlands, November 2, 2001 – Paiz Ahold, the successful 50/50 joint venture of food retailers La Fragua
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and Ahold in Guatemala, El Salvador and Honduras, has signed an agreement with Costa Rican supermarket and hypermarket company CSU to form a new joint venture. The new joint venture will bring together all of their operations in the Central American region. Contracts were signed today. Each of the partner companies – Ahold, Paiz and CSU – will effectively have a one-third stake in the new venture. Guatemala, Costa Rica, The Netherlands, November 2, 2001 – Paiz Ahold, the successful 50/50 joint venture of food retailers La Fragua and Ahold in Guatemala, El Salvador and Honduras, has signed an agreement with Costa Rican supermarket and hypermarket company CSU to form a new joint venture. The new joint venture will bring together all of their operations in the Central American region. Contracts were signed today. Each of the partner companies – Ahold, Paiz and CSU – will effectively have a one-third stake in the new venture.
627. On November 15, 2001, Ahold announced in a press release (the “November 15, 2001
Press Release”) that it was prepared to complete the acquisition of Alliant. In this press release,
defendant Van der Hoeven made the following statements regarding the September 2001 Global
Offering:
In a brief comment, Ahold President & CEO Cees Van der Hoeven expressed his satisfaction at the expiration of the waiting period. ‘We can now rapidly proceed with the completion of the Alliant transaction. To partially finance the transaction, we raised Euro 2.57 billion (approximately USD 2.4 billion) in a highly-successful accelerated stock offering announced September 4, 2001, that was fully subscribed within 24 hours. The amount also partially covers financing of the pending acquisition of Bruno’s Supermarkets, Inc.’ Bruno’s has sales of approximately USD 1.65 billion. Van der Hoeven said that the earlier closing of the Alliant transaction means ‘we will be able to incorporate Alliant’s December 2001 results in our full-year consolidated numbers. For our business, December is one of the strongest months of the year.’
628. On December 6, 2001 the Company filed a Form 6-K with the SEC, signed by defendant
Van der Hoeven, which attached as exhibits the November 2, 2001 Press Release and the November 15,
2001 Press Release.
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14. Ahold Wins Dutch Investor Relations Prize
629. Demonstrating, among other things, that Ahold’s false and misleading statements and
omissions of material fact were unknown to investors, on November 16, 2001, the Company issued a
Relations Award.” In the November 16, 2001 Press Release, Ahold stated in pertinent part:
Zaandam, The Netherlands, November 16, 2001 – Ahold has again been awarded the annual Dutch Investor Relations Prize. The food retail and foodservice company was chosen from among the 25 companies listed on the Amsterdam Exchanges (AEX) based on the results of a wide-ranging survey of four key target groups within the investment community in The Netherlands. The 2001 survey canvassed almost 300 portfolio managers, retail investors, financial media and investment analysts and advisors. Ahold scored an average of 9 out of 10, the highest investor relations (IR) score ever recorded by each target group. This year marks the 7th time Ahold has won the award in the 12 years the survey has been conducted. The survey was compiled earlier in the year by the authoritative Dutch research bureau Rematch. The AEX stock- listed companies were assessed on a range of key criteria including credibility, clarity, transparency and timeliness of financial reporting. In addition to IR perception, the Ahold website (www.ahold.com) and its annual report were also highly regarded by respondents, particularly in terms of readability, design and informative character. 15. Ahold Announces Results for the Third Quarter of 2001
630. On November 27, 2001, Ahold issued a press release (the “November 27, 2001 Press
Release”) announcing its financial results for the third quarter of fiscal 2001. In the November 27, 2001
Press Release, Ahold made the following materially false and misleading statements and omissions of
material fact:
Highlights • Net earnings 3rd quarter rise 28.3% to Euro 333.1 million • Sales rise 12.6% to Euro 15.5 billion • Operating earnings increase 21.7% to Euro 667.2 million
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• Earnings per share increase by 14.6% to Euro 0.38 (+16.1% excluding currency impact)
• Confirmation of 15% EPS growth for full-year 2001 excl. currency impact, goodwill amortization and exceptional charge
Consolidated statement of earnings of Royal Ahold Zaandam, The Netherlands, November 27, 2001 – Ahold, the international food provider, achieved third quarter (12 weeks from July 16 through October 7) 2001 net earnings of Euro 333.1 million, an increase of 28.3% (2000: Euro 259.6 million). Sales in the quarter rose 12.6% to Euro 15.5 billion and operating earnings increased by 21.7% to Euro 667.2 million. Net earnings after goodwill amortization amounted to Euro 304.2 million. Earnings per common share for the quarter rose 14.6% to Euro 0.38 (2000: Euro 0.33). Excluding currency fluctuations, specifically the effect of the slightly lower average exchange rate of the U.S. dollar, the Swedish Krona and the Brazilian Real, earnings per common share grew 16.1%.
631. According to the November 27, 2001 Press Release, defendant Van der Hoeven made the
following materially false and misleading statements and omissions of material fact:
With an organic sales growth of 6.4% and an organic operating earnings growth of 16.4% our company proved its capability to also perform well in somewhat weakened economic conditions. Particularly in the United States retail and foodservice achieved very good results. In Europe results were also solid. Notwithstanding difficult circumstances our Latin American operations performed well. We gained market share practically everywhere, while simultaneously achieving strongly improved operating margins.
632. The November 27, 2001 Press Release also set forth the following materially false and
misleading statements and omissions of material fact:
Van der Hoeven said Ahold delivered its 23rd consecutive quarter of double-digit earnings per share growth. He expressed satisfaction at the substantial synergies achieved worldwide and within the regions. He commented on the earlier announced U.S. acquisitions of Alliant Foodservice and Bruno’s Supermarkets and on the joint venture with CSU in Central America: “We are very pleased about the prospect of completing these transactions in such a short time-frame. The companies
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will be contributing to our full-year 2002 results.”
*** Ahold 3rd quarter and year-to-date 2001 results, compared to 2000 Sales and results in the third quarter were negatively impacted by lower average exchange rates of the U.S. dollar (USD 0.90 vs USD 0.89), the Swedish Krona (SEK 9.5 vs SEK 8.4) and the Brazilian Real (BRL 2.3 vs BRL 1.6). Consolidated sales increased by 12.6% to Euro 15.5 billion. Operational cash flow (EBITDA) increased by 23.1% to Euro 1,024.6 million. Operating earnings before goodwill amortization (EBITA) increased by 21.7% to Euro 667.2 million. Excluding currency impact, organic sales growth increased by 6.4% and organic operating earnings by 16.4%. Earnings per share before goodwill amortization increased by 14.6% to Euro 0.38; excluding currency impact this increase amounted to 16.1%. United States (Food retail) Retail sales in the United States increased by 6.6% to USD 5.4 billion. Starting 2001, Ahold USA is using a different definition of net sales; using the previous definition, retail sales growth would have amounted to 11%. Organic sales growth increased by 7.0%. Comparable sales increased by 3.8% and identical sales by 3.4%. This sales increase reflects positive identical growth at Stop & Shop, Giant Landover, Giant Carlisle and Tops. Operating earnings increased by 27.2% to USD 295.5 million. This sharp improvement mainly reflects an improved operating margin due to excellent cost control and synergies. The Grand Union stores, converted during the first six months, also contributed to improved results. Internet grocer Peapod had operating losses of USD 11.0 million (2000: loss of USD 10 million). Operating earnings, excluding Peapod, amounted to 5.7% of sales (2000: 4.8%). United States (Foodservice)
3rd Quarter First Three Quarters
x 1 million USD 2001 2000 Change in %
2001 2000 Change in %
Sales 2,805.6 2,015.9 39.2 8,994.5 3,754.5 139.6
Operating earnings
113.3 81.9 38.3 357.9 158.5 125.8
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At U.S. Foodservice sales increased by 39.2% to USD 2.8 billion, mainly reflecting the acquisition at year-end 2000 of PYA/Monarch, and to a lesser extent due to the Mutual and Parkway acquisitions this year. Organic sales growth amounted to 9.0%. After September 11 events organic sales growth was around 7%. The operating earnings of U.S. Foodservice increased by 38.3% to USD 113.3 million. This increase reflects the good performance of U.S. Foodservice, the three acquisitions and the accompanying synergies and cost savings. The operational margin amounted to 4.0% (2000: 4.1%). This slightly lower margin reflects the consolidation of PYA/Monarch. The full-year margin is expected to be equal to last year. Europe In Europe sales increased by 15.7% to Euro 5.2 billion, specifically as a result of the year-end 2000 acquisition of the Spanish supermarket company Superdiplo. All European companies generated higher sales. Organic sales growth in Europe amounted to 6.3%. In The Netherlands sales increased, primarily due to the acquisition of A&P stores by Schuitema, and organic sales growth of the C1000 stores. Albert Heijn, Deli XL and the specialty stores also improved sales. Sales at ICA Ahold in Scandinavia increased. The opening of new stores in the Czech Republic led to a very strong sales growth. Operating earnings in Europe increased by 15.2% to Euro 186.8 million. The increase can partly be attributed to the acquisition of Superdiplo in Spain. All Dutch operations had a solid performance. ICA-Ahold in Scandinavia also contributed to improved results, despite the lower exchange rate. Operating earnings in Portugal were lower due to lower margins and higher expenses. Latin America At Euro 1.2 billion, sales in Latin America were 11.5% lower than in 2000. Organic sales decreased by 1.3%. The sales decline expressed in Euros was mostly the result of strong devaluation of the Brazilian Real. Although sales at Disco in Argentina were lower than last year reflecting the economic recession, market share of Disco increased. Bompreço in Brazil, Santa Isabel in Chile and La Fragua in Guatemala generated higher sales in local currencies despite a difficult economic environment. Operating earnings of Euro 42.8 million were lower than last year, partially the result of lower earnings at Bompreço and reflecting the
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devaluation of the Brazilian Real. La Fragua in Guatemala generated higher results and earnings of Disco in Argentina stayed at about the same level. Santa Isabel improved its results but remained slightly negative.
*** Confirmation full-year 2001 outlook The Ahold Corporate Executive Board maintains its expectation that sales and operating earnings will improve, reflecting organic growth and contributions from acquisitions. Net earnings are expected to be sharply higher than last year. Earnings per common share for full-year 2001 are expected to rise by 15%, excluding currency impact and goodwill amortization and before the exceptional charge related to the Alliant acquisition.
633. On December 6, 2001, the Company filed a Form 6-K (the “December 9, 2001 Form 6-
K”) which attached as an exhibit the November 27, 2001 Press Release. Defendant Van der Hoeven
signed the December 6, 2001 Form 6-K.
16. Ahold Named “Mass Marketer of the Year”
634. Demonstrating, yet again, that innocent investors were unaware of defendants’ fraudulent
scheme to artificially inflate Ahold’s financial results, on December 13, 2001, Ahold issued a press
release announcing that the Company had been named U.S. Mass Marketer of the Year by the Mass
Market Retailers trade publication in the United States. Commenting on the Company’s receipt of this
recognition, defendant Van der Hoeven made the following materially false and misleading statements
and omissions of material fact:
We just delivered our 23rd consecutive quarter of double digit earnings per share growth and reconfirmed Ahold’s full-year 2001 outlook. Our company stays on track and we continue to deliver on our promises. This recognition is directly related to the quality of our 450,000 associates worldwide, who make sure that our customers return to our stores every week and that new ones are attracted. Our associates are the motor behind our considerable organic growth. It is a pleasure to lead this company and to meet our targets year after year.”
***
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In the United States, its largest market, Ahold owns and operates six prominent supermarket companies under the names of Tops, Stop & Shop, Giant (Carlisle), Giant (Landover), BI-LO and Bruno’s. Together the U.S. food retail companies operate 1,600 supermarkets with annualized sales totaling approximately USD 24 billion. In addition, Ahold owns the rapidly-growing American food service companies U.S. Foodservice, PYA/Monarch and Alliant Foodservice. The foodservice companies look after the food needs of the out-of-home consumption markets, including restaurants, hotels, schools, company cafeterias, government facilities and the diversified health care sector, in which Alliant plays a prominent role and offers unique expertise. Ahold annualized foodservice sales in the U.S. total approximately USD 19 billion. Together with sales from the retail activities, this makes Ahold USA a USD 43 billion operation. 17. Analysts Embrace The Defendants’ False and Misleading Statements
635. During the time period from January 1, 2001 through December 31, 2001, analysts
closely followed the defendants’ public statements and announcements in connection with reporting
Company developments to investors. Analysts routinely relied on and repeated the defendants’
materially false and misleading statements, using such statements as the basis for their reports:
• On January 8, 2001, Schroder Salomon Smith Barney issued a report on
Royal Ahold. The report provided in pertinent part:
• Sales up 55.7% to €52.2 billion, slightly above our forecast and consensus estimates
* * *
Overall sales for 2000 rose by 55.7%, to reach €2 billion. This was slightly above our forecast – we had underestimated growth in the US and Europe, but had been a little too optimistic about Latin American growth. Consensus had been lower at €9 billion, so the results can be said to have exceeded most expectations. The strong growth was driven by acquisitions (particularly those of US Foodservice and ICA) and favourable currency movements (particularly the euro’s weakness against the US dollar). Organic growth (ie stripping
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out the impact of currency movements and acquisitions) was 6.3% for 2000.
• On March 12, 2001, Credit Suisse First Boston issued a report on Royal
Ahold. It rated Royal Ahold a “Buy,” and discussed the feedback from
Ahold USA after the analyst/investor day hosted by Royal Ahold in New
York City on March 8, 2001. The report stated:
Ahold showcased its US retai l and foodservice businesses in New York last week. Coming just three days after the 2000 results, most minds were still focused on the detail of the numbers and the debate over the outlook for 2001. However, the presentations centered more on the long-term strategic opportunity afforded by having a significant retail/foodservice presence in the US. In US retail, management clearly believes it has substantial potential – not just to achieve the 2%-3% comparable/6%-8% autonomous sales growth and 15% EBIT growth targets, but also for significant longer-term margin expansion. Ahold USA has ambitious plans, particularly for central procurement and cost reduction that, if achieved, it claims could deliver a whole extra percentage point of margin than we are currently estimating. In Foodservice, Ahold has an opportunity to expand both organically and by acquisition in a huge, growing, but fragmented market in which it is one of only two large players. We think that many observers are only just beginning to fully understand the secular growth of the foodservice industry and Ahold’s potential for cross-discipline synergies. We remain bullish on both of Ahold’s US businesses. In the short-term, there is no evidence that either food retail or foodservice is slowing as some observers have predicted. In the longer-term, Foodservice offers huge top-line growth potential, while they both offer a margin growth opportunity not possible to the same degree in Europe. With Ahold trading on less than 7x 2001E EV/EBITDA, we do not think this potential is yet reflected in the rating. Buy.
• On March 19, 2001, Lehman Brothers issued a very positive report on
Royal Ahold. It rated Royal Ahold a “1 – Strong Buy,” with a generous
price target of €49.00. The report also stated:
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Ahold’s visit to the US has improved our view of the company’s prospects in this country, as USFS demonstrates superior growth prospects, which we believe should improve valuation.
The Ahold US and European analysts’ meeting involved spending several days in conferences and visiting stores and the operations of USFS. We emerged from these meetings with a very positive view of Ahold’s organic growth prospects, which we believe should accelerate EBIT growth from 10-12% to 14-15% with the inclusion of USFS and other initiatives to improve margins. Ahold deserves a higher multiple rating than it currently has right now, thus we reiterate our 1-Strong Buy recommendation
• On September 4, 2001, Schroder Salomon Smith Barney issued a report
on Royal Ahold. It rated Royal Ahold a “Buy, Medium Risk,” with a
price target of €40.00. The report provided in pertinent part:
We remain firm long-term buyers of Ahold for three reasons.
It is the best integrator of acquisitions in the sector, in our view. The requisite management skills are rare and valuable, as evidenced by problems elsewhere. Ahold is a massively underestimated retailed in its own right. It has world- leading skills in its operating companies, which are being shared amongst its division by its own distribution centre. We remain firm fans of the move into foodservice – a growth industry, with rising margins and case generation. Ahold is leading the consolidation and is creating barriers to entry.
• On October 24, 2001, Morgan Stanley issued a report on Royal Ahold. It
rated Royal Ahold “Outperform,” with a price target of $34.00. The
report further provided:
Jim Miller, CEO of USF (Ahold’s Foodservice division) Gave An Upbeat Presentation On Ahold’s Foodservice Outlook on October 23, 2001 in New York, indicating 10% minimum annual sales growth.
* * *
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Foodservice Growth Strategy Mr. Miller indicated that accounts that are independently owned (e.g., street accounts) yield roughly 6-7% EBIT versus chains which tend to yield 2-3% EBIT. Consequently, AHO’s goal is to increase higher margin street account sales (which made up 53% of sales in FY 1996 and 56% of sales in FY 2000) at a faster rate than chain account sales, with an ultimate target of 65% of sales. USF currently captures only 25-30% of its street customers’ purchases on average, versus 95% of its chain customers’ purchases.
* * * Maintain Outperform: In addition to the Alliant acquisition, we expect Ahold’s US operations will continue to benefit from the acquisition of Bruno’s, strong organic growth, benefiting from expansion (5% square footage growth), healthy idents (2-4%), improving operating margins as AHO continues to benefit from best practices. We also believe Ahold will benefit from its geographic diversity, particularly strong execution in the U.S., and solid growth prospects. We expect USF to generate strong organic growth as well as benefit from synergies from its recent acquisitions. AHO’s weak spots include working capital and a few relatively small geographic areas (Latin America, Poland, Czech Republic, Asia). At 15.3 times our 2002 estimate, a 30% discount to the market, we continue to view shares of AHO as attractive and we maintain our Outperform rating. 18. Additional SEC Filings That Certain Individual Defendants Signed
636. In addition to the foregoing 2001 statement s, certain Individual Defendants signed the
following documents that were filed with the SEC and incorporated, either directly or by reference,
various materially false and misleading statements relating to the Company’s financial performance
during the Class Period:
4/6/01 Form 6-K (containing false and misleading 1999 and 2000 financial results for Ahold), signed by Van der Hoeven; 5/18/01 Form 6-K (containing false and misleading 2000 financial results for Ahold), signed by Van der Hoeven; 8/17/01 Form F-4 and S-4 (containing false and misleading 2000 and 2001 financial results for Ahold), signed by Van der Hoeven, Andreae, Meurs, Tobin, and Grize; and
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10/1/01 Form S-8 (containing false and misleading 2000 and 2001 financial results for Ahold), signed by Van der Hoeven, Andreae, Grize, and Miller.
637. Each of the statements made in 2001 from September 2001 through December 2001
companies, and/or the Company’s internal controls, was false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
a. Ahold’s reported net income during fiscal 2001 was artificially inflated by EUR 215 million due to the improper recognition of vendor allowances before the amounts recognized had been earned, as admitted by Ahold in its 2002 Form 20-F, at F-25 & F-27. As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
b. Ahold’s reported revenues during fiscal 2001 were materially overstated by EUR 80 million due to the failure to attribute appropriately earned vendor allowances to the “cost of goods sold” account rather than the “revenue account,” as Ahold admits in its 2002 Form 20-F, at F-28;
c. The USF net income that Ahold reported during fiscal 2001 was materially overstated by $260 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $260 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
d. By virtue of the improper recognition of revenues, net income and the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2000 and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
e. Defendants’ statements during fiscal 2001 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, among other things: Ahold’s 2000 Annual Report; the March 6, 2001 Press Release -- in which Van der Hoeven stated: “[t]he Ahold advantage is that we have a superb track
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record of integrating companies very successful;” and the Second April 9, 2001 Press Release; were materially false and misleading because, inter alia:
(i) there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
(ii) The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iii) Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
(iv) USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
(v) The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
f. The financial results, including revenues, net income and assets reported by Ahold U.S.A. to Ahold for consolidation were also materially false and misleading. As stated above, Ahold U.S.A. was responsible for Ahold’s United States retail operations, including Tops and Giant-Carlisle. Ahold U.S.A’s, and therefore Ahold’s, net income was materially overstated by $29 million in fiscal 2000 and 2001 based upon what Ahold has admitted to be: “intentional improper recognition of vendor allowances and pervasive earnings management, including the recording of unsupported vendor allowance income, premature recognition of contract signing fees and vendor allowance billings, over-billings to vendors and the improper holding of company funds at vendors, as well as other instances of earnings management;”
g. Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint
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ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.” Ahold has admitted that its net sales for fiscal 2001 were overstated by $12.20 billion due to the improper consolidation of these joint ventures;
h. By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s and/or fiscal 2001 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
i. At no time during fiscal 2001 did Ahold own the requisite interest in JMR, DAIH, Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
j. Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
E. 2002 Events and False and Misleading Statements
638. In 2002, the defendants made and/or caused to be issued numerous materially false and
misleading statements and/or omissions of material facts, some of which were made in connection with
the events depicted on the following graph:
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1. Ahold Announces Year 2001 Results
639. On January 8, 2002, Ahold issued a press release entitled “Ahold 2001 Sales Surge 27%
To Record Euro 66 Billion” (the “January 8, 2002 Press Release”). In this press release, Ahold made
the following materially false and misleading statements and/or omissions of material fact:
15% earnings per share growth announced for 2002 Highlights Record 2001 sales confirm Ahold’s top position in food retail/foodservice Organic sales up 6.4% in 2001, excluding currency impact Ahold reconfirms full-year 2001 outlook of 15% earnings per share growth, excluding currency impact, goodwill amortization and exceptional charges Ahold announces 15% earnings per share growth target for 2002, excluding currency impact and goodwill amortization Operations benefit strongly from economies of scale December 2001 acquisitions of Alliant Foodservice and Bruno´s Supermarkets will contribute to full-year 2002 results Provision of Euro 100 million pre-tax in 4th Quarter 2001 for Argentine Peso devaluation Zaandam, The Netherlands, January 8, 2002:
Jan. 8, 2002 - Ahold announces that its 2001 sales surged 27% to Euro 66 billion -- setting a record
Jan. 21, 2002 - Ahold announces that the 50/50 joint venture of La Fragua and Ahold in Central America and Costa Rican supermarket and hypermarket company CSU have completed their new regional joint venture. The three companies now operate 253 food stores in five countries with annual sales of over USD 1.3 billion.
Mar. 7, 2002 - Ahold announces that it achieved net earnings Euro 1.1 billion for full-year 2001 after goodwill amortization and exceptional charges including the impact of devaluation of the Argentine peso.
May 7, 2002 - Ahold announces that its net sales for the first quarter 2002 rose22.0% to Euro 22.2.
June 6, 2002 - Ahold officially announces its financial results for the first quarter 2002. The company's sales rose 22.1% to Euro 22.2 billion; operating earnings increased 21.8% to Euro 866.3 million; and net earnings increased by 3.8% to Euro 328.0 million.
July 16, 2002 - Ahold's DAIH joint venture partner, VRH, defaulted on its bank loans, activating an agreement that required Ahold to pay $490 million to cover those loans and to buy Ve lox's state in DAIH.
July 17, 2002 - Ahold announces its lower EPS target growth from 15% to 5 - 8%, as a result of deteriorating situation in Argentina, prolonged integration of Spanish activities, lower than anticipated gains from th e sale of real estate and the company's pay-off to cover Velox's default on its bank
Aug. 12, 2002 - Ahold announces that it has assumed full ownership of DAIH.
Aug. 29, 2002 - Ahold announces that it suffered a net loss of Euro 1 97.5 million for the second quarter of 2002.
Aug. 29, 2002 - Defendant Van der Hoeven, in response to the Ahold's net loss, states: "Fortunately the reasons are entirely incidental and largely unrelated to operational performance. . . . the fundamentals of the business are really quite robust. . . ."
Sept. 12, 2002 - Questions regarding Ahold's accounting practices surface in light of the company's second quarter 2002 announcement that while the company gained Euro 1.1 billion under Dutch GAAP, it suffered a loss of approximately EUR 198 million when the same financial results were reported under US GAAP.
Sept. 12, 2002 - Defendant Van der Hoeven, in response to the accounting questions, is quoted by The Wall Street Journal as stating: "There are no accounting issues in Ahold. We never booked anything wrong. We have been in full compliance throughout the whole process."
Sept. 12, 2002 - Ahold announces that it has reached an agreement to acquire certain assets and assume certain liabilities of Lady Baltimore Foods, Inc.
Oct. 25, 2002 - Ahold announces that its third quarter 2002 sales increase of 5.5% to Euro 16.4 billion.
Nov. 19, 2002 - Ahold announces its official financial results for third quarter 2002. Net earnings of Euro 257.6 million, which are below last year's earnings as a result of higher goodwill amortization, higher financial expenses, higher income taxes and unfavorable currency differences. In addition , the company also announced that it has lowered its outlook for full- year 2002 from 5.8% (plus) to 6 -8% (negative).
Nov. 19, 2002 - Ahold announces its three-year company wide initiative, which will also result in the divesture of non-core businesses.
Dec. 5, 2002 - Ahold announces that it has signed an agreement to acquire Allen Foods, Inc.
Dec. 20, 2002 - Defendant Van der Hoeven announces its withdrawal from the Supervisory Boards of ABN AMRO and Royal KPN
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Ahold, the Netherlands-based international food retail and foodservice company with major operations in the United States and Europe, today reported full-year 2001 consolidated sales of Euro 66.6 billion, a 27% increase over the Euro 52.5 billion sales generated in 2000. Organic sales growth at constant currency rates was 6.4% higher for the year. Ahold reconfirmed its full-year 2001 outlook of 15% earnings per share growth, excluding currency impact, goodwill amortization and exceptional one-time charges related to the acquisition of Alliant Foodservice and the Argentine Peso devaluation. For full-year 2002, Ahold expects to again deliver 15% earnings per share growth, excluding currency impact and goodwill amortization.
640. In addition, according to the January 8, 2002 Press Release, defendant Van der Hoeven
stated:
The company [Ahold] is in excellent shape and eager to deliver again on its promises.
641. The January 8, 2002 Press Release also contained the following materially false and
misleading statements and omissions of material fact:
Ahold is set to report detailed 2001 results and 2002 outlook on March 7. United States In the United States, Ahold owns and operates 6 prominent supermarket chains along the eastern seaboard and a rapidly-expanding nationwide foodservice operation. Full-year 2001 consolidated sales in the U.S. jumped to USD 35.3 billion, a 27% increase over 2000. Organic U.S. sales increased by 6.8% (2000: 5.3%). U.S. operations represent 59% of worldwide sales. U.S. retail sales of the Ahold regional supermarket chains Stop & Shop, Tops, Giant (Landover), Giant (Carlisle) and BI-LO increased by 6.5% to USD 23.2 billion. The total includes sales at Bruno’s Supermarkets as of December 12, 2001. Organic U.S. retail sales for the year, excluding currency impact, increased by 6.2%. Identical U.S. retail sales rose 2.6% and comparable U.S. retail sales grew by 3.1%. (* For definition of terms see end of release). U.S. foodservice sales increased by 103.8% to USD 12.1 billion. The total includes a full year of U.S. Foodservice (USF) sales, the acquisition of PYA/Monarch at year-end 2000 and, to a lesser extent, the
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Mutual and Parkway acquisitions in 2001. Sales at Alliant Foodservice, acquired in December, were only included as of December 1, 2001. Organic sales of the Ahold foodservice operations in the U.S., excluding currency impact, increased for the year by 10.8%. After the September 11 tragedy, organic foodservice sales growth was 7.0%. Europe In Europe, Ahold´s 2001 sales increased by 31.4% to Euro 21.8 billion. The total includes the year-end 2000 acquisition of Superdiplo in Spain and a full year of ICA sales in Scandinavia. Ahold now has operations in 13 European countries with overall sales representing 33% of total worldwide sales. All Ahold operating units in Europe achieved considerable sales increases. Organic sales growth, excluding currency impact, increased by 6.8%. All operations (The Netherlands, Scandinavia, Spain, Portugal, Poland and the Czech Republic) contributed strongly to the overall sales increase for the region. Latin America In Latin America, sales totaled Euro 4.9 billion, a 3.7% decrease over 2000. Organic sales, excluding currency impact, increased by 1.4%. Latin America represents 7% of worldwide Ahold sales. In local currencies, Bompreço in Brazil, Santa Isabel in Chile and La Fragua in Guatemala generated higher sales, despite difficult economic conditions. Sales at Disco in Argentina (joint venture with Velox Retail) were lower than last year, reflecting the impact of the financial and economic crisis. Market share at Disco increased. A provision of Euro 100 million pre-tax will be taken in the 4th Quarter 2001 in relation to the devaluation of the Argentine Peso.
*** Ahold reconfirms full-year 2001 earnings outlook Ahold reconfirms its earnings outlook for full-year 2001. The Corporate Executive Board expects operating earnings to improve and net earnings to be sharply higher, reflecting organic growth and contributions from acquisitions. Earnings per common share for full-year 2001 are reconfirmed to rise by 15%, excluding currency impact and goodwill amortization and before an exceptional one-time charge for the restructuring of Alliant, announced last November, and the provision related to the devaluation of the Argentine Peso. Ahold will report its full-year and 4th quarter 2001 results on Thursday March 7, 2002.
642. According to the January 8, 2002 Press Release, defendant Van der Hoeven made the
following materially false and misleading statements and /or omissions of material fact:
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Our customers clearly showed their appreciation for the value proposition Ahold provides throughout the world. Their support enabled us to implement our dual strategy of food retail and foodservice, using economies of scale to boost sales to record levels. Our worldwide organic sales growth of 6.4%, excluding currency impact, reflects the quality of operations. Several outstanding acquisitions in 2001 will contribute to earnings growth in a major way, specifically during the second half of 2002 and beyond. We’re proud of last year’s overall performance. Moreover, Van der Hoeven said that Ahold further improved its organizational structure in the U.S. and Europe to maintain and accelerate the company’s success in the future. We have stepped up our efforts to add more value to the company in the coming years, benefiting all stakeholders, he added.
*** As a consequence of our value-added efforts and based on the current business status and our 2002 plans,…the Ahold Corporate Executive Board expects the company again to deliver 15% earnings per share growth for full-year 2002, excluding currency impact and goodwill amortization. [Van der Hoeven added that] ‘the integration of Alliant Foodservice into U.S. Foodservice is expected to slightly backload Alliant’s results towards the second half of the year. Our shareholders will probably see higher earnings per share in the last two quarters than in the first two, as new shares issued in September 2001 to finance the acquisition are earnings eligible for full-year 2002.’
*** [O]ur company considerably strengthened itself last year. We’re in excellent shape to continue to meet our targets, step up organic sales growth and deliver on the promises we make to stakeholders.
643. On January 21, 2002, Ahold issued the following statement in a press release pertaining
to the operations of the Company’s Paiz Ahold joint venture:
Guatemala, Costa Rica, The Netherlands, January 21, 2002 – Paiz Ahold, the 50/50 joint venture of La Fragua and Ahold in Central America, and Costa Rican supermarket and hypermarket company CSU have announced the completion of their new regional joint venture. The joint venture brings together the retail activities of the three companies and now
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operates 253 food stores in five countries with annual sales of over USD 1.3 billion.
644. On January 22, 2002, the Company filed a Form 6-K (the “January 22, 2002 Form 6-K”)
which attached as an exhibit the January 8, 2002 Press Release. Defendant Van der Hoeven signed the
January 22, 2002 Form 6-K.
645. On March 7, 2002, Ahold issued a press release (the “March 7, 2002 Press Release”),
announcing the Company’s financial results for 2001. In this press release, Ahold made the following
materially false and misleading statements and omissions of material fact to investors:
Zaandam, The Netherlands, March 7, 2002 - Ahold, the international food retail and foodservice company, achieved net earnings of Euro 1.11 billion for full-year 2001 (52 weeks) after goodwill amortization and exceptional charges including the impact of the devaluation of the Argentine Peso. The aggregate impact in Euros was 411 million. Before goodwill amortization and exceptional charges including the impact of the Argentine Peso devaluation, net earnings for 2001 amounted to Euro 1.5 billion (2000: Euro 1.1 billion), a rise of 36.2%. Consolidated net sales in 2001 rose 29.2% to Euro 66.6 billion (2000: Euro 51.5 billion). Organic sales growth was 6.1% (2000: 6.3%) and organic earnings growth was very strong at 20.2% (2000: 16.8%). Operating earnings (EBITA) rose 30.7% to Euro 3.0 billion (2000: Euro 2.3 billion). EBITA amounted to 4.5% of net sales (2000: 4.4%). EBITDA increased by 30.0% to Euro 4.5 billion (2000: Euro 3.5 billion). EBITDA amounted to 6.7% of net sales (2000: 6.7%). Earnings per share amounted to Euro 1.25. Earnings per share, before goodwill amortization and exceptional charges including the impact of the Argentine Peso devaluation increased 16% to Euro 1.73 (2000: Euro 1.49). Excluding currency fluctuations, adjusted earnings per share rose 15.1%.
646. According to the March 7, 2002 Press Release, defendant Van der Hoeven issued the
following comments:
‘If we look at our total worldwide business, we see excellent further growth potential in the United States and Europe. In Latin America we continue to see long-term operational growth prospects. We are well positioned, have a strong focus on creating value for all our stakeholders and have again forecasted 15% earnings per share growth for 2002.’
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647. The March 7, 2002 Press Release also contained the following materially false and
misleading statements and omissions of material fact:
The U.S. Retail sales in the United States rose 10.8% to USD 23.2 billion. Starting 2001 fiscal year the definition of sales was redefined. For comparison purposes sales for 2000 were also adjusted. Sales were higher at all retail operating companies, especially at Stop & Shop and Giant-Landover. Organic U.S. retail sales increased by 6.2%, comparable U.S. retail sales grew by 3.1% and identical retail sales rose 2.6%. Retail operating earnings rose 16.7% to USD 1.3 billion. All retail operating companies contributed to the rise in operating earnings. The Grand Union stores acquired and remodeled by Stop & Shop and Tops in the first half of the year performed well. The USD 27.8 million cost for remodeling was absorbed in operating earnings. BI-LO underperformed against expectations but management changes to improve results have been implemented. Internet retailer Peapod had an operating loss of USD 47.9 million (2000: USD 32.2 million). Excluding Peapod’s loss, operating earnings as a percentage of sales amounted to 5.7% (2000: 5.4%). U.S. Foodservice sales rose 103.8% to USD 12.1 billion. This increase mainly reflects the full year consolidation of U.S. Foodservice and PYA/Monarch, acquired at the end of 2000, and to a lesser degree the contribution of Parkway and Mutual acquired in 2001. Organic foodservice sales growth totaled 10.4% for the full year. Foodservice operating earnings increased by 96.2% to USD 481.2 million, largely reflecting the full year consolidation of U.S. Foodservice and the three acquisitions, and corresponding synergies and cost savings. Operating margin declined slightly to 4.0% (2000: 4.1%) as a consequence of new acquisitions. Europe In Europe, sales rose 31.2% to Euro 21.8 billion, largely reflecting the acquisition of the Spanish supermarket group Superdiplo in December 2000 and the full-year consolidation of ICA in Scandinavia. All Ahold European companies generated higher sales. Organic European sales growth amounted to 6.7%. In The Netherlands, Albert Heijn, Deli XL and the specialty stores also had significant organic sales growth. Wholesaler Schuitema (73% Ahold-owned) acquired the Dutch A&P stores in September 2000 and had considerable organic sales growth at the C1000 stores. Sales also
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increased in Poland and the Czech Republic, partially reflecting the opening of new supermarkets and hypermarkets. In Portugal, sales growth at both Pingo Doce and Feira Nova was below plan. European operating earnings rose 30% to Euro 870.8 million, partially due to the acquisition of Superdiplo and the full-year consolidation of ICA. The integration of several companies in Spain under one banner is more challenging than expected. Operating earnings were improved in all European trade areas, particularly in The Netherlands and at ICA. Poland still showed an operating loss. Latin America In Latin America, sales amounted to Euro 4.9 billion, slightly lower than in 2000. Organic sales growth was 1.2%. The decrease in sales in Euros largely reflects the devaluation of the Brazilian Real. The economic recession in Argentina caused Disco sales in local currency to dip slightly below 2000. Bompreço in Brazil, Santa Isabel in Chile and La Fragua in Guatemala all generated higher sales in local currencies, despite difficult economic circumstances. Operating earnings in Latin America amounted to Euro 203.2 million, about the same as last year, reflecting the devaluation of the Brazilian Real and, to a lesser degree, slightly lower earnings at Disco in Argentina. Santa Isabel reduced its operating loss and La Fragua increased operating earnings.
*** Fourth Quarter In the fourth quarter of 2001, net earnings were Euro 169.5 million; earnings per share amounted to Euro 0.17. Net earnings before goodwill amortization and exceptional charges including the impact of the Argentine Peso devaluation rose 32.2% to Euro 493.5 million (2000: Euro 373.2 million). Operating earnings (EBITA) rose 22.5% to Euro 905.2 million (2000: Euro 738.9 million). Organic EBITA growth was 22.2% (2000: 21.7%). Earnings per common share before goodwill amortization and exceptional charges including the impact of the Argentine Peso devaluation increased by 13.7% to Euro 0.53 (2000: Euro 0.46). Excluding currency fluctuations, adjusted earnings per share increased by 16.9%. Consolidated sales for the fourth quarter increased by 11.6% to Euro 16.8 billion (2000: Euro 15.1 billion). Organic sales growth in the fourth quarter was 4.0%. Retail sales in the United States rose 8.9% to USD 5.6 billion (2000:
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USD 5.2 billion). Retail operating earnings increased by 29.5% to USD 360.6 million (2000: USD 278.5 million), reflecting significant margin expansion. Organic retail sales growth amounted to 3.7%. U.S. Foodservice sales rose 42.7% to USD 3.1 billion (2000: USD 2.2 billion). U.S. Foodservice operating earnings increased by 42.1% to USD 123.3 million (2000: USD 86.8 million), largely reflecting the acquisition of PYA/Monarch at the end of 2000. Mutual and Parkway, acquired in 2001, also contributed to the increase. Organic U.S. Foodservice sales growth amounted to 8.5%. In Europe sales increased by 11.2% to Euro 5.6 billion, (2000: Euro 5.0 billion) largely reflecting the consolidation of Superdiplo. All operating units achieved higher sales. Organic sales growth was 4.4%. Operating earnings increased by 24.9% to Euro 304.0 million (2000: Euro 243.3 million), caused by strong performance in The Netherlands and of ICA. In Latin America sales amounted to Euro 1.3 billion (2000: Euro 1.4 billion). The decrease is fully attributable to Disco in Argentina. Santa Isabel, Bompreço and La Fragua all achieved higher sales. Organic sales growth declined 0.5%. Operating earnings amounted to Euro 78.4 million (2000: Euro 90.4 million). This decrease is explained mainly by lower results in Argentina as a result of decreased sales and the devaluation of the Brazilian Real. The results of Bompreço and La Fragua in local currencies were higher than last year.
648. Also on March 7, 2002, the Company issued another press release incorporating its
official financial results for fiscal year 2001, entitled “Cees Van der Hoeven, President & CEO Ahold
Speech; Announcing the 2001 Annual Results 2002; Record Sales and Earnings.” Van der Hoeven is
quoted as making the following materially false and misleading statement and/or omissions of material
facts:
Other than the exceptional, we are proud that once again we have announced record sales and earnings and that we delivered the results we set out to achieve in 2001. Annual sales reached Euro 66.6 billion, a 29% increase over 2000. Net earnings before goodwill amortization and exceptional charges including the impact of the Argentine Peso devaluation, were Euro 1.5 billion, 36.2% higher. Reported net earnings at Euro 1.1 billion were equal to last year. Earnings per share before goodwill amortization and exceptional charges, including the impact of the Argentine Peso devaluation at Euro 1.73 were 16.0% up. Excluding
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currency fluctuations, adjusted earnings per share rose 15.1%, in line with our forecast.
* * * Recently, we were very disturbed by wrongful speculation about so-called “accounting and tax issues” at Ahold. These rumors are totally unfounded and we will address them specifically in the coming days during conference calls, analyst presentations and roadshows. We will, however, step up our efforts to communicate the details behind our key performance indicators because we recognize that in our sector, because of size and complexity, we are a difficult company to fully comprehend. There were also major achievements last year. Amongst the many well performing companies, fortunately the top five (by size) performed according to or better than expectation. These include U.S. Foodservice, Stop & Shop, Giant Food (Landover), Albert Heijn and ICA Sweden. They form a solid core unwaivered by deteriorating circumstances. Ahold’s knowledge network has once again proved to be the key to better performance. The benefits translate into higher sales, better margins and lower costs. For the same reason we have also been able to integrate newly acquired companies very quickly and smoothly. Our record in this is second to none and it gives us great confidence in our future to generate substantial further organic earnings growth as well as contributions from newly acquired companies. Certainly a major achievement of the last two years has been our swift move into foodservice with the successive acquisitions of US Foodservice (2000), PYA/Monarch (2000) and Alliant (2001). In 2002 U.S. Foodservice is expected to reach approximately US$ 18.5 to 19 billion in sales. Our company has become a prominent provider in this attractive segment of the food business. The integration of PYA/Monarch with U.S. Foodservice was a role model for the future and it bodes well for the task ahead to integrate Alliant. We saw a successful conversion of the Grand Union stores and current performance exceeds our expectations. The Bruno’s acquisition, which closed in December, is already expected to contribute in 2002 as we are vigorously addressing the many opportunities at hand. It was a proud moment when we announced our newly formed partnership in Central America between CSU in Costa Rica and La Fragua, our joint venture company in Guatemala. The combined entity will be the prominent food retailer in the region with some US$ 1.3 billion sales. Last but not least the equity offering of September 5 in order to finance
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the acquisitions of Alliant and Bruno’s. We were able to raise Euro 2.6 billion in new equity capital within 24 hours. The reason that we chose to proceed with accelerated book building was to ensure that the impact on the stock price for existing shareholders was minimal and we believe that we have succeeded in that objective. 2. Ahold Issues Its 2001 Annual Report
649. On or about March 7, 2002, Ahold issued its Annual Report signed by Van der Hoeven to
investors announcing the Company’s financial results for 2001 (the “2001 Annual Report”). Concerning
Ahold’s sales performance, the 2001 Annual Report contained the following materially false and
misleading statements:
All of us at Ahold are proud that once again we have announced record sales and earnings and that we delivered the results we set out to achieve in 2001. Annual sales reached Euro 66.6 billion, a 29% increase over 2000.
650. Ahold’s 2001 Annual Report also contained materially false and misleading statements
concerning the Company’s purported success at integrating acquired entities. In this regard, Ahold
stated in the 2001 Annual Report:
Ahold’s knowledge network has once again proved to be the key to better performance. The benefits translate into higher sales, better margins and lower costs. For the same reason we have also been able to integrate newly acquired companies very quickly and smoothly. Our record in this is second to none and it gives us great confidence in our future to generate substantial further organic earnings growth as well as contributions from newly acquired companies.
651. In Ahold’s 2001 Annual Report, Ahold made, among others, the following materially
false and misleading statements regarding USF’s performance:
Ahold’s foodservice operations in the United States generated 2001 sales of USD 12.1 billion (up 104%) and operating earnings (EBITA) before exceptional charges of USD 481 million (up 96%).
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652. In Ahold’s 2001 Annual Report, the Company made, among others, the following
materially false and misleading statements and /or omissions of material fact regarding the results of the
Company’s European operations:
With 6513 stores at year-end and 2001 consolidated sales of Euro 21.8 billion (up 31%), Ahold is growing rapidly in Europe. Operating earnings (EBITA) rose 30% to Euro 871 million.
*** In Europe, Ahold generated consolidated sales of Euro 21.8 billion, a rise of 31%. Organic sales growth was 6.7%.
653. In Ahold’s 2001 Annual Report, the Company made the following materially false and
misleading statements and/or omissions of material fact concerning sales results in Northern Europe:
Sales rose 45% to Euro 7.0 billion. The joint venture with ICA made good progress in 2001.
654. In Ahold’s 2001 Annual Report, the Company made the following materially false and
misleading statements and/or omissions of material fact concerning sales in Portugal through JMR:
In Portugal, although sales rose 6% to Euro 1.6 billion, results were disappointing.
655. In Ahold’s 2001 Annual Report, the Company made the following materially false and
misleading statements concerning sales in Central America through Paiz Ahold:
Sales at the Paiz Ahold joint venture rose 13% to Euro 712 million.
3. Van der Hoeven And Meurs Mislead Investors During The April 8, 2002 Analyst Call
656. On April 8, 2002, the Company issued a press release (the “April 8, 2002 Press
Release”), entitled, “Analyst conference call, Monday April 8, 2002.” In the April 8, 2002 Press
Release, Ahold republished the following materially false and misleading statements made by
defendants Van der Hoeven and Meurs at an analyst conference call on April 8, 2002 at Ahold’s
corporate headquarters in Zaandam, The Netherlands:
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When we had our conference call on March 7 and the long analyst meeting on March 8, we did not have as yet a full reconciliation of Dutch GAAP to U.S. GAAP. So far we have generally done this reconciliation only once a year in preparation of the Annual Report and 20-F. We are in the process of changing this practice and we will inform you on a quarterly basis of any major differences beginning 1st Quarter 2002. The differences in 2001 were very significant and Michael will address them in much greater detail later on in the call. The interpretation that several of you have made is that we have overstated our 2001 Dutch GAAP earnings. This of course is factually incorrect as we have totally conformed to Dutch accounting rules. However, you may argue that some of the gains could have been explained in more detail as part of our 2001 Dutch GAAP results. This applies in particular to real estate gains as well as the gains on derivative transactions. Real estate Real estate gains are a normal part of our business as we get involved with the development of shopping centers and other real estate in which we are the anchor tenant. We sell them off once they reach a steady value and the real estate markets are favorable. Real estate investment is simply not our core business. The gains made will of course vary year by year and in 2001 they were higher than normal. Usually one should see approx. EUR 50-100 million in real estate gains and last year these were EUR 159 million. However, we had singled them out in the cash flow presentation that Michael made on March 8 and therefore they should not have come as a surprise. In our earnings outlook for 2002 we have taken into account a normal level of real estate gains. In other words, we expect to make up the difference with 2001 in 2002 operating earnings. Derivatives transactions The SFAS 133 adjustment is new to all of us and requires a detailed explanation. The upshot is that net financial expense in 2001 benefited from a pre-tax gain of EUR 76 million because of a swap transaction. Under U.S. GAAP these gains amortize during the remaining lifetime of the underlying item being hedged, which in this particular case is the next 6 years. We did tell you in March of 2001 that we expected approx. EUR 900 million of net financial expenses for the year. We reduced this guidance in September partly because of the one-time gain of a swap transaction. From now on we will clearly notify you of any such one-time items if they were to occur in the future. Again here we have taken the 2001 gain into account when projecting our growth targets for 2002. It signifies that we expect operating earnings growth to make up for the difference.
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Michiel Meurs Good afternoon and good morning, ladies and gentlemen. Thank you for joining us today to discuss the release of our 2001 results under U.S. GAAP included in the annual report. The purpose of this call is to clearly define the differences between our results under U.S. GAAP versus Dutch GAAP, and to explain why these results came to the market in the manner in which they did. On March 7, Ahold reported net earnings of EUR 1.1 billion using Dutch GAAP, the accounting standard Ahold has used for decades. As required by the SEC, Ahold performs a reconciliation at the end of the fiscal year of its results under Dutch GAAP to U.S. GAAP. Due to differences between Dutch GAAP and U.S. GAAP, accounting standards related to goodwill, derivatives, and real estate gains our results were materially impacted, resulting in U.S. GAAP net earnings of EUR 120 million, after preferred dividend. We will walk you through the three major items that impacted the results under the two accounting standards. Goodwill The largest item is goodwill, representing a EUR 728 million reduction to net earnings under U.S. GAAP. An analysis of our investment in Disco resulted in an impairment write down of EUR 511 million under U.S. GAAP. This impairment is related to the value of our shares in Disco Ahold International Holdings. Under Dutch GAAP we already deducted the goodwill from equity on the date of the acquisition, which was in January 1998 (as we did with all goodwill on acquisitions dating from before December 2000). Due to the economic conditions in Argentina and the value of the Peso, we adjusted the value of these 2619 shares in DAIH from $272,000 to $100,000. It should be noted that under U.S. GAAP, goodwill can only be revised downwards to reflect depreciable value, not upward to reflect any appreciation in other businesses. The remaining EUR 217 million reduction in goodwill is related to the difference in treatment of goodwill under U.S. GAAP and Dutch GAAP. Please note that under the U.S. GAAP as well as under Dutch GAAP reconciliation, also the impact of the lower exchange rate of the Argentine Peso versus the US Dollar has been included. Decree 214, which sees to a transition of all third party US Dollar denominated debt under Argentine law, is now working in our favor, more than we previously foresaw. At an exchange rate of 3 Peso to the Dollar, most likely, there would be no impact on our earnings under both GAAP systems. The current exposed
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third party debt in US dollars amounts to $ 190 million as per today. Outside of the obligations recorded on our balance sheet, we also have certain commitments and contingencies that may have future cash requirements. These commitments primarily consist of operating lease commitments and a maximum contingent liability of $492 million (EUR 557 million) under our guarantee of the indebtedness of our partner in Disco, Velox. These contingent liabilities will only materialize in such a case that Velox defaults under the above referenced bank indebtedness. For the last couple of months we have been in close contact with Velox management. As stated in our annual report, Velox has confirmed to us that no such default had occurred and that it intends to be a long-term partner of Disco. We believe that the purchase price for existing and new Disco shares exceeds the current fair market value. The extent to which this would lead to an impairment of goodwill in the future is too early to say. If such an impairment of goodwill would occur, this will lead to a charge to earnings in the quarter in which required payments would be made.
*** [D]uring 2001 the notional value of our derivative portfolio increased from EUR 1.7 billion to EUR 5 billion. This increase is largely attributed to 2001 debt issuances that were swapped to the USD or the EUR.
*** The final large adjustment to Dutch earnings was EUR 137 million in gains from the sale of properties. Ahold frequently develops its own projects with one of its stores as the anchor tenant. After the project is completed, the project is sold to a real estate investor, often resulting in a gain to Ahold. Although the amount of real estate gains have increased over the last couple years, this is normal course of business for us. U.S. GAAP and Dutch GAAP differ in the timing of the recognition of gains related to operational leases. Under U.S. GAAP, if a property is sold and leased back, the gain is amortized over the life of the lease. Under Dutch GAAP, the entire gain has to be recognized in the year of sale, provided the lease qualifies as an operational lease. As we have stated, real estate gains are an ongoing part of doing business for us. Over the past three years, real estate gains have amounted to EUR 28.5 million in 1999, EUR 95.5 million in 2000, and EUR 158.6 million in 2001. As a percentage of operating earnings before goodwill and exceptionals, this amounts to 2.0%, 4.2%, and 5.3% respectively. Real estate gains are included in EBITA; thus some concern has been raised by the market as to what margin movement has been without these gains,
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especially in the United States. We intend to provide this information. Real estate gains in the United States amounted to EUR 10.2 million in 1999, EUR 43.8 million in 2000, and EUR 54.4 million in 2001. Thus, adjusting for real estate gains, margin improvement in 2001 in the U.S. was approximately 26 basis points, in line with the improvement if you include real estate gains. The rest of the real estate gains are primarily in Europe, with the Netherlands and Scandinavia being the largest contributors. Real estate gains in Europe amounted to EUR 18.3 million in 1999, EUR 52.7 million in 2000, and EUR 103.7 million in 2001. Adjusting for real estate gains in Europe, margins fell approximately 19 basis points in 2001, higher than the 4 basis point reduction including real estate gains. In the future, we will provide real estate gains by region so that you can calculate margins excluding real estate gains if you choose. We wish to note, however, that regardless of whether you include or exclude real estate gains from the numbers, the trend in margins in the various regions is the same. As Cees mentioned, we expect real estate gains of between EUR 50 and 100 million. We expect that about 25% of the gains will come from the US and the remainder from Europe. In closing, one comment about the business. We are on track to deliver the targets that we have set out to achieve for 2002. We do, however, repeat that sales and earnings growth will be somewhat backloaded towards the latter half of this year. 4. Ahold Files Its 2001 Form 20-F
657. On April 9, 2002, Ahold filed its year-end report on Form 20-F for the fourth quarter and
year ended December 30, 2001 (the “2001 Form 20-F”).
658. The 2001 Form 20-F disclosed the following materially false and misleading sales
figures:
Net Sales
Net sales in fiscal 2001 increased by EUR 15,051 million, or 29.2%, over fiscal 2000. At constant exchange rates, consolidated net sales growth was 29% in fiscal 2001 compared to fiscal 2000. Net sales in fiscal 2001 were heavily impacted by the full year consolidation of U.S. Foodservice, PYA/Monarch and ICA, which were acquired in fiscal 2000.
***
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Net sales in fiscal 2000 increased by EUR 18,718 million, or 57%, over fiscal 1999. At constant exchange rates, consolidated net sales growth was 42% in fiscal 2000 compared to fiscal 1999. The major reasons for the increase in net sales were, in addition to organic growth, the acquisition of U.S. Foodservice, consolidated starting April 2000, and the acquisition of the 50% partnership interest in ICA, consolidated starting May 2000.
659. In the 2001 Form 20-F, Deloitte made the following materially false and misleading
statement:
Independent Auditors’ Report
To the Supervisory Board and Shareholders of Koninklijke Ahold N.V.:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Koninklijke Ahold N.V. as of December 30, 2001 and December 31, 2000 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in The Netherlands.
* * * Deloitte & Touche Accountants
660. Ahold’s 2001 Form 20-F made the following materially false and misleading statements
and omissions of material fact regarding Ahold’s consolidation of operating results:
Consolidation
Royal Ahold consolidates all companies over which it exercises control, as evidenced by majority ownership (51%) or through control of management. Companies over which Royal Ahold can exercise considerable influence in terms of business and financial policy, and where Royal Ahold owns more than a 20% interest, are accounted for using the equity method. Other unconsolidated companies are stated at historical cost unless there is a permanent decline in value.
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661. Similarly the Company’s 2001 Form 20-F made the following materially false and
Revenues are recognized at the point of sale to retail customers and upon delivery of inventory to franchised and associated stores or upon delivery to our food service accounts. Royal Ahold records shipping and handling costs billed to customers as sales revenues. Promotional discounts issued by the Company are recorded upon redemption as a reduction of sales. Costs incurred for shipping and handling are included in “Selling expenses.”
Income for in-store promotions, merchant coupons, or other incentives from suppliers that are non-refundable credits or payments are recognized when the related activities that are required by the supplier are completed, the amount is fixed and determinable and the collectibility is reasonably assured. This income is generally included as an offset of “Cost of sales.” The total value of any up-front or other periodic payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts are then amortized to reduce cost of goods sold over the life of the contract based upon periodic purchase volume. The total value of any up-front or other periodic payments received from vendors that are not linked to purchase commitments is also initially deferred and recognized in income when earned. Funds that are directly linked to advertising commitments are recognized as a reduction of cost of sales when the related advertising commitment is satisfied.
5. Ahold Announces Sales for the First Quarter of 2002
662. On May 7, 2002, Ahold issued the following materially false and misleading statements
in a press release announcing the Company’s sales for the first quarter of 2002:
Zaandam, The Netherlands, May 7, 2002 – Ahold, the food retailer and foodservice operator, generated consolidated net sales (excluding VAT) over the first quarter of the year (16 weeks through April 21, 2002) of Euro 22.2 billion, a rise of 22.0%. Worldwide organic sales, excluding currency fluctuations, grew 5.4%. Ahold USA – retail operations: sales up 16.2% to USD 7.9 billion In the United States, retail sales increased 16.2% to USD 7.9 billion. Organic retail sales grew 5.7%, comparable retail sales 2.0% and identical retail sales 1.3%. Lower fuel prices depressed identical retail sales growth by approximately 0.4%. All retail operating companies,
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except for BI-LO, contributed to sales growth. Sales at the recently acquired supermarket company Bruno’s were better than anticipated. Ahold USA – foodservice operations: sales up 56.9% to USD 5.4 billion Foodservice sales in the United States grew 56.9% to USD 5.4 billion mainly due to the consolidation of Alliant. Organic foodservice sales for the quarter were 4.3% higher. Voluntary market exits depressed organic sales growth by 1.2%. The integration of distribution facilities is moving as scheduled. The current plan is to consolidate 10 more facilities. U.S. Foodservice expects to have completed the major part of the integration process by year-end 2002. Europe: sales increase 6.4% to Euro 6.1 billion In Europe, sales rose 6.4% to Euro 6.1 billion. Organic retail sales, excluding currency impact, grew by 5.8%. In The Netherlands, sales were 6.1% higher. Operations in Scandinavia, Central Europe and Spain also contributed to the sales rise. Sales in Portugal were lower. South America: sales total Euro 840 million In Brazil, Argentina, Chile and Peru, sales amounted to Euro 840 million, down 32% from last year. Organic retail sales, excluding currency impact, increased by 4.3%. In local currencies, Bompreço in Brazil and Santa Isabel in Chile generated higher sales. Sales at Disco in Argentina were essentially the same as last year. Central America: sales total Euro 410 million Starting January 1, 2002, Paiz Ahold, the joint venture of Ahold and La Fragua in Central America, formed a new regional joint venture with CSU named CARHCO. La Fragua sales are deconsolidated since January 1, 2002. The results from CARHCO will be reported as income from unconsolidated subsidiaries. Sales of CARHCO amounted to Euro 410 million. Organic sales growth in Central America, excluding currency impact, increased by 10.5%. 6. Van der Hoeven’s May 7, 2002 Shareholder Address
663. On May 7, 2002, the Company issued a press release entitled, “Annual General Meeting
of Stockholders of Royal Ahold.” This press release repeated certain materially false and misleading
statements that defendant Van der Hoeven issued at the May 7, 2002 Annual Shareholder’s Meeting:
In 2001, our sales totaled Euro 66.6 billion, an increase of 29% on 2000. Net earnings before goodwill amortization and exceptional charges, including the impact of the devaluation of the Argentine Peso, increased
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by 36% to Euro 1.5 billion. After the aggregate impact of Euro 411 million for goodwill amortization and exceptional charges, including the impact of the Peso, net earnings amounted to Euro 1.11 billion. Earnings per share therefore totaled Euro 1.25. Organic sales growth amounted to 6.1%, and organic operating earnings growth (EBITA) at 20% proved to be stronger than most of our competitors.
***
It is worth mentioning that our five most prominent companies – U.S. Foodservice, Stop & Shop, Albert Heijn, Giant-Landover and ICA – showed considerable sales and earnings growth. They continue to form a strong base for further corporate growth. In the U.S., where the economy suffered a telling blow as a result of the September 11 events, both our food retail and foodservice operations have been able to improve their performance. All supermarket chains contributed to the earnings increase. Sales growth in foodservice in excess of 100% was mostly due to the full-year consolidation of U.S. Foodservice and PYA/Monarch, the latter acquired at the end of 2000. At year-end 2001, we acquired Alliant, the third-largest foodservice operator in the United States with a robust position in the health care sector. U.S. Foodservice is currently forging ahead with the integration process and we expect this to generate considerable synergies and cost savings.
***
Transparency You are also familiar with the efforts we take to be transparent, both in terms of our strategy and the numbers we present to you. We can imagine there was some confusion when our stock price fluctuated so severely in the wake of the publication of the annual report. I would like to take this opportunity to once again explain what happened. On March 7, we announced our earnings statement to the media, followed by a thorough briefing for the investment community on March 8. The published results were based on Dutch GAAP, the Dutch accountancy rules. A few weeks later, on April 4, we published our annual report. As we are also listed in New York, we presented a reconciliation of our numbers according to U.S. GAAP, the American accounting principles. This reconciliation was made after publication of our results based on
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Dutch GAAP. Differences between these two accounting systems gave rise to a large variance between our earnings under Dutch GAAP and under U.S. GAAP. In real terms, this meant that net earnings under Dutch GAAP amounted to Euro 1.1 billion, and under U.S. GAAP to Euro 120 million. That difference is largely due to the treatment of goodwill, gains from derivative transactions and real estate gains. The most important difference regards the amortization of goodwill. This item represents a decrease in earnings under U.S. GAAP of Euro 728 million, and was primarily caused by an impairment of goodwill of our share in our Argentine operations. This impairment is directly related to the economic crisis in that country and the Peso devaluation. Another important adjustment under U.S. GAAP is related to the treatment of derivative transactions. Like most international companies, Ahold uses derivatives to limit currency and interest risks. Last year a new and complex standard, SFAS 133, was introduced under U.S. GAAP. This new standard led to a negative pre-tax earnings adjustment under U.S. GAAP of Euro 133 million. And finally, an adjustment of Euro 137 million was made under U.S. GAAP for gains from the sale of real estate. This is not our core business, but an ongoing corporate activity. We are frequently involved in the development of shopping centers where one of our stores serves as the anchor tenant. We sell these real estate properties once a stable situation has been achieved and the market is favorable. Our gains from this activity vary from year to year, and in 2001 they were higher than usual: Euro 159 million compared to an average of Euro 50 to 100 million formerly.
*** Strategy I would like to summarize where our company now stands and how we view the future. Ahold wants to be the world’s best and most successful food provider. Our strategy to achieve this mission is transparent and consistent, driven by different distribution channels and store formats under various brand names. This approach enables us to focus on local markets and needs, and allows us to truly serve our local customers whenever, wherever and however they require. Simultaneously, our companies cooperate closely behind the scenes at an international level. This enables us to benefit from economies of scale, to generate synergies and to share the knowledge we gather throughout our trade areas. The result? The whole is greater than the sum of its parts. We
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form a closely-knit family of companies serving more than 40 million customers on a weekly basis. This strategy optimally positions us for further growth, fueled by organic sales and earnings development and the positive impact of recent acquisitions. Under the current circumstances we project a decrease in acquisition activity and we will not be tapping the capital markets this year to finance our growth. Outlook for 2002 I would like to make the following observations with regard to our 2002 outlook. Ahold companies, particularly the prominent ones, continue to perform well.
664. Each of the statements made from January 2002 through May 2002 concerning Ahold’s
fiscal 2001 and/or fiscal 2002 financial results, success at integrating acquired companies, and/or the
Company’s internal controls, was false and misleading when issued. The true but concealed and/or
misrepresented facts included, but were not limited to:
(a) By virtue of the improper recognition of revenues, net income and/or the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(b) Defendants’ statements during 2002 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, among other things: Ahold’s 2001 Annual Report; defendant Van der Hoeven’s May 7, 2002 Shareholder Address; the Second June 6, 2002 Press Release; and the press releases that the Company issued on August 29, 2002; were materially false and misleading because, inter alia:
i. there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
ii. The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income,
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as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
iii. Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
iv. USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
v. The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
(c) Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH (until July 2002). As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(d) By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
(e) At no time during fiscal 2002 did Ahold own the requisite interest in JMR, DAIH (until July 2002), Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
(f) Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
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7. Ahold Announces Results for the First Quarter of 2002
665. On June 6, 2002, the Company announced its financial results for first quarter 2002 (the
“June 6, 2002 Press Release”) and indicated that its sales rose 22.1% to Euro 22.2 billion; its operating
earnings increased 21.8% to Euro 866.3 million; its net earnings increased by 3.8% to Euro 328.0
million; and earnings per common share, excluding goodwill amortization and currency impact,
amounted to Euro 0.42, equal to last year. In the press release, the Company further stated in pertinent
part:
Growth of net earnings and earnings per share excluding goodwill amortization and currency impact in the first quarter of 2002 was obviously below our usual standard but in line with expectations, said Ahold President & CEO Cees Van der Hoeven. It is largely the result of significant backloading towards the latter half of the year of earnings growth at BI-LO, and in Portugal and Spain, as well as other gains in the first quarter of 2001. On a pro forma basis, reflecting the true comparison of operating strength, net earnings increased by 22% and earnings per share by 10%. By all accounts, the core business continued to perform very well. U.S. Retail, U.S. Foodservice and our large companies in Europe and Latin America all showed substantial sales and earnings growth. Since other companies are catching up, we expect to significantly surpass last year’s numbers in the second half of 2002. As an early sign of recently introduced EVA programs, our capital efficiency improved compared to 2001. Sales and earnings in the first quarter were positively impacted by the higher average exchange rate of the U.S. dollar (Euro 1 = USD 0.88 vs. Euro 1 = USD 0.92 last year). This effect is partly offset by the devaluation of the Argentine Peso (ARS 1 = Euro 0.53 vs. ARS 1 = Euro 1.09 last year). Consolidated sales rose 22.1% to Euro 22.2 billion. Excluding currency fluctuations, organic sales growth amounted to 5.5%. Operating earnings totaled Euro 866.3 million, representing an increase of 21.8%. Net earnings increased 3.8% to Euro 328.0 million. Net earnings growth was substantially lower than operating earnings growth, mostly due to higher amortization of goodwill (Euro 38.4 million) and higher net financial expense (Euro 83.4 million). Cash flow from operating activities amounted to Euro 582.6 million (2001: Euro 62.2 million). Investments in tangible and intangible fixed
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assets amounted to Euro 698.2 million (2001: Euro 579.2 million). United States – retail In the United States, retail sales rose both organically and as a result of the acquisition of Bruno’s Supermarkets in December 2001. Organic retail sales growth amounted to 5.7% (2001: 7.2%). Comparable retail sales growth was 2.0% (2001: 3.3%) and identical retail sales growth totaled 1.3% (2001: 2.9%). Lower fuel prices depressed identical retail sales growth by approximately 0.4%. All retail operating companies except BI-LO contributed to sales growth. Sales at Bruno’s were ahead of plan. Operating earnings rose as a result of strong improvements at all operating companies except BI-LO, and also due to the aforementioned consolidation of Bruno’s. BI-LO’s operating earnings were lower than last year but in line with expectations. Internet grocer Peapod - where sales rose 25% - had an operating loss of USD 11.6 million (2001: loss of USD 14.4 million). United States - Foodservice In the United States, foodservice sales grew mainly due to the consolidation of Alliant. Organic foodservice sales growth amounted to 4.1%. Voluntary market exits depressed organic sales growth by 1.2%. The integration of Alliant is ahead of schedule. U.S. Foodservice expects to have completed the major part of the integration process by year-end 2002. Foodservice operating earnings in the United States were significantly higher and in line with expectations. Operating margins are slightly lower due to the consolidation of Alliant. Europe In Europe, organic sales growth, excluding currency impact, amounted to 6.4% (2001: 8.0%). Operations in The Netherlands, Scandinavia and Central Europe contributed to the sales rise. Sales in Spain were at the same level as last year. Sales in Portugal were lower. Operating earnings at Albert Heijn and ICA Ahold showed considerable improvement. Spain came in lower than last year mostly as a result of increased costs related to the integration process. Operating earnings in Portugal were lower due to lower sales and increased expenses. In Central Europe, operating results from the Czech Republic were better than last year, but fully offset by higher operating expenses related to the entry into the Slovakian market. Poland performed slightly better than last year.
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Central America In Central America – Guatemala, Costa Rica, Honduras, Nicaragua and El Salvador – Paiz Ahold, the joint venture of Ahold and La Fragua, formed a new regional joint venture with CSU named CARHCO, effective January 1, 2002. Since that date, La Fragua has been deconsolidated. CARHCO’s results are reported as income from unconsolidated subsidiaries. CARHCO’s sales amounted to Euro 416 million. Organic sales growth, excluding currency impact, amounted to 14.5%. Operating earnings in Central America increased to Euro 16.9 million (2001: Euro 4.6 million), mainly attributable to the formation of the new joint venture. The net income from CARHCO reported as income from unconsolidated subsidiaries amounted to Euro 3.1 million.
*** Cash flow statement The first quarter of 2002 generated a cash flow from operating activities of Euro 582.6 million (2001: Euro 62.2 million) largely due to a strong development of operating earnings and lower investment in working capital. Investments in working capital were substantially lower than last year and amounted to Euro 208.4 million (2001: Euro 627.3 million). Cash outflows from investing activities amounted to Euro 740.1 million (2001: Euro 123.1 million), mainly consisting of investments in tangible and intangible fixed assets totaling Euro 698.2 million (2001: Euro 579.2 million). Group equity Group equity, expressed as a percentage of the balance sheet total, amounted to 21.0% (at year-end 2001: 20.4%). Assuming conversion of the convertible subordinated notes outstanding, group equity amounts to 26.1%. Capital accounts amounted to 26.6% of the balance sheet total. Shareholders’ equity amounted to Euro 6.0 billion. In the first quarter of 2002, net earnings after deduction of the dividend on preferred financing shares were added to shareholders’ equity. In addition, the proceeds from exercised option rights were added to shareholders’ equity. The negative balance of exchange rate fluctuations was deducted from shareholders’ equity. Goodwill related to acquisitions through November 2000 was charged to shareholders’ equity. Goodwill related to acquisitions after November 2000 was capitalized. U.S. GAAP reconciliation Net results according to U.S. GAAP amounted to Euro 387.9 million (2001: Euro 170.4 million). Earnings per share under U.S. GAAP
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increased to Euro 0.42 (2001: Euro 0.21). In particular, lower goodwill amortization relating to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) and positive results as a consequence of the application of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) contributed to this substantial increase of net results under U.S. GAAP. SFAS 142 was adopted on December 31, 2001, and at that time the company stopped amortizing goodwill. The company is required to test all goodwill for impairment by the end of 2002. It is expected that this may cause an impairment charge to earnings under U.S. GAAP.
666. On June 6, 2002, the Company filed a Form 6-K (the “June 6, 2002 Form 6-K”) which
attached as an exhibit the June 6, 2002 Press Release.
667. On June 7, 2002, one day after Ahold published its first quarter 2002 results, Deutsche
Bank Securities, Ltd. published an analyst report which maintained the firm’s Market Perform rating
on the stock. While the analyst report was skeptical regarding Ahold, largely due to a profit shortfall in
Europe, the report stated that “Foodservice, meanwhile, saw operating profit increasing 53% to
US$187 m,” and that “the profit shortfall in Europe was offset by a greater than expected widening of
the margin at the US food retail operations.”
8. Ahold Is Forced to Acquire DAIH Shares From Joint Venture Partner
Target To 5-8%,” in which the Company discussed earnings per share growth in the 2nd quarter 2002
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and organic operating earnings growth. This was the first time that Ahold mentioned VRH’s default. In
the press release, the Company stated in part:
Ahold, the international food retailer and foodservice operator, announces that it anticipates earnings per share growth for full-year 2002 at 5 – 8%, excluding currency impact, goodwill amortization/impairment charges and a Euro 350-450 million charge related to the Velox Retail Holdings (“VRH”) default. Organic operating earnings growth is confirmed at approximately 15%, excluding currency impact.
* * * Towards the end of the second quarter of 2002, which ended on July 14, it became more apparent that VRH would default on bank debts secured by its shares in DAIH. On July 16, 2002 Ahold received notice that VRH had defaulted on several of its credit agreements. These defaults constitute a default under VRH’s other credit agreements secured by VRH’s shares in DAIH. Ahold will be required to take over loans and purchase substantially all of the remaining shares held by VRH in DAIH for a total consideration of approximately USD 490 million. Such payments are expected to be made in the third quarter. About 60% of this investment will be financed from available funds. The rest will be financed by utilizing credit facilities specifically arranged for this purpose. It is expected that net interest expenses will increase by approximately Euro 10 – 12 million in 2002. Ahold intends to terminate its shareholders’ agreement with VRH. The takeover of loans and purchase of VRH’s shares in DAIH will generate a substantial charge in the second quarter 2002 under Dutch and U.S. GAAP estimated at Euro 350 – 450 million, as the amount paid will exceed the fair value of the DAIH shares.
669. According to the July 17, 2002 Press Release, defendant Van der Hoeven made the
following comments:
In light of the unfolding developments, we feel it is necessary to revise our outlook for full-year 2002 earnings per share growth to the mid single-digits… In this statement, we have provided a detailed discussion and quantification of the issues, which are mainly unrelated to operations. The Corporate Executive Board has made every effort to be as transparent as possible in outlining the specific circumstances that can potentially impact our results. Preliminary results for the second-quarter of 2002,
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which ended on Sunday, July 14, indicate that, compared to last year, no EPS growth should be expected, largely because of non-operating factors. However, we are encouraged by the underlying strength of our core business and are fortunate that most Ahold companies are performing according to or better than expectation.
*** Performance continues to be particularly solid at U.S. Foodservice, Stop & Shop, Albert Heijn, Giant-Landover and ICA-Sweden. Operating earnings at these five companies are according to plan and all are expected to sustain their performance throughout the year. Significant organic growth and margin expansion are being driven by Ahold’s customer focus, operational strength and economies of scale, and we are pleased with the way our operations are embracing EVA principles.
670. The July 17, 2002 Press Release further stated:
Organic operating earnings growth, excluding currency impact, confirmed at approximately 15% The Ahold Corporate Executive Board expects operating earnings, excluding currency impact to increase organically by approximately 15% in 2002. The implied strong margin expansion is derived from significant additional economies of scale, synergies and operational enhancements. Including the acquisitions of Alliant and Bruno’s, but excluding currency impact, operating earnings are expected to increase by approximately 20%. Earnings are expected to grow faster in the second half of 2002 than in the first half of the year, mainly reflecting completion of the integration of Alliant into U.S. Foodservice. Other developments: 1. U.S. Foodservice U.S. Foodservice sales for the full year 2002, originally projected at around USD 18.5-19 billion, are now expected to be USD 18.0-18.5 billion. Sales in the second quarter are anticipated to be flat as a consequence of shedding some unprofitable business. The integration of Alliant continues according to schedule. Operating earnings of U.S. Foodservice for the full year are expected to be in line with earlier projections.
671. On August 12, 2002, the Company issued a press release (the “August 12, 2002 Press
Release”) entitled, “Ahold Assumes Full Ownership of Disco Ahold International Holdings.” In the
August 12, 2002 Press Release, the Company stated in pertinent part:
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Zaandam, The Netherlands, August 9, 2002 – Ahold, the international food retailer and foodservice operator, today announced it has assumed full control of Disco Ahold International Holdings (DAIH), its former Latin American joint venture company with Velox Retail Holdings (VRH). Ahold announced its intention on July 17 to terminate its shareholders’ agreement with VRH. Following VRH’s July 16 default on outstanding indebtedness owed to certain banks, Ahold was required to take over loans and purchase substantially all of VRH’s shares in DAIH for a total consideration of approximately USD 490 million. The aforementioned requirements have now been met and the agreement between VRH and Ahold has been brought to a formal close. As a consequence, Ahold’s direct stake in DAIH has increased from approximately 66% to 100%.
672. On August 23, 2002, the Company filed a Form 6-K with the SEC, signed by Van der
Hoeven, which attached as an exhibit the August 12, 2002 Press Release.
673. On August 29, 2002, Ahold issued a press release announcing that the Company suffered
a loss for the second quarter of 2002 (the “August 29, 2002 Press Release”). The Company stated in
pertinent part:
Zaandam, The Netherlands, August 29, 2002 – Ahold, the international food retailer and foodservice operator, today announced a second quarter 2002 net loss of Euro 197.5 million (2001: net profit of Euro 323.8 million). The second quarter 2002 results include exceptional charges of Euro 490 million, of which Euro 410 million relates to the default of Velox Retail Holdings (VRH), Ahold’s former joint venture partner in Latin America, and Euro 80 million relates to goodwill impairment for Argentina.
674. According to the August 29, 2002 Press Release, defendant Van der Hoeven issued the
following remarks:
This quarter Ahold reports its first loss in many years. That hurts because we are a proud company, always striving for excellence towards all stakeholders. Fortunately the cause is incidental and not structural. As communicated earlier, we had to take an exceptional charge as well as goodwill impairment for our Argentine operations. We think we have finally put this behind us and we can concentrate on reinforcing Disco’s position as the best company in its market.
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675. The Company also made the following materially false and misleading statements in the
August 29, 2002 Press Release:
Consolidated sales rose 7.3% to Euro 17.3 billion (+16.0% excluding currency impact). Excluding currency fluctuations, organic sales growth amounted to 2.9%. Operating earnings were Euro 777.8 million, representing an increase of 11.9% (+20.9% excluding currency impact). Net earnings showed a loss of Euro 197.5 million and were substantially below last year for the following reasons: Exceptional charges of Euro 490 million, mainly related to the default of VRH, Ahold’s former joint venture partner in Latin America; United States – retail In the United States, retail sales rose both organically and as a result of the consolidation of Bruno’s Supermarkets with effect from December 2001. All retail operating companies contributed to sales growth. Organic retail sales growth amounted to 5.6% (2001: 8.5%). Comparable retail sales growth was 2.1% (2001: 5.5%) and identical retail sales growth totaled 1.4% (2001: 5.1%). Lower fuel prices depressed identical sales by approximately 0.3%. Operating earnings rose as a result of strong improvements at most operating companies and due to the aforementioned consolidation of Bruno’s Supermarkets. In particular, performance at Stop & Shop, Giant (Landover) and Giant (Carlisle) was excellent. BI-LO’s operating earnings are improving but still lower than last year. Internet grocer Peapod - where sales rose 19% - reduced its operating loss to USD 7.6 million (2001: loss of USD 11.3 million). United States - foodservice In the United States, foodservice sales grew mainly due to the consolidation of Alliant with effect from December 2001. Organic foodservice sales decline was 1.7%, primarily as a result of the exit from unprofitable business at Alliant. Voluntary market exits reduced organic sales growth by 2.6%. The integration of Alliant is ahead of schedule. U.S. Foodservice expects to have completed the major part of the integration process by year-end 2002. Foodservice operating earnings in the United States were significantly higher primarily as a result of the consolidation of Alliant, purchasing synergies and cost reductions. Results at U.S. Foodservice were strong. Europe
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In Europe, organic sales growth, excluding currency impact, amounted to 3.2% (2001: 9.2%). All retail operations in The Netherlands, Scandinavia, Spain and Central Europe contributed to the sales rise. Sales in Portugal were lower as a result of the exit from unprofitable product categories. Operating earnings at Albert Heijn, ICA Ahold and Portugal showed considerable improvement. Spain, although profitable, came in lower than last year mostly as a result of increased integration costs. In Central Europe, operating results in the Czech Republic reached break-even point, partly offset by higher operating expenses related to the entry into the Slovakian market. Operations in Poland are still loss making.
*** U.S. GAAP reconciliation Under U.S. GAAP, the second quarter net loss amounted to Euro 74.2 million (2001: net earnings of Euro 181.0 million). Earnings per share under U.S. GAAP decreased to a loss of Euro 0.08 (2001: earnings of Euro 0.22). In particular, lower goodwill amortization related to the adoption on December 31, 2001, of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), contributed to a lower net loss under U.S. GAAP than under Dutch GAAP. Outlook for full-year 2002 Ahold reconfirms its 2002 earnings per share (EPS) growth, excluding currency impact, goodwill amortization and exceptional items, at between 5-8%, as announced on July 17, 2002. The outlook was revised due to the impact of the prolonged integration process in Spain, real estate gains coming in at the lower end of the range and rising interest rates in Ahold’s Latin American markets. Organic operating earnings growth, excluding currency impact, will amount to approximately 15%. Including the acquisitions of Alliant and Bruno’s Supermarkets, but excluding currency impact, operating earnings are expected to increase by approximately 20%. Operating earnings are expected to grow faster in the second half of 2002 than in the first half of the year, mainly reflecting completion of the integration of Alliant into U.S. Foodservice.
676. On September 6, 2002, the Company filed a Form 6-K (the “September 6, 2002 Form 6-
K”) which attached as an exhibit the August 29, 2002 Press Release.
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9. Defendants Van der Hoeven and Meurs Reassure Investors With Lies
677. Also on August 29, 2002, the Company issued a press release entitled, “Ahold President
& CEO Cees Van der Hoeven: ‘Let’s Not Forget for Whom We Work.’” In attempting to explain the
Company’s second quarter 2002 loss to investors, defendant Van der Hoeven made materially false and
misleading statements:
This morning, we reported the first quarterly loss in many years. As I mentioned in the press release, reporting a loss hurts for a company that is used to deliver consistently strong results and proud to be an excellent partner for its stakeholders. Fortunately the reasons are entirely incidental and largely unrelated to operational performance. The earlier announced exceptional charge with respect to the default of our Argentine partner Velox Retail Holdings of € 410 million and the additional impairment of goodwill in Disco Ahold International Holdings of € 80 million explain most of the difference. When Michael Meurs walks you through the numbers later, you will also notice there are some other non-operational issues that worked against us compared to last year. These include increased goodwill amortization and higher currency differences in financial expenses. Lower gains on real estate sales also had a negative impact. Once you take out these factors, the fundamentals of the business are really quite robust, as you can see in the pro forma earnings statement attached to the press release. In the current trading environment, where most markets have experienced a slowdown in the second quarter, it is hard to grow sales at an acceptable level. In these circumstances, we are very pleased that most Ahold companies have gained market share in their trade areas. This is the clear result of strong business fundamentals and the many special efforts our companies have made. Despite that, organic sales growth for this quarter was only 2.9%. This growth is obviously very low compared to previous quarters. United States – foodservice It is largely explained by U.S. Foodservice, however, where we have shed quite a lot of unprofitable business. We also lost sales due to the restructuring that took place at U.S. Foodservice as Alliant was being integrated. The integration process itself is ahead of schedule and we already see significant bottom-line benefits. This is evidenced by the increase in operating margin of our foodservice activities. The purchasing synergies and cost reductions we’ve put in place have helped significantly and that bodes well for the future. As yet, we see no uptake
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in the foodservice market in general and our sales are expected to remain relatively soft through the rest of the year. United States – retail The retail activities in the US performed very well, particularly at Stop & Shop, Giant-Landover and Giant-Carlisle. Consumer demand was lackluster in this sector but we managed to do quite well under the circumstances. Margins continued to improve as a consequence of cost reductions and other synergies. There are lots of new initiatives to improve performance even further. Competition in U.S. food retail markets continues unabated but collectively our companies form a strong group able to increase market share and operating margins at the same time. We are seeing further improvements at BI-LO but there is still some way to go. Bruno’s continues to deliver on plan and losses are being reduced at Peapod. Europe In Europe, we saw improvements from the first quarter. Spain, although profitable, came in lower than last year but we see the early signs of integration efforts bearing fruit. Portugal improved its earnings over last year, although sales were impacted by the discontinuation of loss-making business. In the Netherlands, Albert Heijn did very well, as did ICA in Sweden. The Norwegian operations are also much improved over last year. In Central Europe, we saw the cost impact of our entry into Slovakia and continued losses in Poland. The Czech Republic managed to break even in the traditionally low season. In Europe, real estate gains were much lower than last year. Latin America and Asia Latin America was evidently impacted by lower exchange rates. In the very challenging environment, our companies performed well when measured in local currencies. Our two latest additions, Barbosa in Brazil and CARHCO in Central America, turned in excellent results. Performance in Asia continues to be impacted by a lack of critical mass. Michael will mention the other elements of our results, such as the factors that impacted financial expenses, the tax rate and the improved working capital. Revised earnings outlook 2002 reconfirmed Ladies and Gentleman, despite the fact that we have dealt with the main concerns in Argentina and that the fundamentals of the business are really quite good, the rest of this year will continue to be challenging. The retail market is likely to remain depressed and we are putting a lot of hard work into driving sales, reducing costs and increasing other synergies. Fortunately we are blessed with an extremely motivated and dedicated group of Ahold associates determined to rise to the challenge
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and work collectively to keep our business strong for all our stakeholders. We reconfirm the revised earnings outlook we gave on July 17th. It does require a good performance in the second half of 2002 and we are confident that we can deliver.
678. On September 17, 2002, the Company filed a Form 6-K (the “September 17, 2002 Form
6-K”) which attached as an exhibit the text of the speech made by Van der Hoeven on August 29, 2002.
The September 17, 2002 From 6-K stated in pertinent part:
On September 12, 2002, The Wall Street Journal ran an article discussing certain questions surrounding Ahold’s accounting practices. In particular, this article focused upon Ahold’s second quarter 2002 announcement that while the Company experienced EUR 1.1 billion under Dutch GAAP, it actually suffered a loss of approximately EUR 198 million when the same financial results were reported under U.S. GAAP. In deflecting investor concerns regarding the problematic reconciliation, The Wall Street Journal quoted defendant Van der Hoeven as saying: “There are no accounting issues in Ahold. We never booked anything wrong. We have been in full compliance throughout the whole process.”
679. On October 8, 2002, the Company issued a press release (the “October 8, 2002 Press
Release”) entitled “Ahold Clarifies Shareholders’ Agreement with Scandinavian Partners.” In the
October 8, 2002 Press Release, the Company stated in pertinent part:
Zaandam, The Netherlands, October 8, 2002 – Ahold today issued the following statement reiterating and clarifying certain terms of its Shareholders’ Agreement with its Scandinavian partners, ICA Forbundet and Canica: In April 2000, Ahold formed a joint venture with the ICA Group, the leading Scandinavian food retailer. Ahold holds a 50% interest in ICA Ahold Holding AB, in which all activities of the ICA Group have been brought together. The other shares in ICA Ahold Holding AB are held by the association of ICA retailers (ICA Forbundet, 30%) and the investment company of the Norwegian Hagen family (Canica, 20%). Pursuant to the Shareholders’ Agreement, all partners have the right to sell their shares, although not before April 2004. If either ICA Forbundet or Canica decides to sell shares, it is first required to offer the shares to the other. Should the Scandinavian partners fail to reach agreement, Ahold is obliged to purchase the shares at a price reflecting the market value of ICA Ahold at the date of sale (to be set by an independent third-party
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valuation). Any transaction must consist of a minimum of 5% of the shares in ICA Ahold.
680. According to the October 8, 2002 Press Release, defendant Meurs stated:
It is common practice in joint venture arrangements that partners agree on an exit strategy for the joint venture should they wish to terminate the relationship at any point… In that event, we wanted to ensure that Ahold had the right to buy the partners’ shares and create a majority position for our company.
681. The October 8, 2002 Press Release further stated:
Ahold has one more joint venture agreement in which it has an obligation to buy the shares of its partner at market value: the Paiz Ahold partnership in Central America. Under this agreement, Ahold has the obligation to purchase the Paiz family’s interest in Paiz Ahold should the Paiz family’s stake in CARHCO, the Central American Retail Holding Company, fall from its current 33.3% to 13.3% or less. ICA Ahold The ICA Ahold joint venture is the leading retailer in Scandinavia with 2001 sales of Euro 6.6 billion and 3,100 stores in Sweden, Norway, Denmark, Estonia, Latvia and Lithuania. Ahold is an international food retailer and foodservice operator with 2001 sales of Euro 66.6 billion and approximately 9,000 stores and foodservice activities in 27 countries on four continents.
682. On October 18, 2002, Dow Jones International News published an article entitled,
“Portugal’s JMR to Boost Capital By €230 M.” Among other things, the article asserted the following,
of which Ahold and Deloitte were aware during the Class Period:
In a statement, JMR said Jeronimo Martins SGPS (E.JMT) and Dutch retailer Royal Ahold N.V. (AHO) have agreed to the capital increase. Jeronimo Martins controls 51% of JMR, while Ahold controls 49%, the statement said.
683. Amid a downturn in Ahold’s stock price, Dow Jones International News published an
article on October 23, 2002 in which it quoted defendant Van der Hoeven as stating: “we’ve done our
damndest to be as open and transparent as can be.” The Wall Street Journal Europe repeated the
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foregoing quote from defendant Van der Hoeven in a story that ran on October 25, 2002. As the 2002
Form 20-F and 2002 Annual Report admit that a full investigation of Ahold’s improper accounting for
its joint ventures was already underway at this time, defendant Van der Hoeven’s statement was
materially false and misleading. As the 2002 Form 20-F and 2002 Annual Report admit that a full
investigation of Ahold’s improper accounting for its joint ventures was already underway, Van der
Hoeven’s statement was materially false and misleading.
684. Each of the statements made from May 2002 through October 2002 concerning Ahold’s
fiscal 2001 and/or fiscal 2002 financial results, success at integrating acquired companies, and/or the
Company’s internal controls, was false and misleading when issued. The true but concealed and/or
misrepresented facts included, but were not limited to:
(a) The USF net income that Ahold reported during fiscal 2002 was materially overstated by $510 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $510 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;” As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
(b) Ahold’s fiscal 2002 reported quarterly earnings were materially false and misleading as reflected in the table below, which sets forth Ahold’s fiscal 2002 “correcting adjustments” published in the 2002 Form 20-F, which the Company stated, “affected our reported quarterly earnings for fiscal 2002 as announced in press releases on June 6, 2002, August 29, 2002, and November 19, 2002, which were included in Form 6-K reports furnished to the SEC, as follows:”
Fiscal 2002
Quarter ended Quarter ended Quarter ended
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April 21, 2002 July 14, 2002 October 6, 2002
(in EUR millions) Net sales as previously reported 22,191 17,273 16,413 Net sales reflecting correcting adjustments 19,559 14,786 14,045 Net income (loss) as previously reported 328 (198 ) 258 Net income (loss) reflecting correcting adjustments 135 (266 ) 177
(c) By virtue of the improper recognition of revenues, net income and/or the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
(d) Defendants’ statements during 2002 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, among other things: Ahold’s 2001 Annual Report; defendant Van der Hoeven’s May 7, 2002 Shareholder Address; the Second June 6, 2002 Press Release; and the press releases that the Company issued on August 29, 2002; were materially false and misleading because, inter alia:
i. there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
ii. The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
iii. Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
iv. USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
v. The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders
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Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH (until July 2002). As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(f) By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
(g) At no time during fiscal 2002 did Ahold own the requisite interest in JMR, DAIH (until July 2002), Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
(h) Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
10. Defendant Van der Hoeven Leaks Third Quarter 2002 Results
685. On October 25, 2002, following an investor luncheon in New York City at which
defendant Van der Hoeven apparently leaked certain aspects of Ahold’s financial results for the third
quarter of 2002, the Company previewed its third quarter 2002 results in a press release (the “October
25, 2002 Press Release”). The October 25, 2002 Press Release contained the following materially false
and misleading statements:
3rd quarter 2002 sales of Euro 16.4 billion, a 5.8% increase over the Euro 15.5 billion generated in 2001. Organic sales growth, excluding currency impact, amounted to 1.5% for the quarter (2001: 6.5%).
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United States U.S. retail sales of the Ahold regional supermarket chains Stop & Shop, Giant-Landover, Giant-Carlisle, Tops, BI-LO and Bruno’s rose 11.5% to USD 6.0 billion (2001: USD 5.4 billion). Organic U.S. retail sales growth amounted to 3.4% (2001: 7.3%). Identical U.S. retail sales amounted to –0.2% (2001: 3.4%). Comparable U.S. retail sales grew by 0.6% (2001: 3.8%). U.S. foodservice sales increased by 43.3% to USD 4.0 billion (2001: USD 2.8 billion). Organic U.S. foodservice sales growth amounted to –6.1% (2001: 9.0%). Europe In the 13 European countries in which Ahold is active, sales increased by 6.6% to Euro 5.5 billion. Organic sales growth, excluding currency impact, amounted to 4.8% (2001: 6.3%). South America In South America – Brazil, Argentina, Chile, Peru and Paraguay – sales decreased by 49.3% to Euro 586 million. Organic sales growth, excluding currency impact, was 6.0% (2001: -1.3%).
***
Central America In Central America – Guatemala, Costa Rica, Honduras, Nicaragua and El Salvador – the joint venture Paiz Ahold, owner of La Fragua, formed a new regional joint venture with CSU named CARHCO, effective January 1, 2002. Since that date, La Fragua has been deconsolidated. CARHCO’s results are reported as income from unconsolidated subsidiaries and affiliates. Sales in the third quarter amounted to Euro 372.0 million. Organic sales growth, excluding currency impact, amounted to 17.1%.
686. On October 25, 2002, the Company filed a Form 6-K (the “October 25, 2002 Form 6-K”)
which attached as an exhibit the October 25, 2002 Press Release.
11. Ahold Announces Results For The Third Quarter of 2002
687. Approximately one month later, on November 19, 2002, the Company issued a press
release (the “First November 19, 2002 Press Release”), announcing its official financial results for third
quarter 2002. The Company and defendant Van der Hoeven made the following materially false and
misleading statements:
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[T]hird-quarter 2002 net earnings of Euro 257.6 million (2001: Euro 304.2 million). The company launched an aggressive company-wide initiative focused on organic growth, cost reduction, capital efficiency and portfolio review for the 2003-2005 plan period. The initiative is intended to substantially improve Ahold´s competitiveness and financial performance. The objective is to generate free cash flow and reduce debt. Remarks by Cees Van der Hoeven, Ahold President & CEO Consolidated sales rose 5.8% to Euro 16.4 billion (+14.5% excluding currency impact) mainly due to the inclusion of Alliant and Bruno’s Supermarkets. Organic sales growth amounted to 1.5% (2001: 6.4%). Operating earnings were Euro 756.2 million, representing an increase of 13.3% (+24.0% excluding currency impact).
*** United States – retail In the United States, retail sales rose both organically and as a result of the consolidation of Bruno’s that took effect in December 2001. Organic retail sales growth amounted to 3.4% (2001: 7.0%). Comparable retail sales growth was 0.6% (2001: 3.8%) and identical retail sales declined 0.2% (2001: increase of 3.4%). Operating earnings rose as a result of strong improvements at most operating companies, supported by increased synergies, effective margin management and cost control. In particular, performance at Stop & Shop, Giant (Landover) and Giant (Carlisle) was strong, offset to a limited degree by BI-LO. Internet grocer Peapod reduced its operating loss to USD 7.4 million (2001: loss of USD 11.1 million). Results on tangible fixed assets mainly related to a sale and leaseback transaction at Giant (Landover). United States - foodservice In the United States, foodservice sales grew mainly due to the consolidation of Alliant with effect from December 2001. Organic foodservice sales declined by 6.1% (2001: increase of 9.0%). The company shed unprofitable business that was part of the Alliant portfolio, closed unprofitable operations and rationalized distribution. U.S. Foodservice expects to complete its planned 24-month operational integration of Alliant in 15 months.
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Foodservice operating earnings in the United States were significantly higher, primarily as a result of the consolidation of Alliant, purchasing synergies and cost reductions. Results at U.S. Foodservice, excluding Alliant, were strong due to effective streamlining of the business. The combination of the voluntary exit of the unprofitable business and the stepped-up transition activities has resulted in almost a doubling of operating earnings. Europe In Europe, organic sales growth, excluding currency impact, amounted to 4.8% (2001: 6.3%). In particular Albert Heijn, Schuitema, ICA Ahold and Central Europe contributed to the sales rise. Latin America In Latin America, sales in Euros were significantly lower as a result of the devaluation of several currencies, mainly the Argentine Peso and the Brazilian Real, as well as the deconsolidation of La Fragua. Organic sales growth, excluding currency impact, amounted to 6.0% (2001: minus 1.3%). Sales at Disco in Argentina in local currency were higher, partly as a result of strongly increased inflation. In Brazil, sales in local currency were higher mainly due to the acquisition of G. Barbosa in January of this year. In local currencies, Santa Isabel in Chile, Peru and Paraguay generated sales at the same level as last year. Sales in the third quarter amounted to Euro 371.9 million. Organic sales growth amounted to 17.1%. Operating earnings in the third quarter in Central America increased to Euro 15.8 million (2001: Euro 8.5 million), mainly attributable to the formation of the new joint venture. The net income from CARHCO, reported as income from unconsolidated subsidiaries and affiliates, amounted to Euro 0.9 million.
*** U.S. GAAP reconciliation Under U.S. GAAP, third quarter net earnings amounted to Euro 302.1 million (2001: net earnings of Euro 199.2 million). In particular, lower goodwill amortization related to the adoption on December 31, 2001, of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), contributed to higher net earnings under U.S. GAAP than according to Dutch GAAP. This was partly offset by gains related to sale and operating leaseback transactions, recognized as income according to Dutch GAAP, but
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amortized over the remaining period of the lease contract under U.S. GAAP.
688. On November 19, 2002, the Company filed with the SEC a Form 6-K (the “November
19, 2002 Form 6-K”), signed by defendant Meurs, which attached as an exhibit the November 19, 2002
Press Release.
12. Defendant Van der Hoeven Continues To Mislead Class Members
689. While the Company stated that it lowered its full-year outlook, defendant Van der
Hoeven sought to minimize the impact of the negative statements. Van der Hoeven, in a separate press
release issued on November 19, 2002, made the following materially false and misleading statements:
As announced in the trading statement published on October 25th, sales were soft. Consolidated sales rose 5.8% to 16.4 billion Euros, or 14.5% excluding currency. Organic sales growth was limited to 1.5%. Although U.S. Foodservice sales grew by 43.3%, organic sales growth declined by 6.1%. These numbers were heavily impacted by the intentional exit from unprofitable business at Alliant, as well as sales lost in the restructuring process. For example, we eliminated approximately 300 million dollars of annual intercompany sales between U.S. Foodservice and Alliant. The company shed unprofitable business, closed unprofitable operations, and rationalized distribution. U.S. Foodservice expects to complete the integration of Alliant ahead of schedule - in 15 months instead of 24. Stripping out the impact of the integration, the sales performance of U.S. Foodservice was in line with the best in the business. Retail sales in the United States rose both organically and as a result of the consolidation of Bruno’s. Sales in local currency increased 11.5%, organic sales growth amounted to 3.4%, and comparable sales growth was 0.6%. As reported in the trading statement issued in October, identical sales declined 0.2%, but even this number was better than that of most U.S. retail competitors. Sales performance in Europe was quite robust. Against the background of slower economic growth, organic sales growth was 4.8%, excluding currency. Sales in South America, expressed in Euros, declined 49%, due largely to currency devaluations. Organic sales growth, excluding currency impact, was a positive 6%. Sales in Asia rose 16.8% to 109 million Euros; organic sales growth, excluding currency, amounted to 21.7%.
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In the light of tough trading conditions, operating earnings in the 3rd quarter were outstanding. They increased 13.3% to 756.2 million Euros, or 24% excluding the impact of currency. This good performance was clearly reflected in the increase of operating margins from 4.3% to 4.6%, in line with previous improvements. Earnings at both U.S. foodservice and U.S. retail were excellent. The positive impact of the integration of Alliant, as well as strong results in the base business, were reflected in our foodservice operating earnings. At U.S. retail, the trend from the previous quarters was sustained. Considerable earnings improvement at Stop & Shop, Giant Landover, Giant Carlisle and Tops was marginally offset by BI-LO.
*** The revised outlook for 2002 As a consequence and most unfortunately, we have had to lower our outlook for 2002 again. ‘When it rains, it pours”, and 2002 is not our lucky year. We have had several disappointments coming from different directions, but mainly South America, all in one year. By the time you’ve added up the impact of extremely difficult trading conditions, the huge impact of currency devaluations, the default of Velox, the impact on financial expenses and the average tax rate, South America accounts for most of it. It is essential to understand that our problems are localized. Outside South America, the only material setback has been Spain, with a similar negative impact on the tax rate. All other Ahold companies are delivering results that range anywhere from the satisfactory to the extraordinary.
13. Defendants Meurs and Miller Continue To Mislead Investors During the
Third Quarter 2002 Analyst Presentation
690. On November 19, 2002, Ahold gave an analyst presentation concerning the Company’s
financial results for the third quarter of 2002 (“Third Quarter 2002 Analyst Presentation”), which was
broadcast live over the internet. During this presentation, defendants Van der Hoeven, Meurs, Miller,
and Grize discussed, among other things, the Company’s operations and prospects as well as those at
USF. In summarizing Ahold’s disappointing financial results, defendant Van der Hoeven made
materially false and misleading statements, claiming that the Company’s United States, Netherlands, and
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Swedish (ICA) operations were on track, but that Ahold’s South American units were negatively
impacting Company-wide results:
What you are seeing in the results is strong performance in the United States, strong performance also in the Netherlands and in Sweden, but a lot of noise around South America where the results are very disappointing. And in fact they also impact on the financial expenses as well as the tax rate, which I’m sure is a little bit of a surprise to most of you.
691. During the Third Quarter 2002 Analyst Presentation, defendant Meurs also discussed the
Company’s financial results. Early in his comments concerning Company-wide performance, Meurs
made the following materially false and misleading statements:
But all in all our net earnings at $257.6m is clearly not exactly what we would have wanted to present to you. But if we dive a little deeper you will see that there is quite a bit of good news below there. So let’s turn the page quickly and look at our organic sales growth. We will be talking about - and that’s why also Jim [Miller]is here, but the whole Board is here - we’ll be talking about sales a bit more than we probably did in the past. This number has been affected by our organic sales growth number at [indiscernible], but there’s a very clear reason why that was minus 6.1%, and that obviously affects the 1.5% number that you see here. So all in all our organic growth is positive. We continue to grow in most of our markets, and we’re pretty happy with what we see. And certainly the position to go forward is quite good. Now if you look at the United States you will see that sales increased by 11.5% to almost E6b, but out EBITDA increased even more by 23.6% to E365m. 6.1% operating earnings margin. You have t realize that we have had the benefit f real estate being in the US, approximately E29m, which is affecting this number. If you would exclude for that even then, our EBITDA number would have increased.
692. Speaking on the outlook for year 2002 financial results at the Third Quarter 2002 Analyst
Presentation, defendant Meurs made the following materially false and misleading statement regarding
Ahold’s sales:
What will benefit for the course of this year, and also as we go into next year, is the centralized buying strategy that we have included now. More
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and more we are centralizing that, and we will have the benefit of that as we go forward. Clearly we continue to improve our efforts to improve shrink, and that will all contribute to margin enhancement. Working capital clearly is something that we will focus much more on, but that is something that I will leave to Cees in the strategic plan. Foodservice -- We’ve seen as sales grow by 43.3% to a touch over $4b. EBITDA $208m, a pretty significant margin expansion, and that is a combination of two things. One is, our sales growth has been a little less than we had anticipated, but the growth has been much more in profitable area of sales, and that’s why we have been able to achieve a pretty significant margin expansion.
693. Regarding sales performance in Europe, defendant Meurs made the following materially
false and misleading statements and /or omission of material fact:
Europe -- That’s the area where our sales have been growing the fastest. It’s a 6.7% growth, E5.6b right now approximately. We have seen a slight decline in our margins, from 3.6% to 3.5 %. That is caused by the composition of our sales and earnings mix. Total sales went up by 6.7%. We have had some [win] in the bank from the Norwegian krona, so that has helped us a little bit, but if you would exclude that our sales increase is almost 5%. EBITDA margin, a decline of 20 basis points, but as I said, it’s caused by the mix of sales and earnings that we have generated. We grow faster in central Europe than we do in other parts, and that’s why we see the earnings mix change a little bit.
*** Likewise, ICA, we see good sales growth ICA, most coming out of Sweden right now, but also in Norway we see good improvements, even though the sales growth has been almost flat for the quarter.
694. During the Third Quarter 2003 Analyst Presentation, defendant Meurs also made the
following materially false and misleading statements and/or omissions of material facts concerning the
Company’s accounting for promotional allowances:
Our working capital number at the end of the quarter was unfavored by E395m. A big part of that is caused by two very specific reasons. One is, we had sold some real estate at the end of the quarter of which we have a significant receivable on our books. And also the promotion allowances
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in Foodservice, they do accrue over the quarters and are almost at the highest point at the end of the third quarter. And we start collecting those allowances in the fourth quarter and in the first quarter of next year. So by then we will see a receivables drop.
695. At the conclusion of his remarks at the Third Quarter 2002 Analyst Presentation,
defendant Meurs made the following representations concerning Ahold’s outlook for 2003 and the
Company’s accounting policies:
Confirmation. We confirm our outlook for 2003. There’s nothing new that we will tell you in terms of numbers. We’ve said something about organic growth that would be between 4% and 5%. We continue to work hard and improve obviously our earnings, but we will not release or give you any number before March 5, next year, when we release the full year numbers. Just a final statement on accounting policy, we will adopt IAS fully as of January 01, 2004. We will have comparable numbers between 2004 and 2003. So, internally we already start using IAS by January 01, 2003. We’re not fully done yet, so we will not report on those numbers as of 2003, but we’re pretty much there. Our external reports re-comply with Dutch law, and they are ruled by the guidelines for annual reporting, and we’ll reconcile these figures to U.S. GAAP as you all know. Now Dutch GAAP has probably more than any other GAAP in Europe, implemented many IAS standards. Now let me show you where we are in terms of implementation of Internal Accepted Standards. So for business combinations, so how you deal with goodwill, we use IAS 22. For pensions, as I said, SFAS 87 in both systems. The difference yet is for derivatives. You may all know that IAS has pretty much screwed up how they want to deal with derivatives, they make life so incredibly complicated for themselves, but they don’t see how to get out of this. We will report SFAS on the U.S. GAAP obviously, but under our Dutch GAAP numbers we will continue to use the guidelines for accounting reporting for Dutch GAAP.
696. After defendant Meurs’ remarks, defendant Van der Hoeven resumed his address to
analysts attending the Third Quarter 2002 Analyst Presentation. Concerning Ahold’s investment in
USF, defendant Van der Hoeven made the following materially false and misleading statement and/or
omission of material fact:
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We will continue to be multi-channel. We like the Foodservice business a lot, we think it’s very complimentary to the Retail Business. And Jim [Miller] and his crew will show you that we’ve made a real good investment in the Foodservice business going forward, and that everything that has happened this year in terms of restructuring, put us on a very strong footing for the years to come.
697. Following defendant Van der Hoeven’s and defendant Meurs’ opening remarks, analysts
were able to ask questions of the defendants participating in the Third Quarter 2002 Analyst
Presentation. Among the questions asked and answers given was the following, in which defendant
Miller made materially false and misleading statements and/or omissions of material fact concerning
USF:
PHILIP DORGAN: Second question relates to US Foodservices. I mean looking out, you point to the upside of the large gap between yourselves and Sysco. Is there any structural reason, you know, along the lines of say you have to look at the different industry, food retail in the UK, where Sainsbury and Tesco have huge margin gap, but there’s structural reason why that’s the case and it won’t change. Is there possibly a structural reason why that gap won’t narrow, or are you still confident that you can narrow the gap? JIM MILLER, PRESIDENT AND CEO US FOODSERVICE, ROYAL AHOLD: We’re very confident that we can narrow the gap, and I think when you look at -- if you want to look at the third quarter of Sysco and third quarter of US Foodservice, there hardly a gap. And I think that probably next year, as we put our IT systems together, we’ll have one platform across the United States. And at that point in time the metrics will match up almost identical . And I think that fortunately the gentleman on my right thinks we have more upside, so that’s how we’ll go forward.
698. During the Third Quarter 2002 Analyst Presentation, defendant Miller made the
following materially false and misleading statements and omissions of material fact regarding USF:
HOWARD BRAKE, ANALYST, JULIUS BIER: Just on the communication policy, wouldn’t it have been more appropriate if you would have shared the reason for the early earnings release today, and the meeting today, with the market yesterday? That’s question number one. And question number two is for Jim Miller. Jim, can you give us a little bit of comfort, what we’re going to see in Q1? Are we going to see --
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should we expect more sales declines because of the restructuring of Alliant, the integration of Alliant? MICHIEL MEURS: I guess whatever we say nowadays in terms of communication is bad news. So we’re trying to say as little as possible. But to make sure that you have the information available as soon as possible, and that will be our policy going forward. JIM MILLER: Well I think as we end up this year you’re going to see that our business is stabilized. And if you think back to about a year ago when we announced Alliant, we intended to shed about $700m, $750m of business in total. We probably lost $200m just because of some things that we didn’t do properly. The good news is, history tells us over the next six to nine months that business will come back to us. So what we see is, we’re getting back to selling again, we’re getting back to marketing, which is what we do best. And I think as we go into the first quarter you’re going see the organic sales totally grow within US foods. When you strip away the base US Foodservice business in the third quarter, we had about 7% organic growth. So I think in the next two to three weeks our marketing department is going to announce several very major contracts, which are going to be very encouraging. I think you will all be very, very pleased when you see those.
699. Defendant Miller also made the following materially false and misleading statements
and/or omissions of material fact representation regarding USF:
JURGEN EPHUS, ANALYST, COMMERZBANK: This is Jurgen Ephus from Commerzbank. Just another question for Jim Miller on the organic growth of 7% at the original US Foodservice business. Sysco is reporting numbers in the same range, I hear, does that show a change in the fundamental trend? That’s my first question. JIM MILLER: I think that if you looked at the base business throughout this last year, we have been about the same in terms of our organic growth base business. I think that in the second quarter our organic growth was slightly higher than theirs, reversed itself in the second. And the third is about even. And as we’re getting the Alliant sales force integrated and trained, I think you will see us coming into ‘03 and you’ll see a gradual improvement with the entire business. And I think we will be on at least the same rates of growth by the end of ‘03.
700. In connection with the Company’s November 19, 2002 announcement of its results for
the third quarter of 2002, defendant Van der Hoeven gave an interview to CNBC, segments of which
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were published in a November 19, 2002 article by Dow Jones International News. The article stated,
among other things:
Van der Hoeven said the company’s core operations are still doing well and that issues triggering the profit warning are largely one-time items. ‘We are relatively optimistic for next year,’ he said. Ahold maintains its organic growth target of 4% to 5% next year. ‘It’s not an impressive number, but a solid one,’ he said. He also said that the difficult market circumstance in the U.S., where the company generates the bulk of its profits, will remain difficult. ‘Sales in the U.S. has come down and that will continue in the fourth quarter,’ he said. ‘But margins are relatively healthy. We are relatively happy with the way things are going there.’ 14. USF Announces Planned Acquisition of Allen Foods
701. On December 5, 2002, the Company issued a press release entitled, “Ahold’s U.S.
Foodservice to Acquire Allen Foods.” In this press release, the Company made the following materially
false and misleading statements concerning its 2001 sales:
Zaandam, The Netherlands, December 5, 2002 – Ahold’s wholly owned foodservice subsidiary in the United States, U.S. Foodservice, today announced that a definitive agreement has been signed and the transaction has closed, to acquire Allen Foods, Inc. (“Allen”) of St. Louis, Missouri. Allen is a broadline foodservice distributor that services the St. Louis, Kansas City and southern Illinois market. In its most recent fiscal year Allen produced food service net sales of approximately USD 245 million. The acquisition does not include Halben Food Manufacturing Co., Inc., which was retained by the Allen shareholders.
* * * Ahold is a food retailer and foodservice operator serving 40 million customers in 27 countries every week, with 2001 sales of Euro 66.6 billion. Under their own brand names, Ahold companies operate approximately 9,000 stores in the U.S., Europe, Latin America and Asia. In addition to the United States, Ahold also operates foodservices activities in three European countries.
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15. Defendant Van der Hoeven Withdraws From ABN AMRO Supervisory Board
702. On December 20, 2002, the Company issued a press release entitled, “Ahold’s Van der
Hoeven to withdraw from Supervisory Boards ABN AMRO and Royal KPN.” In this press release, the
Company stated in pertinent part:
Zaandam, The Netherlands, December 20, 2002 - Ahold today announced that President & CEO Cees Van der Hoeven has decided to withdraw from the Supervisory Boards of ABN AMRO N.V. and Royal KPN N.V. with effect from the upcoming Annual General Meetings of Shareholders of April 29th, 2003 and May 12th, 2003 respectively. In connection with these withdrawals, Cees Van der Hoeven commented as follows “Because of Ahold´s ambitious plans for the coming years I have decided to give my undivided attention to the company and reduce my other activities to the minimum. I have been very honored to serve for many years on the Supervisory Boards of two great companies.” Van der Hoeven was appointed member of the Supervisory Board of ABN AMRO in 1997 and has been a member of the Supervisory Board of Royal KPN since 1998. 16. Analysts Embrace The Defendants’ False and Misleading Statements
703. During the time period from January 1, 2002 through December 31, 2002, analysts
followed defendants’ public statements and announcements closely in connection with reporting
Company developments to investors. Analysts routinely relied upon defendants’ materially false and
misleading statements, using such statements as the basis for their reports:
• On April 18, 2002, Commerzbank issued a report on Royal Ahold. It
rated Royal Ahold a “Buy,” with a price target of €34.00. The report
further stated:
Our discussions with the CEO have not led us to change our bullish view on US Foodservice. We expect an EBITA margin of 4% of sales in 2002. This number compares with stand-alone EBITA margins of around 3.7% for US Foodservice (prior to acquisition by Ahold), 3.4% for PYA/Monarch and 2.2% for Alliant. The expected combined sales of all three businesses of around US $19bn and EBITA margin of 4.0% is not
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simply a miracle. The numbers are greatly helped by external factors (highly fragmented industry, and little price competition between market leader Sysco Corp. and US Foodservice). It should be remembered that Ahold made provisions for integration charges of the order of 105m (US $95m) related to the Alliant integration in its 2001 Dutch GAAP earnings.
The provision covers the market exit costs for certain locations. In the wider context of the Alliant acquisition, the company decided to close 15 Alliant distribution facilities, for which provisions of around US $100m were sufficiently covered in the purchase accounting at the time of the acquisition. In addition, it was decided to close 11 US Foodservice facilities and keep the more up-to-date facilities of Alliant instead. As the exit costs for those facility closures are effectively covered by the provisions made, the related operating costs of these facilities will be eliminated as the year progresses. Assuming that the provisions more or less match the operating costs (including personnel costs), and assuming a full-year elimination of costs as of 1 January 2002, US Foodservice would not need to improve operating earnings at all in order to meet the targeted 4.0% EBITA margin for 2002.
• On June 7, 2002, Deutsche Bank Securities, Ltd. published an analyst
report, which maintained the firm’s Market Perform rating on the stock.
The report stated that “Foodservice, meanwhile, saw operating profit
increasing 53% to US $187m,” and that “the profit shortfall in Europe was
offset by a greater than expected widening of the margin at the US food
retail operations.”
• On August 30, 2002, Lehman Brothers issued a report on Royal Ahold. It
provided the Company with a “1-Overweight” rating, with a price target of
€25.00. The report also stated:
Europe: Ahold reported organic sales growth of 3.2% in Europe, excluding currency impact (versus 9.2% in 2001); all retail operations in The Netherlands, Scandinavia, Spain and Central Europe contributed to this increase. Whilst operating earnings at Albert Heijn, ICA and Portugal illustrated improvements; in the Czech Republic operating results reached break-even point and in Poland losses are still being recoded.
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The underlying growth in Europe also needs some adjustments to real estate gains to see that margins improved by 22 basis points instead of 10 as shown in the results. Thus considering Spain is below company expectations and Poland continues with losses, EBIT excluding real estate gains improved 11.4%. The result is better than our estimates which was factoring a decline in margins of about 20 basis points, thus more than making up for the sales shortfall in our estimates.
• A Credit Suisse First Boston Fixed Income Report, released on November
27, 2002, stated:
Operating earnings remain strong but bottom line is pressured - Overall, third quarter results were respectable, particularly when one focuses on the operating line and given the challenging environment in several of its markets. For the quarter, operating earnings increased 13.35 to euro 756 million on a 5.8% increase in revenues to euro 16.4 billion and a 30bps increase in the operating margin.
Regarding Foodservice the report stated:
Operating earnings improved 83.7% to $208.1 million as operating margins increased 120 bps to 5.2% of revenues. 17. Additional SEC Filings That Certain Individual Defendants Signed
704. In addition to the foregoing 2002 statements, certain Individual Defendants signed the
following documents that were filed with the SEC and incorporated, either directly or by reference,
various materially false and misleading statements relating to the Company’s financial performance
during the Class Period:
1/3/02 Form 6-K (containing false and misleading 3rd Quarter 2001 financial results for Ahold), signed by Van der Hoeven. 11/22/02 Form 6-K (containing false and misleading financial results for the 12-week quarter ended October 6, 2002 (Third Quarter 2002) and financial review of the Company for that quarter), signed by Meurs.
705. Each of the statements made in 2002 from October 25, 2002 through December 20, 2002
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companies, and/or the Company’s internal controls, was false and misleading when issued. The true but
concealed and/or misrepresented facts included, but were not limited to:
(a) The USF net income that Ahold reported during fiscal 2002 was materially overstated by $510 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $510 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;” As Dudley Eustace admitted during the May 8, 2003 Conference Call, USF systematically “in its search to bring cash in early got cash in ahead of it being earned;”
(b) Ahold’s fiscal 2002 reported quarterly earnings were materially false and misleading as reflected in the table below, which sets forth Ahold’s fiscal 2002 “correcting adjustments” published in the 2002 Form 20-F, which the Company stated, “affected our reported quarterly earnings for fiscal 2002 as announced in press releases on June 6, 2002, August 29, 2002, and November 19, 2002, which were included in Form 6-K reports furnished to the SEC, as follows:”
Fiscal 2002
Quarter ended April 21, 2002
Quarter ended July 14, 2002
Quarter ended October 6, 2002
(in EUR millions) Net sales as previously reported 22,191 17,273 16,413 Net sales reflecting correcting adjustments 19,559 14,786 14,045 Net income (loss) as previously reported 328 (198 ) 258 Net income (loss) reflecting correcting adjustments 135 (266 ) 177
(c) By virtue of the improper recognition of revenues, net income and/or the establishment of fictitious receivables, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP, and there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;”
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(d) Defendants’ statements during 2002 regarding integration, recognition of synergies, and recognition of economies of scale, made in or in connection, with among other things: Ahold’s 2001 Annual Report; defendant Van der Hoeven’s May 7, 2002 Shareholder Address; the Second June 6, 2002 Press Release; and the press releases that the Company issued on August 29, 2002; were materially false and misleading because, inter alia;
i. there was a wholesale lack of adequate internal controls at Ahold governing, in particular, vendor allowances. Based upon the internal investigations conducted following the Company’s February 24, 2003 Announcement, Ahold has admitted in its 2002 Form 20-F that “significant internal control weaknesses [were] raised or confirmed in the internal investigations. Over 275 items relating to internal control weaknesses were identified;”
ii. The Company did not have any reasonable basis for reporting USF’s financial results, but instead, “the company [was] flying blind with very, very inadequate control systems on what is the most important part of its income, as Ahold’s interim Chief Financial Officer, Dudley Eustace admitted during the May 8, 2003 Conference Call;
iii. Deloitte flagged Ahold’s inadequate internal controls in “every report,” as Dudley Eustace admitted during the May 8, 2003 Conference Call;
iv. USF was typified by “numerous material weaknesses in internal controls, including a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally, and failure by management to understand and properly apply GAAP and Ahold’s stated accounting policies in the area of vendor allowances and rebates,” as Ahold admits in its 2002 Form 20-F;
v. The Company was, in fact, not successfully integrating the entities that it acquired or with which it entered into a joint venture. Instead, as Anders Moberg admitted during his September 4, 2003 presentation at Ahold’s General Meeting of Shareholders: “[t]he company has grown very fast but failed to integrate at the same pace, and failed to have adequate financial controls;”
(e) Ahold’s financial statements and results issued during this period were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR, ICA, Paiz Ahold and DAIH (until July 2002). As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them;”
(f) By virtue of the improper consolidation of JMR, Bompreco, ICA, Paiz Ahold, and DAIH, Ahold’s and Deloitte’s representations that Ahold’s fiscal 2001 and/or fiscal 2002 financial statements were prepared in accordance with Dutch GAAP were false. As set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing
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Standards,” consolidation was prohibited by Dutch GAAP because Ahold lacked control over these joint ventures;
(g) At no time during fiscal 2002 did Ahold own the requisite interest in JMR, DAIH (until July 2002), Paiz Ahold, or ICA to consolidate 100% of the financial results of any of these joint ventures; and
(h) Ahold’s reported financial results from Argentina were inherently unreliable because, as Ahold has since admitted in its 2002 Form 20-F: Disco was plagued by “a series of suspicious transactions, some of which involved the use of fictitious invoices to conceal or mischaracterize payments, or payments that were otherwise improperly documented. In addition, in some instances these payments were improperly capitalized rather than expensed. Significant internal control weaknesses were also found.”
F. 2003 Events and False and Misleading Statements
706. During 2003, the defendants made and/or caused to be issued materially false and
misleading statements and/or omissions of material facts, some of which were made in connection with
the events depicted on the following graph:
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1. Ahold Previews Year 2002 Results
707. On January 7, 2003, the Company issued a press release (the “January 7, 2003 Press
Release”), entitled, “Ahold Sales Rise 9.2% to Euro 72.7 Billion,” wherein the Company previewed its
fourth quarter 2002 and fiscal year 2002 financial results. In the press release, the Company made the
following materially false and misleading statements:
Zaandam, The Netherlands, January 7, 2003 – Ahold, the international food retailer and foodservice operator, today reported 2002 sales of Euro 72.7 billion, a rise of 9.2% over the Euro 66.6 billion generated in 2001. Organic sales growth amounted to 3.2% for the year (2001: 6.1%). In the fourth quarter, sales amounted to Euro 16.9 billion, a 0.3% increase over the Euro 16.8 billion generated in 2001. Organic sales growth in the fourth quarter was 2.5% (2001: 4.0%). Consolidated sales in Euro were negatively impacted by the lower exchange rate of the U.S. Dollar and to a lesser extent by the devaluation of the Argentine Peso and the Brazilian Real . Ahold reconfirms that earnings per common share for 2002, excluding
Jan. 7, 2003 - Ahold announces that its 2002 sales rose 9.2% to Euro 72.7 billion.
Jan. 17, 2003 - Ahold debt cut by Moody's.
Feb. 25, 2003 - Moody's cuts Ahold debt.
Feb. 26, 2003 - Ahold annouces SEC probe
Mar. 6, 2003 - D&T disavows prior audits
Feb. 24, 2003 - Ahold announces restatement
Feb. 27, 2003 - Ahold executives resign
Mar. 11, 2003 - Ahold appoints new CFO
Mar. 21, 2003 - D&T will not face Dutch accounting probe for Ahold.
April 3, 2003 - Ahold announces intention to sell South American activities April 14, 2003 - Unilever announces it won't give Ahold additional time to pay bills
May 2, 2003 - Moberg named new CEO.
May 7, 2003 - Ahold to clear top management in Accounting probe
May 13, 2003 - Ahold announces resignation of US Foodservices head -Jim Miller
May 8, 2003 - Ahold announces pretax profit was overstated by $880 millio n .
May 16, 2003 - Ahold first quarter US retail sales beat estimates dropping only 11%.
May 20, 2003 - Ahold restates sales, says part of last week's report incorrect
June 25, 2003 - Ahold announces resignation of Tops Markets CEO
June 4, 2003 - Ahold sells candy chain to reduce debt
May 27, 2003 - Ahold finds accounting errors at Tops Supermarkets
Aug. 18, 2003 - Ahold restates 2001 and 2002 sales figures by $225mm related to sales of postage stamps.
July 30, 2003 - Argentinian Judge impounds sale of Disco unit
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goodwill amortization, exceptional items and currency impact, are expected to decline 6-8%.
708. According to the January 7, 2003 Press Release, defendant Van der Hoeven stated as
follows:
2002 was a year of increasingly challenging trading conditions…Sales slowed in the course of the year as a consequence of further deteriorating economic circumstances. However, we are encouraged by the fact that we strengthened our position in most markets. Compared to the third quarter, all regions showed slightly better organic sales growth. As announced on November 19, 2002, Ahold launched a three-year company-wide initiative focused on portfolio rationalization and debt reduction. This initiative is on track and we will comment periodically during the course of this year.
709. The January 7, 2003 Press Release further stated:
United States - retail Sales rose both organically and as a result of the consolidation of Bruno’s that took effect in December 2001. Organic U.S. retail sales growth amounted to 4.8% (2001: 6.2%). Identical U.S. retail sales growth totaled 0.9% (2001: 2.6%). Comparable U.S. retail sales growth was 1.6% (2001: 3.1%). Organic sales growth in the fourth quarter was 4.1% (2001: 3.7%). Identical sales growth in the same period totaled 1.0% (2001: decline of 0.4%) and comparable sales growth was 1.6% (2001: 0.1%). United States - foodservice Foodservice sales grew mainly due to the consolidation of Alliant with effect from December 2001. Organic sales declined by 1.9% (2001: increase of 10.4%). The company shed unprofitable business that was part of the Alliant portfolio, closed unprofitable facilities and rationalized distribution. Organic sales declined by 5.2% in the fourth quarter (2001: increase of 8.5%). Europe Organic sales growth amounted to 5.0% (2001: 6.7%). Organic sales growth in the fourth quarter was 5.2% (2001: 4.4%). Latin America Sales in Euro were significantly lower as a result of the devaluation of mainly the Argentine Peso and the Brazilian Real, as well as the
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deconsolidation of La Fragua. Organic sales growth was 5.6% (2001: 1.2%). Organic sales growth in the fourth quarter was 9.8% (2001: decline of 0.5%). Central America The non-consolidated sales of CARHCO amounted to Euro 1.6 billion (2001: Euro 0.7 billion).
710. On January 7, 2003, the Company filed a Form 6-K (the “January 7, 2003 Form 6-K”)
which attached as an exhibit the January 7, 2003 Press Release. Defendant Van der Hoeven signed the
January 7, 2003 Form 6-K.
711. On January 15, 2003, Ahold issued a press release concerning a business transaction that
its ICA joint venture was evaluating. This press release affirmed that:
ICA Ahold AB is the leading retailing group in the Nordic region with 3,100 stores in Scandinavia and the Baltic countries. In addition, ICA Ahold and Statoil jointly own and operate 1,500 Statoil service stations across Scandinavia. ICA Ahold is owned by ICA Forbundet Invest AB (30%), Canica AS of Norway (20%) and Ahold (50%).
712. From January 15, 2003 until the end of the Class Period on February 24, 2003,
defendants’ materially false and misleading statements and/or omissions concerning, among other
things, Ahold’s sales results and success at integrating acquired companies remained uncorrected, and
the true but concealed facts were unknown to Class Members.
713. Each of the statements made in 2003 concerning Ahold’s fiscal 2002 financial results,
was false and misleading when issued. The true but concealed and/or misrepresented facts included, but
were not limited to:
a. The USF net income that Ahold reported in connection with announcing its year-end 2002 financial results was materially overstated by $510 million by virtue of deliberate fraud. Ahold has admitted in the Company’s 2002 Form 20-F, that the $510 million overstatement of net income consisted of, among other things “fictitious and overstated vendor allowance receivables and improper or premature recognition of vendor allowances, which caused vendor allowance income to be
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overstated and therefore cost of goods sold to be understated” Moreover, “[C]ertain USF senior officers and other employees used inflated recognition rates for vendor allowances for the purpose of overstating vendor allowance income and accrued vendor allowance receivable balances, intentionally caused the incorrect accounting for and mischaracterization of vendor allowance cash receipts, and intentionally caused the misapplication of Dutch GAAP and U.S. GAAP;”
b. Ahold’s fiscal 2002 reported quarterly earnings, as announced in 2003 were materially false and misleading as reflected in the table below, which sets forth Ahold’s fiscal 2002 “correcting adjustments” published in the 2002 Form 20-F, which the Company stated, “affected our reported quarterly earnings for fiscal 2002 as announced in press releases on June 6, 2002, August 29, 2002, and November 19, 2002, which were included in Form 6-K reports furnished to the SEC, as follows:”
Fiscal 2002
Quarter ended April 21, 2002
Quarter ended July 14, 2002
Quarter ended October 6, 2002
(in EUR millions) Net sales as previously reported 22,191 17,273 16,413 Net sales reflecting correcting adjustments 19,559 14,786 14,045 Net income (loss) as previously reported 328 (198 ) 258 Net income (loss) reflecting correcting adjustments 135 (266 ) 177
c. By virtue of the improper recognition of revenues, net income and/or the establishment of fictitious receivables, Ahold’s and Deloitte’s representations in 2003 that Ahold’s fiscal 2002 financial statements were prepared in accordance with Dutch GAAP, and that there was proper reconciliation in accordance with U.S. GAAP, were false, as set forth in detail below in the section entitled “Defendants’ Violation of Dutch and United States Accounting Principles and Auditing Standards;” and
d. Ahold’s financial statements and results for 2002 issued during 2003 were materially overstated because they included artificially inflated net sales due to the improper consolidation of all of the reported net sales of JMR and ICA. As Ahold admits in its 2002 Form 20-F, “consolidation of the aforementioned joint ventures was inappropriate under Dutch GAAP and U.S. GAAP, since the Company did not control them.”
XIV. DEFENDANTS’ VIOLATION OF DUTCH AND UNITED STATES ACCOUNTING
PRINCIPLES AND AUDITING STANDARDS
714. Despite defendants’ representations to the contrary, Ahold’s Class Period financial
statements failed to comply with Dutch and U.S. GAAP. Furthermore, the Company’s disclosure that a
restatement will be necessary in the amount of at least $880 million for the past two and one half years is
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an admission that Ahold’s Class Period financial statements for those years were materially false and
misleading.
A. MISREPRESENTATIONS CONCERNING DUTCH AND U.S. GAAP
1. The Representations Concerning Dutch and U.S. GAAP
715. In each of Ahold’s Forms 20-F, Annual Reports and Quarterly Reports reported on Forms
6-K since December 28, 2000 disseminated during the Class Period, Ahold represented that the financial
statements included were prepared in accordance with accounting principles generally accepted in The
Netherlands. In addition, in its Forms 20-F and Annual Reports, Ahold disclosed that its shareholders’
equity and net earnings were prepared in accordance with U.S. GAAP.
716. Specifically, each Form 20-F disclosed the following, regarding compliance with GAAP:
The consolidated financial statements of Koninklijke Ahold N.V., also referred to as “we,” “us,” “our,” “Royal Ahold” or “Ahold,” appear in Item 18 of this annual report. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in The Netherlands (“Dutch GAAP”). Dutch GAAP differs in certain material respects from generally accepted accounting principles in the United States (“U.S. GAAP”). The differences between Dutch GAAP and U.S. GAAP which materially affect our reported ne t earnings and shareholders’ equity are explained in the notes to the consolidated financial statements, followed by a reconciliation of Dutch GAAP net earnings and shareholders’ equity to amounts computed under U.S. GAAP.
717. Similarly, Ahold’s Forms 20-F, included audit reports prepared by Deloitte in which
Deloitte represented that Ahold’s financial statements contained therein complied with Dutch GAAP:
present fairly, in all material respects the consolidated financial position of [Ahold] at [the applicable dates] and the results of its operations, changes in equity and its cash flows for each of the three fiscal years in the [applicable] period, in conformity with generally accepted principles in the Netherlands.
718. Furthermore, each of Ahold’s Annual Reports disseminated during the Class Period
represented that Ahold’s financial statements were prepared in accordance with Dutch GAAP and
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included a reconciliation of Dutch GAAP to U.S. GAAP in the financial statement footnotes. Also, each
Annual Report included audit reports prepared by Deloitte by which Deloitte represented that Ahold’s
financial statements contained therein:
give a true and fair view of the financial position of the company as of [the applicable date] and of the result for the year then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil Code.
Deloitte’s audit reports further represented that the application of U.S. GAAP would have affected
Ahold’s reported net earnings and stockholders’ equity in the manner set forth by Ahold in footnotes to
the referenced financial statements.
719. The statements set forth in the preceding four paragraphs were materially false and
misleading in that the referenced financial statements were not prepared in accordance or conformity
with accounting principles generally accepted in the Netherlands or the applicable provisions of The
Netherlands Civil Code (“NCC”). In addition, contrary to Ahold’s representations concerning net
earnings and shareholders’ equity in accordance with U.S. GAAP, they were not prepared in accordance
with those principles.
2. Violations of Dutch GAAP
720. In the Netherlands, accounting principles are based on the NCC and the Council for
Annual Reporting’s Guidelines on Annual Reporting (“GAR”). They are collectively referred to herein
as “Dutch GAAP.” Ahold’s publicly disseminated financial statements violated Dutch GAAP in at least
the following respects:
a. Overstated Vendor Allowances
721. Ahold’s accounting for vendor allowances overstated reported assets, revenues, net
income and shareholders’ equity as well as understated liabilities. Furthermore, Ahold’s improper
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and/or premature recognition of vendor allowances violated at least Sections 362, 363, 374 and 384 of
the NCC. These statutes require, among other things, that:
(a) The financial statements provide reliable and useful information as to the assets and liabilities of the entity (NCC §§2:362(1); 2:363);
(b) The balance sheet and notes thereon fairly, clearly and systematically reflect the net assets and composition of the assets and liabilities (NCC §2:362(2));
(c) The profit and loss account and the notes thereon fairly, clearly and systematically reflect the result for the financial year and the items of income and expense upon which it is based (NCC §2:362(3));
(d) Profits shall be shown only to the extent that they have been realized or earned on the balance sheet date (NCC §2:384(2));
(e) Losses and risks originating before the end of the financial year shall be taken into account if they become known before the balance sheet date (NCC §2:384(2)); and
(f) Liabilities and losses as of the balance sheet dates to the extent known or can be reasonably estimated should be reflected in the financial statements (NCC §§2:374 and 2:375(1.c)).
722. Ahold’s improper and/or premature recognition of vendor allowances also violated at
least the following provisions of GAR:
(a) In presenting financial statement s:
(i) revenues and income should not be recognized until earned;
(ii) matching of revenues with related expenses should be adhered to (GAR – Framework at ¶¶94-96 and §110 – Objectives and Basic Assumptions at ¶¶118-121); and
(b) Accruals and deferred income, which comprise, among other things, amounts received in advance in respect of income attributable to ensuing periods or prepayments, shall be reflected as liabilities in the company’s balance sheet (GAR §258 – Accruals and Deferred Income);
(c) The Guidelines concerning Qualitative Characteristics of Financial Statements (included in the Introductory “Framework” section of GAR) which include requirements of understandability, reliability, neutrality, prudence, completeness, comparability and fairness and accuracy in presentation of financial statements. The Framework section also notes the requirement that financial statements must, among other things, reflect underlying substance and economic reality;
(d) Assets and liabilities reflected in the financial statements must represent economic reality (GAR – Framework, ¶¶35 and §120 – Valuation Principles and §130 at ¶¶106-108);
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(e) All relevant information should be disclosed in the financial statements (GAR – Framework at ¶38; GAR §110, ¶16). Information is relevant if the misstatement or omission of such could influence the economic decisions of users of the financial statements (GAR §130 – Criteria for Inclusion and Disclosure of Financial Information); and
(f) Disclosure of fundamental errors to previously issued financial statements should be made as closely as possible to the financial year in which the fundamental error was made (GAR §150 – Correction of Fundamental Errors; see also NCC §2:362(6)).
723. In its 2002 Form 20-F, Ahold admitted that its accounting for vendor allowances prior to
fiscal 2000 and for fiscal 2000, 2001 were materially incorrect and violated Dutch GAAP. See 2002 20-
F, at F-27-28, 73, 80.
b. Improper Consolidation of Joint Ventures
724. Ahold’s consolidation of the financial results of its joint ventures in ICA, DAIH,
Bompreço, Paiz Ahold and JMR violated Dutch GAAP in at least the following respects: Full
consolidation is only appropriate where one joint venturer “controls” the joint venture. GAR §214:103a;
NCC §2:24b. “Control” is evidenced by the ability to exercise a majority of the voting rights or to
appoint or dismiss a majority of the managers. GAR §214.103a; see also NCC §§2:409; 2:24a(1).
Further, as of January 1, 2001, the applicable GAR provided that the hallmark of a joint venture is
shared management in which none of the participants has a decisive voice or can enforce its own policy.
Therefore, an entity qualifying as a joint venture cannot typically be consolidated. GAR §§214.803-804.
725. The effect of improperly consolidating the financial results of ICA, DAIH, Bompreço,
Paiz Ahold and JMR was a material and artificial inflation of Ahold’s reported revenues for fiscal years
1997 through 2001 and for the first three quarters of fiscal 2002. Rather than consolidating the financial
results of these joint ventures, Ahold was required to reflect its interest in these joint ventures under the
“equity method” until, with respect to DAIH and Bompreço, such time as Ahold acquired a majority
interest and control over DAIH in July 2002 and Bompreço in July 2000. GAR §214. Under the equity
method, there would have been no inflation of Ahold’s revenues.
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726. Ahold’s improper consolidation of Paiz Ahold as of December 1999 and ICA as of April
2000 also violated Dutch GAAP because Ahold improperly recorded restructuring accruals relating to
these “acquisitions.” See, e.g., GAR §214. Ahold has admitted, that either under Dutch GAAP or U.S.
GAAP, it improperly established the reserves and restated its financial statements to reverse the reserves
taken upon acquisition and record its share of the actual costs when incurred. See 2002 Form 20-F, at F-
22.
727. Ahold has admitted in its 2002 Form 20-F that it lacked the requisite control to
consolidate each of these entities and that they were improperly consolidated under Dutch GAAP.
c. Improper Acquisition Accounting
728. Ahold’s reported net income for fiscal 2000 and 2001 and first three quarters of fiscal
2002 was not determined in accordance with Dutch GAAP because Ahold failed to properly allocate a
portion of the purchase price to certain acquired real estate properties in connection with the acquisition
of Superdiplo and the interest in ICA during fiscal 2000. Further, in fiscal 2001, Ahold failed to allocate
a portion of the purchase price to identifiable intangible assets upon other acquisitions. Pursuant to
Dutch GAAP, purchase consideration must be allocated to all tangible and identifiable intangible assets
purchased as a part of an acquisition. See, e.g., GAR §214. The portion of the purchase price charged to
goodwill is the excess of the price over the fair value of all acquired tangible and identifiable intangible
assets. GAR §500. In addition, by failing to assign any value to such real estate, Ahold overstated the
gain on the sale of certain of such real estate in fiscal 2000 and 2001.
729. Further, Ahold failed to depreciate the cost of such real estate as required by NCC
§2:386(1) and GAR §212, ¶¶214-215. Such depreciation would have reduced net income commencing
in the year of each respective acquisition. As a result of its improper acquisition accounting, net income
was overstated by €36 million and €8 million for fiscal years 2001 and 2000, respectively.
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d. Improper Recording of Reserves, Allowances and Provisions
730. Ahold admitted in its 2002 Form 20-F that it overstated net earnings prior to fiscal 2002
by material amounts by improperly recording certain reserves, allowances and provisions related to
income taxes, pensions and restructuring expenses. In addition, Ahold admitted that certain pension and
early retirement plans had not been accounted for as defined benefit plans and that as a consequence,
charges and accruals related to certain health and welfare plans were not calculated properly prior to
fiscal 2002. As a result, expenses in these periods were understated and net income was overstated by
€33 and €38 for fiscal 2001 and 2000, respectively. According to Ahold’s own admission, the
establishment and releases of these reserves, allowances and provisions was improper since there was
insufficient documentation to support the amounts recorded or the accounts were of a “non-specific
nature,” which does not meet the definition of a loss contingency. Pursuant to Dutch GAAP, any
reserve allowance or provision recorded on a company’s financial statements must be supportable (NCC
§2:374 and GAR §252) and must be for a specific purpose. GAR §252, ¶¶201-226. In addition, by
improperly establishing reserves, Ahold’s accounting violated, among others, the provisions of Dutch
GAAP set forth at ¶ 721(a)-(f) and ¶ 722(a)-(f) above. Ahold also admitted in its 2002 Form 20-F that it
improperly recorded and/or calculated liabilities and related expenses concerning its pension plans and
certain health and welfare plans.
e. Improper Recording of Real Estate Transactions
731. Ahold’s improper accounting for certain real estate transactions materially inflated net
earnings for fiscal 2000. These real estate transactions consisted of leveraged lease transactions by
which Ahold sold certain real estate to third parties and pursuant to the terms of the sale, the real estate
was leased back to Ahold. Several of these leases were admitted by Ahold to have been improperly
recorded as operating, rather than capital leases. In the case of an operating lease, the lease payments
should be treated as rental expense. In the case of a capital lease, the properties should be capitalized
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and therefore remain as an asset on a company’s balance sheet and the related lease obligation should be
recorded as a liability. Depreciation on the properties and interest expense on the lease obligations
should be recorded on a monthly basis. In failing to properly characterize these leases, Ahold violated
GAR §292, ¶¶102, 107-108, which sets forth the criteria for classification of leases, as well as the
provisions of Dutch GAAP described in ¶721(a)-(f) and ¶ 722 (a)-(f)
f. Other Accounting Issues
732. In its 2002 Form 20-F, Ahold has also admitted to a variety of other accounting
improprieties which resulted in an overstatement of its net earnings in fiscal 2000 and 2001 by €21
million and €53 million, respectively. The improprieties included, among other things, the improper
capitalization of payments as tangible fixed assets relating to the Disco subsidiary and the failure to
record impairment in the value of certain long-term assets during fiscal 2001. These accounting
improprieties violated provisions of Dutch GAAP including, but not limited to, those set forth at
¶721(a)-(f) and ¶ 722 (a)-(f).
g. Interim Reports
733. As noted above, Ahold issued quarterly, also known as interim, financial reports
throughout the Class Period. Pursuant to Dutch GAAP, “[t]he policies with respect to the valuation of
assets and liabilities and determination of results applied in the preparation of the [annual financial
statements] should also be adhered to for the interim report[s].” GAR §550. In each interim report,
Ahold represented that the financial results contained therein were prepared in accordance with Dutch
GAAP. Inasmuch as Ahold’s interim financial reports were materially misstated, they were also
materially false and misleading.
3. Violations of U.S. GAAP
734. U.S. GAAP are those generally accepted principles recognized by the SEC and the
accounting profession as the conventions, rules and procedures necessary to define accounting practice
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at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) requires that financial statements
filed with the SEC be prepared in conformity with U.S. GAAP and those that are not in conformity with
U.S. GAAP are presumed to be misleading and inaccurate, despite footnotes or other disclosures. Id.
The most authoritative sources of U.S. GAAP are statements and interpretations issued by the Financial
Accounting Standards Board (“FASB”), also sometimes referred to as “FAS” statements, and opinions
issued by the Accounting Principles Board (“APB”).
735. As noted above, included in each of Ahold’s Forms 20-F, Annual Reports and to the
extent included in Ahold’s Quarterly Reports, disseminated during the Class Period, were
representations as to the amount of net earnings and shareholders’ equity of the Company in accordance
with U.S. GAAP. Such representations were materially false and misleading because the amounts were
derived based on the violation of, among others, the following provisions of U.S. GAAP:
a. The principle that financial reporting should provide information that is useful to present potential investors and creditors and other users in making rational investment, credit and similar decisions (FASB Statement of Concepts No. 1, ¶34);
b. The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources (FASB Statement of Concepts No. 1, ¶40);
c. The principle that financial reporting should provide information about an enterprise’s financial performance during a period so that investors and creditors may use information about the past to help in assessing the prospects of an enterprise (FASB Statement of Concepts No. 1, ¶40) (FASB Statement of Concepts No. 1, ¶42);
d. The principle that financial reporting should be reliable so that such reporting represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶58-59);
e. The principle of completeness, which means that there are no omissions of information that may be necessary to validly represent underlying events and conditions (FASB Statement of Concepts No. 2, ¶79);
f. The principle that financial reporting should be verifiable so that it provides a significant degree of assurance that accounting
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measures represent what they purport to represent (FASB Statement of Concepts No. 2, ¶81);
g. The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered (FASB Statement of Concepts No. 2, ¶¶95, 97);
h. The principle that revenues and related earnings should not be recognized until earned and that expenses should be recognized in the period incurred (FASB Statement of Concepts No. 5 and No. 6); and
i. The principle that revenues considered to be earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. (FASB Statement of Concepts No. 5. ¶83(b)).
736. Moreover, Ahold’s originally reported net income and shareholders’ equity during the
Class Period also violated the following U.S. GAAP Provisions :
a. FAS 94, ¶13, which provides in pertinent part that “a controlling financial interest through direct or indirect ownership of a majority voting interest” is a prerequisite for consolidation;
b. FAS 5, ¶17, which provided in pertinent part that “contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization” and that “adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization;”
c. APB 16, ¶87, which provides in pertinent part that “all identifiable assets acquired . . . , whether or not shown in the financial statements of the acquired company, should be assigned a portion of the cost of the acquired company, normally equal to their fair values at date of acquisition” and that “the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed should be recorded as goodwill;”
d. FAS 5, ¶8, which sets forth the requirements for establishing a reserve, allowance or provision, and provides in pertinent part that they may be established only if the following two conditions are met: (1) “information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred as the date of the financial statements;” and (2) the amount of loss can be reasonably estimated;”
e. FAS 13,¶7, which provides the criteria for classifying a lease as a capital lease and operating lease;
f. FAS 28, which provides the accounting for a capital lease and requires any profit or loss on the sale portion of the sale- leaseback transaction to be deferred and amortized in proportion to the amortization of the leased asset. As a result, Ahold should have deferred any gain or loss on the sale of the real estate properties
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accounted for as capital leases and recognized a portion of such gain or loss in subsequent periods based on the amortization of the leased asset;
g. APB 16, ¶¶67-68, which provide in pertinent part that acquired assets should be valued at fair value or cost depending on the nature of the consideration; and
h. FAS 121, ¶¶5-6, which set forth examples of circumstances in which the recoverability of the carrying amount of an asset should be assessed and the requirements for recognizing an impairment loss.
737. The restatement of Ahold’s previously reported fiscal 1998, 1999, 2000 and 2001 U.S.
GAAP results is, in and of itself, an admission that the originally issued financial information was
materially false and misleading when made since U.S. GAAP requires the restatement of previously
issued financial statements for the correction of a material error in the financial statements of a prior
period. “Errors in financial statements result from mathematical mistakes, mistakes in the application of
accounting principles, or oversight or misuse of facts that existed at the time the financial statements
were prepared.” APB No. 20 (emphasis added). In this case, the restatements were due to the misuse of
facts that existed at the time the original financial statements were prepared and were known about and
recklessly disregarded by defendants at the time the false financial statements were prepared and issued.
738. To the extent that Ahold provided a U.S. GAAP reconciliation in its quarterly financial
statements, these reconciliations also violated APB No. 28 entitled Interim Financial Reporting, which
provides the guidance on the preparation and presentation of interim financial statements. It states in
relevant part, that:
Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. (APB 28, ¶9)
739. Further, APB 28 states that the “…results for each interim period should be based on the
accounting principles and practices used by an enterprise in the preparation of its latest annual financial
statements…”
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B. Misrepresentations Concerning GAAS
740. In each audit report included in Ahold’s Annual Reports publicly disseminated during the
Class Period, Deloitte represented that:
We conducted our audit in accordance with auditing standards generally accepted in The Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. . . . We believe that our audit provides a reasonable basis for our opinion.
As alleged above, Deloitte opined that each of the subject financial statements of Ahold gave “a true and
fair view of the financial position of the company as of [the applicable date] and of the result for the year
ended in accordance with accounting principles generally accepted in The Netherlands and comply with
the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil
Code.”
741. Similarly, in each audit report included in Ahold’s Forms 20-F publicly disseminated
during the Class Period, Deloitte represented that:
We conducted our aud its in accordance with auditing standards generally accepted in The Netherlands and the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. . . . We believe that our audit provides a reasonable basis for our opinion.
As alleged above, Deloitte opined that each of the subject financial statements of Ahold “present fairly,
in all material respects, the consolidated financial position of [Ahold] for the subject and prior year and
the results of operations, changes in its equity and cash flows for [the subject year and each of the prior
two fiscal years], in conformity with general accepted accounting principles in The Netherlands.” Also,
as alleged above, Deloitte stated that the application of U.S. GAAP to Ahold’s reported net earnings and
stockholder’s equity would result in certain differences set forth in footnotes to Ahold’s financial
statements.
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742. The foregoing representations by Deloitte concerning the conduct of its audits were
materially false and misleading, for the reasons set forth below.
743. Deloitte failed to qualify, modify or disclaim its audit opinions on Ahold’s fiscal 1997,
1998, 1999, 2000 and 2001 financial statements, in violation of at least the following provisions of both
Dutch and U.S. GAAS:
(a) Deloitte auditors failed to maintain independence in conducting its audits (e.g., AU §150.0217 and NAS §200(4));18
(b) Deloitte failed to use due professional care and an appropriate level of professional skepticism in the performance of the audits and preparation of its reports concerning the audits (e.g., AU §§150.02 and 230 and NAS §§200(4), (6));
(c) Deloitte failed to adequately plan the audits of Ahold and properly supervise its staff (e.g., AU §§150.02 and 311 and NAS §§220, 300 and 310) and, furthermore, failed to appropriately consider audit risk and materiality when planning and performing the audits (e.g., AU §312 and NAS §320);
(d) Deloitte failed in the planning and performance of its audits to appropriately consider the risk of material misstatement in the financial statements as a result of error or fraud (e.g., SAS No. 82 and NAS §240);
(e) Deloitte failed to comply with its requirement to plan for and conduct its audits based on its understanding and evaluation of the internal control structure at Ahold (e.g., AU §150.02 and 319 and NAS §§400 and 401);
(f) Deloitte failed to obtain sufficient competent evidential matter to support and provide for a reasonable basis for its audit opinions (e.g., AU §§150.02 and 326 and NAS §500) and inappropriately relied on the representations of Ahold management as a substitute for necessary audit procedures in violation of AU §333 and NAS §580;
(g) Deloitte failed in its professional responsibility to determine that Ahold had properly applied GAAP and the Company’s own policies, as required by AU §411.04, NAS §§200 (7), 700(17);
(h) Deloitte violated its obligations under GAAS by repeatedly stating that Ahold’s financial statements complied with Dutch GAAP when, in fact, they did not (e.g., AU §150.02 and NAS §70019);
17 U.S. GAAS, as approved and adopted by the American Institute of Certified Public Accountants (“AICPA”), defines the conduct of auditors in performing and reporting on audit engagements. Statements on Auditing Standards (“SAS”) are endorsed by the AICPA as the authoritative promulgation of GAAS and are sometimes also referred to by the term “AU.” 18 In the Netherlands, the audit profession is regulated by the Law on Register Accountants which provides, inter alia, that The Netherlands Institute on Register Accountants (“Royal NIVRA”) shall set the by-laws and standards, otherwise known as Netherlands Auditing Standards (“NAS”), by which members of the Royal NIVRA, such as Deloitte, are expected to comply with. The Netherlands’ statutes and NAS to which auditors in The Netherlands or Register Accountants such as Deloitte were subject to during the Class Period are referred to herein as “Dutch GAAS.”
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(i) Deloitte violated its reporting obligations under GAAS by failing to note in Deloitte audit reports that the footnote disclosures in the financial statements upon which it was opining were materially misstated, including the footnote disclosures pursuant to which Ahold purported to present its financial results in accordance with United States GAAP (e.g., AU §150.02 and NAS §700); and
(j) Deloitte failed to qualify or disclaim its audit opinions in accordance with AU §508 and NAS §700.
744. On February 24, 2003, Deloitte withdrew its audit reports concerning Ahold’s financial
statements for fiscal 2000 and 2001.
XV. DELOITTE’S KNOWING OR RECKLESS PARTICIPATION IN THE SCHEME TO DEFRAUD
745. Throughout the Class Period, Deloitte, individually and in concert with Ahold and other
Defendants, directly and indirectly, by the use and means of instrumentalities of interstate commerce
and of the mails, engaged and participated in a continuous course of conduct to conceal adverse material
information about Ahold, including its true financial results, as specified herein. Deloitte employed
devices, schemes and artifices to defraud while in possession of material, adverse non-public
information and engaged in acts, practices and a course of conduct that included the making of, or
participation in the making of, untrue and misleading statements of material facts and omitting to state
material facts necessary in order to make the statements made about Ahold not misleading. Specifically,
Deloitte knew or recklessly disregarded, that Ahold’s reported annual financial results for 1997, 1998,
1999, 2000 and 2001, as filed with the SEC in Ahold’s Reports on Forms 20-F and in its Annual Reports
disseminated to the investing public, were materially misstated and were not presented, as represented,
in accordance with Dutch or U.S. GAAP, that Deloitte’s audits were not, as represented, performed in
accordance with Dutch GAAS and U.S. GAAS and, therefore, that Deloitte’s unqualified audit reports,
as included or incorporated by reference in those Forms 20-F, Annual Reports and the 2001 Global
Registration Statement, were materially false and misleading. 19 In issuing unqualified audit reports stating that Ahold’s financial statements for 1998, 1999, 2000 and 2001 were presented in conformance with Dutch GAAP, when, in fact, they did not, Deloitte also violated provisions of the NCC including, but not limited to, §§ 2:393(3)-(5).
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A. Deloitte U.S. And Deloitte Netherlands Acted As One Firm With Respect To Ahold
746. DTT holds itself out today as a Swiss verein or association of which Deloitte U.S. and
Deloitte Netherlands are members. DTT markets its members as part of a unified global firm. On
DTT’s web site, under the heading “Our global practice,” DTT states “The people of Deloitte’s member
firms take great pride in delivering consistent services worldwide. In About Us, learn more about our
brand, and why one word – Deloitte – says it all.”
747. On its website, Deloitte further highlights the ability of its global network of auditors to
service the needs of any international client: “Our global network of audit professionals can assist you in
achieving your business objectives, managing your risk, and improving your business performance no
matter where in the world you reside.” This marketing approach is not new. A September 1, 2000
article by “Deloitte & Touche” concerning the North American Food Processing Industry published in
Food in Canada, further demonstrates the international approach of Deloitte and its member auditing
firms. In that article, “Deloitte & Touche” states:
Internationally, we call on our resources in every major region of the world to meet the expanding needs of our clients. . . . Deloitte Touche Tohmatsu audits over 700 companies with sales or assets in excess of US$1 billion. With 90,000 people in over 135 countries, our internationally experienced professionals deliver seamless, consistent services wherever our clients operate.
748. Recognizing the long-time seamless nature of Deloitte’s member approach to servicing
its clients, on October 1, 2003, Deloitte issued a press release announcing:
the launch of the new brand name ‘Deloitte’ to highlight the value of its multidisciplinary organization. Today’s change means that the firms known in various national and global markets as Deloitte Touche Tohmatsu, Deloitte & Touche, and Deloitte Consulting, while retaining their local legal names, will now be known as the brand ‘Deloitte.’
749. Consistent with Deloitte’s public representations concerning the global nature of
Deloitte’s business, and the dominant role of Deloitte U.S. in that global business, James E. Copeland,
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Jr., Chief Executive Officer of Deloitte U.S. since 1999, also served as the Global Chief Executive
Officer of DTT during the period 1999 through May 31, 2003. He was also the firm’s Advisory Partner
for the Royal Ahold account during 2001 and 2002. Mr. Copeland only served as advisory partner to a
limited number of prestige clients, underscoring the importance of Ahold’s business to Deloitte and to
its members worldwide. Mr. Copeland announced his intention to step down as the head of DTT and
Deloitte U.S. on September 25, 2002 – shortly before the commencement of Ahold’s internal
investigation into account ing improprieties.
750. In the wake of the Enron financial scandal, in February 2002, Mr. Copeland announced
that due to the independence issues raised by its provision of audit and consulting services to clients of
Deloitte member firms, they planned to shed their consulting businesses and would no longer accept
new engagements to perform internal audit outsourcing for audit clients. Nevertheless, Deloitte
continued to provide such services for Ahold.
751. A Deloitte U.S. SEC “filing reviewer” was required by SEC Practice rules adopted by the
AICPA Division for CPA Firms, of which Deloitte U.S. was a member, to have extensive discussions
with the Deloitte foreign partner in charge of the engagement concerning each SEC filing, including the
associated firm’s audit report. In addition, as many as ten auditors from the Baltimore office of Deloitte
were responsible for the audits of USF and provided the basis for the representation in Deloitte’s audit
opinion that Ahold’s consolidated financial statements, which included the financial results of USF and
other United States subsidiaries, were audited by the firm in accordance with U.S. GAAS.
752. Each of Deloitte’s audit reports publicly disseminated during the Class Period which
were included in Ahold’s Forms 20-F represented that its audits were also conducted in accordance
with U.S. GAAS as well as Dutch GAAS. The audit reports also confirmed that Ahold’s
representations concerning its net earnings under U.S. GAAP, as reflected in footnotes to the
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Company’s financial statements, were fairly presented, further highlighting the necessary and required
role of Deloitte U.S. in the audits.
753. Deloitte U.S. and Deloitte Netherlands operated as a single auditing firm in auditing
Ahold’s annual financial statements. Each office was assigned to and worked on various aspects of the
audit engagements. Deloitte U.S. auditors, primarily from its Baltimore, Maryland office, were
responsible for auditing the financial statements of USF and other Ahold subsidiaries in the U.S.
Deloitte’s US auditors provided the results of their audit to their colleagues in the Netherlands for
incorporation in Ahold’s Annual Reports.
754. Consistent with the collective role of Deloitte U.S. and Deloitte Netherlands in the audits
of Ahold following the acquisition of USF in 2000, Ahold referred to its auditors as “Deloitte &
Touche” in its 2000, 2001, and 2002 Annual Reports.
755. As described herein, during the Class Period, Deloitte issued unqualified reports dated
March 10, 1998, March 9, 1999, March 7, 2000, March 6, 2001 and March 7, 2002 concerning its audits
of Ahold’s financial statements for fiscal 1997, 1998, 1999, 2000 and 2001, which were included in
Ahold’s fiscal 1997, 1998, 1999, 2000 and 2001 Forms 20-F and Annual Reports. By these audit
opinions, Deloitte certified, inter alia, that each audit was performed in accordance with Dutch GAAS
and U.S. GAAS. Contrary to its representations, Deloitte’s audits of Ahold’s financial statements for
fiscal 1997, 1998, 1999, 2000 and 2001 were not performed in accordance with Dutch GAAS or U.S.
GAAS, and Deloitte knew of, but recklessly failed to investigate, serious “red flags.”
B. Allegations Supporting A Strong Inference Of Deloitte’s Scienter
1. Deloitte Knew of the Systemic Lack of Internal Controls at Ahold
756. Pursuant to fundamental principles of both Dutch GAAS and U.S. GAAS, Deloitte was
required to obtain a sufficient understanding of Ahold’s systems of internal accounting controls in order
to plan its audits and properly determine the nature, timing and extent of testing to be performed. See
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Second Standard of Field Work under U.S. GAAS (AU §150.02) and NAS §400. In connection with
obtaining this understanding of internal controls, Deloitte was required to consider, among other things,
how information technology and manual procedures used by Ahold and its subsidiaries affected the
controls relevant to the audits. Controls relevant to the audits are those that individually or in
combination with others would likely have prevented or detected material misstatements in the financial
statement assertions made by Ahold. See AU §319 and NAS §§400 and 401.
757. As Eustace admitted during Ahold’s May 8, 2003 conference call with security analysts
and investors, Deloitte was aware of the inadequacy of Ahold’s internal controls and included this
material deficiency in “every report” to management. Deloitte was required to communicate internal
control failures noted during the audits to Ahold’s Audit Committee since it is a “reportable condition”
under Dutch GAAS and U.S. GAAS (AU §§325 and 380.01 and NAS §400(49)). The standard for a
“reportable condition” is as follows:
these are matters coming to the auditor’s attention that, in his judgment, should be communicated to the audit committee because they represent significant deficiencies in the design or operation of internal control , which could adversely affect the organization’s ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. AU §325.02 (emphasis added).
NAS §400(49) contains similar provisions for reporting material weaknesses in internal controls
to appropriate company management.
758. When an auditor determines, as was the case here, that the internal control environment at
its audit client is weak or unreliable, the auditor is required, under both Dutch GAAS and U.S. GAAS,
to employ what is referred to as a “substantive” audit approach whereby account balances reflected on
the company’s financial statements are more closely scrutinized, with a high degree of skepticism. The
auditor is also required to obtain a sufficient degree of competent evidential matter that supports the
financial statement representations of company management. As described below, in conducting its
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audits of the Ahold financial statements at issue, Deloitte knowingly ignored or recklessly disregarded
these requirements of both Dutch GAAS and U.S. GAAS. See, e.g., AU §§230 and 326 and NAS §500.
759. As described above, internal controls at Ahold and its subsidiaries were virtually non-
existent. Indeed, in its 2002 Form 20-F, Ahold admitted that internal investigations which led to the
restatement of its previously reported financial statements raised or confirmed “significant internal
control weaknesses” and that “over 275 items relating to internal control weakness” had thus far been
identified.
The investigations also noted, as admitted in the same 2002 Form 20-F, that there were “numerous material weaknesses in internal controls” at USF, especially in the area of vendor allowances. Specifically, Ahold admitted to a failure to properly record and track vendor allowance transactions and balances, inadequate accounting and financial reporting systems for vendor allowances generally and failure by management to understand and properly apply Dutch and U.S. GAAP and Ahold’s stated accounting policies in the area of vendor allowances, and rebates. Ahold also admitted to “pervasive earnings management” at certain Ahold subsidiaries, including Tops and Giant-Carlisle.
760. Given that Deloitte was required, in connection with the planning and performance of
each of its audits, to assess and evaluate the internal control structure at Ahold, and its noting of internal
control failures as “reportable conditions,” Deloitte was aware of the void of internal accounting
controls at Ahold, including the severe lack of internal accounting controls at USF – the most important
contributor to Ahold’s earnings since its acquisition in 2000, nevertheless, Deloitte failed to adequately
expand or modify its audit procedures as warranted by the situation.
761. As further admitted by Eustace during the Company’s May 8, 2003 conference call, since
its acquisition of USF, the “company [Ahold] has been flying blind with very, very inadequate control
systems on what is the most important part of its income.” Eustace has also publicly admitted during
the May 8, 2003 Conference Call that even as of the time Ahold acquired USF, defendant Miller warned
Ahold executives that the control systems at USF for keeping track of promotional allowances from
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vendors were “not good at all.” Deloitte conducted due diligence in connection with the acquisition and
therefore knew of Miller’s warning as well.
762. The internal control systems were so lacking at the Company’s Columbia, Maryland
headquarters that, according to a former product line manager with USF who performed work for
defendant Lee, as well as a former USF financial analyst with USF, USF did not even have the ability to
track the quantity of merchandise and food being sold around the country. Only ten of the numerous
USF branches of USF were on a centralized purchasing system. As a result, USF had to rely on oral
communications with divisions or vendors in an attempt to determine the true state of affairs. Again,
Deloitte failed to plan and implement audit procedures to obtain the requisite sufficient competent
evidence in light of Ahold’s decentralized and ineffective control environment.
763. The dire situation with USF’s internal controls, which rendered its financ ial records
suspect at best, did not escape the notice of Ahold’s Audit Committee. By September 4, 2000, the Audit
Committee discussed the necessity of tightening internal controls at USF in regard to promotional
discounts – the very area that was at the heart of the now admitted fraud. Deloitte participated in the
Audit Committee Meetings. As a part of its planning of each audit, Deloitte reviewed Audit Committee
meeting minutes. As set forth above, whatever efforts were undertaken in this area were materially
inadequate. The repeated failure of Ahold to remedy material internal control weaknesses was, at least
in part, a product of the multiple acquisitions by USF of companies with incompatible financial systems,
which compounded Ahold’s internal control failures, and was in, and of itself, a serious red flag. This
situation was compounded by Deloitte’s various consulting and related advisory activities which also
did not correct these problems.
764. For example, as reported by The Financial Times on March 10, 2003, the “Alliant
integration went badly. Its computers could not talk to those of USF, whose systems, in turn, could not
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communicate with those of PYA/Monarch.” Further creating a “red flag” for Deloitte, both of these
acquisitions were represented by defendant Miller as a combination of highly compatible companies.
According to a former vendor data associate of Alliant Foods, from June 1999 until June 2002 each
regional division of Alliant was still running as its own business and was not brought under the control
of USF during the period of this associate’s employment by Alliant.
2. Deloitte Failed to Properly Plan Its Audits
765. Under both Dutch and U.S. GAAS, Deloitte was required to adequately plan each of its
audits of Ahold’s financial statements. See First Standard of Field Work under U.S. GAAS (AU
§150.02) and NAS §§200(6) and 300. Accordingly, Deloitte was required to plan its audits of Ahold in
a manner which recognized the particular audit risks associated with auditing the financial statements of
a company such as Ahold, including but not limited to the risks associated with its inadequate and
recorded in Ahold’s financial statements. For example, Deloitte failed to audit:
(a) The propriety/validity of amounts recorded as vendor allowances, i.e., whether such transactions represented “real” transactions where the earnings process was complete;
(b) The propriety/validity of Ahold’s consolidation of several joint ventures;
(c) The propriety/validity and adequacy of recorded restructuring reserves and purchase accounting contingency reserves; and
(d) Ahold’s application of accounting principles relating to acquisitions and real estate transactions.
Specifically, DT’s audit failed to properly test the propriety of amounts recorded as vendor allowances
and rebates, including the revenue account to which vendor allowances were improperly recorded.
Rather than conduct its audits exercising a heightened degree of professional skepticism demanded by
this breakdown in internal controls, Deloitte failed to do so as evidenced by its failure to adequately
pursue numerous “red flags” concerning the improper recognition of earnings from vendor allowances
and rebates.
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4. The Flawed Audit Confirmation Process
770. As a part of its audit procedures, Deloitte sent letters to USF suppliers/vendors requesting
confirmation of allowance and/or rebate amounts payable or owed to USF (hereinafter referred to as
“Audit Confirmation Letters”). Deloitte, however, knowingly and wrongfully sent these Audit
Confirmation Letters to sales executives at the vendors, who not only lacked authority to confirm such
amounts to Deloitte, but also had an obvious motive to misrepresent amounts owed in order to maintain
their relationship with the second largest, and growing, food service provider in the United States.
Deloitte knew or recklessly ignored that the audit confirmations were required to be sent to appropriate
vendor personnel, such as accounting department management, who had the appropriate resources,
information and authority to confirm amounts and terms pursuant to which the vendor owed USF
allowances or rebates. See e.g., AU §330.27 and NAS §§505, 501.
771. Deloitte recklessly accepted amounts indicated on the Audit Confirmation Letters
notwithstanding the fact that typical receivable confirmation letters such as those used by Deloitte
provided no information to corroborate the amount of the receivables that had actually been earned by
USF as of the dates of recording such in Ahold’s financial statements. As noted above, Deloitte audited
many other companies in businesses similar to Ahold and USF; accordingly, Deloitte knew that
recording and recognition of vendor allowances and rebates by USF (and thus Ahold) were subject to
very specific terms agreed upon between the various vendors and USF. Nevertheless, Deloitte
knowingly and recklessly failed to modify its confirmation requests to confirm with the vendors the
terms under which USF could recognize the allowances and rebates. In this regard, Deloitte also audited
Ahold vendor ConAgra which is also implicated in the Ahold fraud. Deloitte’s audit confirmation
process for Ahold was flawed even as to its own client ConAgra.
772. Moreover, Deloitte failed to obtain and review contracts containing the terms of the
vendor allowance/rebate agreements. Review of such contracts was a critical procedure to determine
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whether the earnings process for such allowances and rebates was complete under Dutch GAAP and
thus properly recorded and recognized in the Company’s financial statements. Indeed, Ahold has
admitted in its 2002 Form 20-F that it concealed vendor contracts from Deloitte. Given that Deloitte
was required under Dutch and U.S. GAAS to review these contracts, the concealment of vendor
contracts from Deloitte required Deloitte, under both Dutch GAAS and U.S. GAAS, to either withdraw
from the audits or issue a qualified opinion explaining that its audits had been limited in scope due to the
inability to review vendor contracts (AU §508.22 and NAS §500(18)).
773. Deloitte also accepted amounts indicated on the Audit Confirmation Letters, even though
amounts of vendor allowances and rebates purportedly confirmed by Audit Confirmation Letters sent to
one of USF’s biggest suppliers, Sara Lee Corporation, were inconsistent with amounts indicated in
formal monthly reports Sara Lee Corporation sent to USF. Deloitte therefore did not obtain the requisite
evidential matter to support Ahold’s recorded amounts of vendor allowances/rebates, since it failed to
confirm amounts with a proper knowledgeable respondent, did not appropriately reconcile exceptions,
and did not review the contracts underlying the transactions.
5. Improper Reliance on Management Representations
774. According to Ahold’s 2002 Form 20-F, senior officials of USF “made misrepresentations
regarding the absence of pre-payments from vendors.” Such pre-payments, however, are a typical
component of vendor allowance programs as Ahold itself disclosed in its 2001 Form 20-F and Annual
Report for 2001. Specifically, Ahold stated that “[t]he total value of any up-front or other periodic
payments received from vendors that are linked to purchase commitments is initially deferred.” See
2001 Form 20-F, at 23; 2001; Annual Report at 51. Deloitte also knew this from its auditing of similar
food service companies. Similarly, Deloitte knew that these pre-payments could not be recognized in
accordance with Dutch and U.S. GAAP until earned by USF. Deloitte, in violation of professional
standards, merely accepted management’s representations regarding the lack of pre-payments without
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attempting to corroborate and/or collect support for the representation and despite the devastating and
admitted lack of internal controls. AU §333 and NAS §580 provide the auditing guidance for
management representations. These standards provide that while representations from management are
part of the evidential matter that an auditor obtains, they are not a substitute for the application of
auditing procedures considered necessary to provide a reasonable basis for an opinion. AU §333.02 and
NAS §580(7).
775. Further, Dutch and U.S. GAAS require that, if a representation made by management is
contradicted by other audit evidence, the auditor should use professional skepticism in investigating the
circumstances and consider the reliability of the representations made. The standard also requires that
based on the circumstances, the auditor should consider whether reliance on management’s
representations concerning other aspects of the financial statements is justified. AU § 333.04; NAS
§§580(6), (7) and (9).
776. Deloitte failed to adequately evaluate the competence and sufficiency of the evidential
matter. U.S. GAAS requires the auditor to evaluate the evidential matter obtained to ensure that the
specific audit objectives are met. The standard states, in relevant part, as follows:
In evaluating evidential matter, the auditor considers whether specific audit objectives have been achieved. The independent auditor should be thorough in his or her search for evidential matter and unbiased in its evaluation. In designing audit procedures to obtain competent evidential matter, he or she should recognize the possibility that the financial statements may not be fairly presented in conformity with generally accepted accounting principles.… In developing his or her opinion, the auditor should consider relevant evidential matter regardless of whether it appears to corroborate or to contradict the assertions in the financial statements. To the extent the auditor remains in substantial doubt about any assertion of material significance, he or she must refrain from forming an opinion until he or she has obtained sufficient competent evidential matter to remove such substantial doubt, or the auditor must express a qualified opinion or a disclaimer of opinion. (AU § 326.25)
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Dutch GAAS similarly provides that the auditor must evaluate and consider the
sufficiency and appropriateness of audit evidence in light of all circumstances confronted
by the auditor and, if unable to obtain sufficient appropriate audit evidence, the auditor
should express a qualified opinion or disclaimer of opinion. NAS §§500(2), (7) and (18).
6. The Obvious Failure to Follow Applicable GAAP
777. Deloitte knew that under Dutch GAAP and U.S. GAAP, as well as under Ahold’s own
stated accounting policies, certain promotional allowances such as vendor allowances and rebates were
to be recorded as a reduction of costs of goods sold and not classified as revenue. Indeed, such policy
was specifically noted by the Company under the “Critical Accounting Policies” section of Ahold’s
2001 Form 20-F, at 22, giving investors the impression that such policy was purportedly followed.
778. Yet, as admitted by Ahold in its 2002 Form 20-F, during 2000 and 2001, in violation of
Dutch and U.S. GAAP as well as its own stated policies, USF wrongfully recorded vendor allowances as
revenues rather than as a reduction of cost of goods sold. As discussed below, this wrongful recording
of revenues also occurred at Ahold’s Tops subsidiary, which Deloitte also audited. This misrecording of
revenues was clearly evident from the face of the books and records of USF to which Deloitte was
auditing and had access. Again, Deloitte failed in its professional responsibility to determine that Ahold
had not properly applied U.S. GAAP and the Company’s own policies to this highly material and
suspect area of USF’s operations. Specifically, U.S. GAAS requires the auditor to determine whether:
(a) the accounting principles selected and applied have general acceptance; (b) the accounting principles are appropriate in the circumstances;
(c) the financial statements, including the related notes, are informative of matters
that may affect their use, understanding, and interpretation;
(d) the information presented in the financial statements is classified and summarized in a reasonable manner; that is, neither too detailed nor too condensed; and
(e) the financial statements reflect the underlying transactions and events in a manner
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that presents the financial position, results of operations, and cash flows stated within a range of acceptable limits; that is, limits that are reasonable and practicable to attain in financial statements.
See AU §411.04 and NAS §§200 (7), 700(17) and NCC §2:393(3).
7. Red Flags Concerning Improper Consolidation
779. As stated above, the requirements for consolidation are clearly spelled out in Dutch
GAAP -- consolidation of a joint venture is only appropriate when one partner has the ability to exercise
a majority of the voting rights or dismiss a majority of the managers. Which was not the case with any
of the joint ventures here. Deloitte knew or recklessly disregarded these facts.
780. As alleged above, in publicly announcing its joint venture with ICA in December 1999,
Ahold described the governing structure as consisting of an eight member board with its Chairman, one
of two Vice Chairmen and two other persons as being ICA designees, with the balance being Ahold
designees. As alleged above, Ahold issued other press releases indicating that the joint venture was
being operated primarily by ICA designees. Accordingly, based upon Ahold’s own press releases, it
lacked the definitive controlling interest required for consolidation.
781. Ahold presented the joint governance structure to the EC for approval of the joint venture
which approval was granted on April 5, 2000. As detailed above in the section entitled “The Truth
About The Joint Ventures”, Deloitte in the early 2000, warned Ahold that the governing structure
presented to the EC for approval would not entitle Ahold to consolidate the ICA joint venture. After EC
approval of that structure, Deloitte again objected to consolidating the ICA joint venture. Nevertheless,
when Ahold produced a side letter to the joint venture agreement, purportedly giving Ahold the right to
dictate its views in the event of a dispute, Deloitte readily accepted it and concurred on Ahold’s decision
to consolidate the joint venture. That side letter, however, was inherently suspicious because it differed
materially from the agreement which had been presented to and approved by the EC; appeared at a
suspicious time, and purported to grant a right to Ahold that was antithetical to a typical joint venture
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partnership. Had Deloitte sought to determine the circumstances of this side letter from any of its
signatories, it would have undoubtedly learned that it was executed together with a second side letter
which demonstrated there was no agreement on this significant issue. As a result, Deloitte knew or
recklessly disregarded that the consolidation of ICA, as well as DAIH, Bompreço, and Paiz Ahold,
which were based on similar side letters was improper.
782. The consolidation of JMR was even more egregious. Ahold only had a forty-nine percent
interest in the joint venture, and that the Article five of the shareholders’ agreement provided for joint
control of JMR by Ahold and Jerónimo Martins. The agreement further provided that JMR would be
run by a Board of Directors consisting at the outset of seven members, four being appointed by Jerónimo
Martins and three by Ahold, and decisions of the Board would be taken unanimously. Furthermore,
Deloitte did not rely on no “side letters” concerning the JMR joint venture. Accordingly, competent
evidential matter was readily available, yet ignored by Deloitte, which contradicted the bases for its
decision to approve of the consolidation of the JMR joint venture.
8. Deloitte’s Failure to Adequately Consider Indicia of Fraud
783. Deloitte was required, under both Dutch and U.S. GAAS, to plan its audits to obtain
reasonable assurance that the financial statements it was auditing were free of material misstatement,
whether caused by error or fraud. In fact, Deloitte was required to specifically assess the risk that
Ahold’s financial statements could be materially misstated as a result of fraud. See, e.g., AICPA-SAS
No. 82 and NAS §240. SAS No. 82 provides examples of various factors that may be indicative of fraud
or motive to commit fraud at an audit client. Some of the very same examples of “red flags” of fraud
noted in the U.S. GAAS literature actually existed at Ahold. Deloitte was required by these GAAS
provisions, among others, to assess the presence of each of these factors and, therefore, knew of or
recklessly ignored these indicia of fraud at Ahold. By way of example, Deloitte knew or recklessly
disregarded the following “red flags” in addition to those discussed above:
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(i) High Management Turnover
(a) High management turnover existed at key Ahold subsidiaries such as USF. In fact, in the
approximately five year period between 1997 and 2001, USF had four different chief financial officers,
at least one of whom, Ernie Smith, left the Company in March 2001 during Deloitte’s audit of Ahold’s
2000 financial statements, vociferously raising the issue of accounting improprieties concerning vendor
allowances with senior management of the Company just prior to his departure;
(b) In approximately early 2002, at around the same time Deloitte was preparing for and/or
conducting the audit of Ahold’s 2001 financial statements, there was a slew of firings of senior
personnel at USF, including:
• Craig Cunningham, one of only seven USF Regional Managers; • Ron Lintz, Head of Finance for USF in Detroit; • Michael Murphy, Head of Marketing for USF in Detroit; and • Dewey Kelly, President of USF – Detroit.
(ii) Inadequate Internal Controls and Management’s Failure to
Remedy
(a) As noted above, Deloitte was aware of the virtual absence of internal controls at Ahold
and its subsidiaries. Moreover, given its repeated advice to Ahold that internal controls were so
insufficient as to constitute a “reportable condition.” Deloitte knew that Ahold was not taking steps to
improve the situation, a clear red flag of increased risk of fraud.
(iii) Ahold Unable to Provide Deloitte with Documentation
(a) As noted above, Ahold has admitted that it concealed vendor contracts from Deloitte.
Deloitte was required under GAAS to review vendor contracts in order to evaluate whether Ahold and
its subsidiaries were properly accounting for vendor allowances and rebates. Ahold’s concealment of
and/or refusal to provide Deloitte with such documentation was a clear indication of increased risk of
fraud ignored by Deloitte.
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(iv) Significant Portion of Management Compensation Based on Company’s Earnings
(a) As reported in a Wall Street Journal article dated February 26, 2003, under the
stewardship of the Individual Defendants, earnings were expected to grow at least 15% annually,
according to a senior executive who left the Company in 2002. These were difficult targets to meet, the
senior executive indicated, but the bonus rewards were lucrative if the targets were met;
(b) The bonus/compensation structure at USF was extraordinary and one which gave
executives extreme motivation to misstate Ahold’s financial results. Under the plan in effect until some
time in 2002, employee bonuses were based upon a percentage of operating earnings. As a result, if
goals were achieved, employees would receive bonuses of 33% or 50% of their salary. Notably, as
conceded by interim CFO Robert Gillison in a Washington Post article published on May 9, 2003, USF
personnel profited as a result of the accounting irregularities. This structure constituted a “red flag” that
should have alerted Deloitte, but for their recklessness, to modify and/or implement audit procedures to
address the increased risk of fraud.
(v) Ahold Used Its Stock as Currency for Corporate Acquisitions
(a) The fact that Ahold was so heavily relying on access to the capital markets to finance its
fast-growing corporate acquisition program and therefore had significant motive to keep the price of its
stock inflated through earnings management, was another “red flag” of the risk of fraud known to or
ignored by Deloitte.
9. The Magnitude And Pervasiveness Of The Fraud
784. As illustrated throughout this Complaint, the fraud, which led to the restatement of four
years of Ahold’s financial statements, was of such a material magnitude as to constitute one of the
largest financial scandals in history. Moreover, “pervasive earnings management” infected the most
significant portions of the Company’s financial results, resulting in Ahold’s net income to be materially
overstated for the years at issue. The massive degree and pervasiveness of these misrepresentations
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further provide a strong inference that Deloitte knew or recklessly disregarded that Ahold’s financial
statements upon which Deloitte was opining did not conform to Dutch or U.S. GAAP and, that
accordingly, its audit reports issued during the Class Period were false.
XVI. GROUP PLEADING
785. Defendants Van der Hoeven, Andreae, de Ruiter, Meurs, Miller, Resnick, Lee, Kaiser,
Tobin, Grize and Fahlin are liable for the false statements in SEC filings and press releases as such
statements represent “group-published” information, disseminated to the public as a result of the
collective actions of these defendants. It is appropriate to treat these defendants as a group and to
presume that the false and misleading information conveyed in the public filings, press releases and
other publications, as alleged herein, are the collective actions of this narrowly defined group of
defendants. By virtue of their high level positions within Ahold, defendants Van der Hoeven, Andreae,
de Ruiter, Meurs, Miller, Resnick, Lee, Kaiser, Tobin, Grize and Fahlin directly participated in the
management of the Company, were directly involved with the day-to-day operations and were privy to
confidential non-public information concerning the operations of Ahold, as alleged herein. These
defendants were involved in drafting, reviewing and/or disseminating the false and misleading financial
statements that were issued by Ahold, approved or ratified these statements and, therefore, adopted them
as their own.
XVII. FRAUD ON THE MARKET
786. At all relevant times, the market for Ahold’s securities was an efficient market for the
following reasons, among others:
a. Ahold’s common stock met the requirements for listing, and were listed and actively traded on the Euronext exchanges of Amsterdam, Paris, and Brussels (symbol AHLN), and Ahold has a secondary listing on the Swiss exchange in Zurich (symbol AHO); highly efficient and automated markets;
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b. Ahold’s ADRs met the requirements for listing, and were listed and actively traded on the New York Stock Exchange (symbol AHO), a highly efficient and automated market;
c. As a regulated issuer, Ahold filed regular reports with the Euronext and with the SEC;
d. Ahold regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services;
d. Ahold was regularly followed by numerous securities analysts employed by major brokerage firms headquartered in the United States and overseas who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace;
e. The material misrepresentations and omissions alleged herein would tend to induce a reasonable investor to misjudge the value of Ahold’s securities;
f. Without knowledge of the misrepresented or omitted facts, Lead Plaintiffs and the other members of the Class purchased or otherwise acquired Ahold securities between the time that defendants made the material misrepresentations and omissions and the time that the truth was revealed, during which time the price of Ahold securities was artificially inflated by defendants’ misrepresentations and omissions.
787. As a result of the foregoing, the international markets for Ahold securities promptly
reacted to current information regarding Ahold from all publicly available sources and reflected such
information in the trading prices of Ahold securities. Under these circumstances, all purchasers and
acquirers of Ahold securities during the Class Period suffered similar injury through their purchase or
acquisition of Ahold securities at artificially inflated prices and a presumption of reliance applies.
XVIII. NO STATUTORY SAFE HARBOR
788. As alleged herein, defendants acted with scienter because at the time that they issued
public documents and other statements in Ahold’s name, they knew or recklessly disregarded the fact
that such statements were materially false and misleading or omitted material facts. Moreover, the
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defendants knew that such documents and statements would be issued or disseminated to the investing
public; knew that persons were likely to rely upon those misrepresentations and omissions; and
knowingly and/or recklessly participated in the issuance and/or dissemination of such statements and/or
documents as primary violators of the federal securities laws.
789. As set forth in detail in this Complaint, the defendants, by virtue of their control over,
and/or receipt of Ahold’s materially misleading statements and/or their association with the Company
which made them privy to confidential proprietary information concerning Ahold which was used to
artificially inflate financial results and which defendants caused or were informed of, participated in and
knew of the fraudulent scheme alleged herein. With respect to non-forward looking statements and/or
omissions, defendants knew and/or recklessly disregarded the falsity and misleading nature of that
information, which they caused to be disseminated to the investing public.
790. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the false statements pleaded in this Complaint because none of
the statements pleaded herein are “forward- looking” statements and no such statement was identified as
a “forward- looking statement” when made. Rather, the statements alleged herein to be false and
misleading all relate to facts and conditions existing at the time the statements were made. Moreover,
meaningful cautionary statements did not identify important factors that could cause actual results to
differ materially from those in any putative forward- looking statements.
791. In the alternative, to the extent that the statutory safe harbor does apply to any statement
pleaded herein which is deemed to be forward-looking, defendants are liable for the false
forward-looking statements because at the time each such statement was made, the speaker actually
knew and/or recklessly disregarded the fact that forward- looking statements were materially false or
misleading, and/or that each such statement was authorized and/or approved by a director and/or
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executive officer of Ahold who actually knew or recklessly disregarded the fact that each such statement
was false and/or misleading when made. None of the historic or present tense statements made by
defendants was an assumption underlying or relating to any plan, projection, or statement of future
economic performance, as they were not stated to be such an assumption underlying or relating to any
projection or statement of future economic performance when made nor were any of the projections or
forecasts made by the defendants expressly related to or stated to be dependent on those historic or
present tense statements when made.
XIX. CLASS ACTION ALLEGATIONS
792. Lead Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of themselves and all persons and entities who purchased Ahold common
stock and/or American Depository Receipts during the Class Period, and who thereby suffered damages.
Excluded from the Class are the defendants, any entity in which the defendants have a controlling
interest or that is a parent or subsidiary of or is controlled by the defendants, and any of the defendants’
officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors and
assigns.
793. The members of the Class are so numerous that joinder of all members is impracticable.
Throughout the Class Period, Ahold common stock was actively traded on the Euronext exchanges of
Amsterdam, Paris, and Brussels, and Ahold had a secondary listing on the Swiss exchange in Zurich.
Moreover, during the Class Period, Ahold ADRs actively traded on the NYSE. While the exact number
of Class members is unknown to Lead Plaintiffs at this time and can only be ascertained through
appropriate discovery, Lead Plaintiffs believe that there are, at a minimum, thousands of members of the
proposed Class. According to the Company, as of December 18, 2003, Ahold had 931 million shares of
common stock outstanding and approximately 31 million ADRs outstanding as of December 2002. The
names and addresses of record owners of Ahold common stock and ADRs and the other members of the
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Class may be identified from records maintained by Ahold or its transfer agent and may be notified of
the pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions.
794. Lead Plaintiffs’ claims are typical of the claims of the Class because all Class members
sustained damages that arose out of the defendants’ unlawful conduct complained of herein.
795. Lead Plaintiffs are representative parties who will adequately protect the interests of the
other Class members. Lead Plaintiffs have retained Court-approved counsel who are experienced and
competent in securities class action litigation. Lead Plaintiffs do not have any interests that are adverse
or antagonistic to the interests of the other members of the Class.
796. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable. Furthermore,
because the damages suffered by many of the individual Class members may be relatively small, the
expense and burden of individual litigation makes it virtually impossible for the Class members
individually to redress the wrongs done to them. Lead Plaintiffs anticipate no unusual difficulties in the
management of this action that would preclude its maintenance as a class action.
797. The prosecution of separate actions by individual Class members would create a risk of
inconsistent and varying adjudications, which could establish incompatible standards of conduct for
defendants. Questions of law and fact common to the Class predominate over any questions that may
only affect individual Class members. Among the questions of law and fact common to the Class are:
(a) whether defendants implemented the manipulative devices or engaged in the wrongful scheme alleged herein;
(b) whether the federal securities laws were violated by defendants’ acts as alleged herein;
(c) whether the defendants issued materially false and misleading
statements during the Class Period;
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(d) whether the defendants’ statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;
(e) whether defendants knew or recklessly disregarded that the
statements that they made were materially false and misleading and/or omitted to disclose material facts;
(f) whether the market prices of Ahold’s securities during the Class
Period were artificially inflated because of the defendants’ conduct complained of herein; and
(g) the extent of the damages sustained by the Class members and the
appropriate measure of such damages.
798. Lead Plaintiffs will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations or failed to disclose material facts during the Class Period;
(b) such misrepresentations and omissions were material; (c) the securities of the Company traded in an efficient market; (d) the misrepresentations and omissions alleged herein would tend to
induce a reasonable investor to misjudge the value of the Company’ s securities; and
(e) Lead Plaintiffs and the other members of the Class purchased
Ahold common stock between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the misrepresented or omitted facts.
Based upon the factors set forth in the preceding paragraph, Lead Plaintiffs and the other members of the
Class are entitled to the presumption of reliance upon the integr ity of the market.
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XX. CAUSES OF ACTION
1. COUNT ONE VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5(b) PROMULGATED THEREUNDER
799. Lead Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein. This claim is asserted against Ahold, Ahold USA, Ahold USA
Holdings, USF, Van der Hoeven, Meurs, de Reuiter, Miller, Resnick, Kaiser, Lee, Andreae, Fahlin,
Tobin, Grize, Boonstra, and Deloitte (collectively, the “10(b) Defendants”).
800. During the Class Period, the defendants named in this Count: (a) deceived the investing
public, including Lead Plaintiffs and other Class members, as alleged herein; (b) artificially inflated and
maintained the market prices of Ahold securities; and (c) caused members of the Class to purchase or
otherwise acquire Ahold securities at artificially inflated prices.
801. The 10(b) Defendants made untrue statements of material fact and/or omitted to state
material facts necessary to make the statements made not misleading, and/or substantially participated in
the creation of the alleged misrepresentations, which operated as a fraud and deceit upon the purchasers
of Ahold securities in an effort to maintain artificially high market prices for Ahold common stock and
ADRs in violation of Section 10(b) of the Exchange Act and Rule 10b-5(b).
802. In addition, defendants USF, Ahold USA, Miller, Kaiser, Lee and Resnick were the
original and knowing source of the misrepresentations alleged herein, in that they provided materially
false financial information concerning USF and Ahold USA to Ahold knowing that it would be
communicated to investors.
803. As a result of their making and/or their substantial participation in the creation of
affirmative statements and reports to the investing public, these defendants had a duty to promptly
disseminate truthful information that would be material to investors in compliance with the integrated
disclosure provisions of the SEC as embodied in SEC Regulation S-K (17 C.F.R. § 229.10, et seq.) and
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other SEC regulations, including accurate and truthful information with respect to the Company’s
operations and performance so that the market prices of the Company’s publicly traded securities would
be based on truthful, complete and accurate information.
804. The 10(b) Defendants named in this Count, directly and indirectly, by the use of means
and instrumentalities of interstate commerce and/or the mails, made, or substantially participated in the
creation of, untrue statements of material facts and/or omitted to state material facts necessary in order
to make the statements made about the Company in light of the circumstances under which they were
made, not misleading, as set forth herein.
805. In addition, Deloitte is primarily responsible for the false audit reports it issued
concerning the Company’s false financial statements for Ahold’s 1997, 1998, 1999, 2000 and 2001
fiscal years.
806. The 10(b) Defendants named in this Count had actual knowledge of the
misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for
the truth in that they failed to ascertain and to disclose such facts, even though such facts were
unavailable to them.
807. The facts alleged herein set forth a strong inference that each of the 10(b) Defendants
named in this Count acted with scienter. These facts include Ahold’s admission of a systemic and
massive fraudulent scheme carried out at much of Ahold’s operations worldwide of which each of the
10(b) Defendants named in this Count played an integral part. The Individual Defendants named in this
Count knew or recklessly disregarded that the financial results publicly disseminated to investors during
the Class were the product of inadequate financial controls such that they could not be deemed reliable.
Deloitte, which itself identified Ahold’s financial controls as “reportable conditions”, ignored a plethora
of “red flags” directly relating to now admitted fraud and notwithstanding its knowledge of those “red
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flags,” as well as actual knowledge regarding certain elements of the overall fraud, issued clean audit
reports year after year.
808. Ahold has also admitted that USF was responsible for the most significant part of the
fraud. USF, through the conduct of defendants Miller, Kaiser, Lee and Resnick, was responsible for the
creation of its fraudulent financial results, which each of these defendants knew would be incorporated
into Ahold’s quarterly and annual financial statements and publicly disseminated reports to investors.
809. Ahold USA is responsible for the overall management of Ahold’s United States retail
operations, at which Ahold has now admitted that “intentional improper recognition of vendor
allowances and pervasive earnings management” occurred.
810. Each of the 10(b) Defendants named in this Count also had a strong motive to engage in
the fraudulent scheme set forth herein. Maintaining a strong stock price was essential to Ahold’s and
USF’s acquisition program which required billions of dollars in new capital each year. Notwithstanding
these defendants’ knowledge that Ahold and USF in particular were experiencing severe problems
integrating these companies, this acquisition spree continued virtually unabated until the fraud was
revealed. Disclosure of the true financial state of the Company would have brought an end to this
acquisition program. In addition, bonuses were heavily dependent on meeting the ever growing
financial targets set by Ahold, and at USF were as much as 30 to 50 percent of base salary.
811. As a result of the dissemination of the materially false and misleading information and
failure to disclose material facts, as set forth above, the market prices of Ahold common stock and
ADRs were artificially inflated throughout the Class Period. In ignorance of the fact that the market
prices of Ahold common stock and ADRs were artificially inflated, and relying directly or indirectly on
the false and misleading statements made by defendants, or upon the integrity of the market in which
such securities trade, and the truth of any representations made to appropriate agencies and to the
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investing public, at the times at which any statements were made, and/or on the absence of material
adverse information that was known or with deliberate recklessness disregarded by 10(b) Defendants but
not disclosed in public statements by defendants, Lead Plaintiffs and the other members of the Class
purchased or acquired Ahold common stock and ADRs at artificially high prices and were damaged
thereby.
812. At the time of said misrepresentations and omissions, Lead Plaintiffs and the other
members of the Class were ignorant of their falsity, and believed the false statements to be true. Had
Lead Plaintiffs and the other members of the Class and the marketplace known of the true nature of the
operations of the Company and the noncompliance with federal law, which were not disclosed by
defendants, Lead Plaintiffs and the other members of the Class would not have purchased such securities
or, if they had purchased such securities, they would not have done so at the artificially inflated prices
which they paid.
813. By reason of the foregoing, the 10(b) Defendants have violated Section 10(b) of the
Exchange Act and Rule 10b-5(b), promulgated thereunder and are liable to Lead Plaintiffs and the other
members of the Class for damages which they suffered in connection with their purchases of Ahold
common stock and ADRs during the Class Period.
2. COUNT TWO VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5(a) AND (c) PROMULGATED THEREUNDER
814. Lead Plaintiffs repeat and reallege each and every allegation contained in each of the
foregoing paragraphs as if fully set forth herein. This claim is asserted against the 10(b) Defendants.
815. This Count is brought solely and exclusively under the provisions of Rule 10b-5(a) and
(c). Accordingly, Lead Plaintiffs need not allege nor prove in this Count that any 10(b) Defendant made
any misrepresentations or omissions of material fact for which they may also be liable under Rule 10b-
5(b) and/or any other provisions of law.
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816. During the Class Period, the 10(b) Defendants carried out a common plan, scheme, and
unlawful course of conduct that was intended to and did: (i) deceive the investing public, including
Lead Plaintiffs and other Class members; (ii) artificially inflate the market prices of Ahold common
stock and ADRs; and (iii) cause Lead Plaintiffs and other Class members to purchase Ahold securities at
artificially inflated prices.
817. In furtherance of this unlawful plan, scheme and course of conduct, the 10(b) Defendants
employed devices, schemes and artifices to defraud and knowingly or recklessly engaged in acts,
transactions, practices, and courses of business which operated as a fraud and deceit upon Lead
Plaintiffs and the other members of the Class, in connection with their purchases of Ahold common
stock and ADRs, in violation of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c)
promulgated thereunder.
818. The 10(b) Defendants’ fraudulent devices, schemes, artifices and deceptive acts,
practices, and course of business included the knowing or reckless falsification of USF’s, Ahold USA’s,
and Ahold’s financial results during the Class Period with knowledge that such results would be
included in the Company’s financial statements and disseminated to investors.
819. The members of the Class reasonably relied upon the integrity of the market in which the
Company’s common stock and ADRs traded.
820. During the Class Period, Lead Plaintiffs and the other members of the Class were
ignorant of the 10(b) Defendants’ fraudulent scheme and unlawful course of conduct. Had Lead
Plaintiffs and the other members of the Class known of the 10(b) Defendants’ unlawful scheme and
unlawful course of conduct, they would not have purchased Ahold common shares or ADRs or if they
had, they would not have purchased them at the artificially inflated prices they paid for such securities.
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821. As a direct and proximate result of the 10(b) Defendants’ scheme to defraud and such
defendants’ unlawful course of conduct, Lead Plaintiffs and the other members of the Class suffered
damages in connection with their purchases of Ahold stock and ADRs.
822. By reason of the foregoing, the defendants named in this Count have violated Section
10(b) of the Exchange Act and Rule 10b-5(a) and (c), promulgated thereunder and are liable to Lead
Plaintiffs and the other members of the Class for damages which they suffered in connection with their
purchases of Ahold common stock and ADRs during the Class Period.
3. COUNT THREE VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
823. Lead Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs of this Complaint as if fully set forth herein. This claim is asserted against Individual
Defendants Van der Hoeven, Meurs, de Ruiter, Miller, Resnick, Kaiser, Lee, Tobin, Grize, Andreae,
Fahlin, and Boonstra.
824. Specifically, defendants Van der Hoeven, Meurs, de Ruiter, Andreae, Tobin, Grize,
Miller and Boonstra acted as controlling persons of Ahold within the meaning of Section 20(a) of the
Exchange Act, as alleged herein. Moreover, defendants Tobin and Grize acted as controlling persons of
Ahold USA within the meaning of Section 20(a) of the Exchange Act. Finally, defendants Miller,
Resnick, Kaiser and Lee acted as controlling persons of USF within the meaning of Section 20(a). By
virtue of their respective high- level positions, and active participation in and/or awareness of the
day-to-day operations at Ahold, USA and/or USF, each of the defendants named in this Count had the
power to influence and control and did influence and control, directly or indirectly, the decision-making
of the Company, Ahold USA and USF, including the content and dissemination of the various
statements and SEC filings that Lead Plaintiffs allege are false and misleading. The defendants were
provided with, or had unlimited access to copies of reports, press releases, public filings and other
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statements alleged herein to be misleading prior to and/or shortly after these statements were issued and
had the ability to prevent the issuance of the statements or to cause the statements to be corrected.
825. In particular, these defendants had direct and supervisory involvement in the day-to-day
operations of the Company, Ahold USA, and/or USF and, therefore, are presumed to have had the power
to control or influence the particular transactions giving rise to the securities violations as alleged herein,
and exercised the same.
826. By virtue of their positions as controlling persons, the Individual Defendants named in
this Count are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of
the wrongful conduct, Lead Plaintiffs and the other members of the Class suffered damages in
connection with their purchases of the Company’s common stocks and ADRs during the Class Period.
4. COUNT FOUR VIOLATION OF SECTION 11 OF THE SECURITIES ACT
827. Plaintiff repeat and reallege the following paragraphs as if fully set forth herein: 25, 28,
187-189, 191-198, 595-625, 715-744, and 792-798. For purposes of this claim, Lead Plaintiffs expressly
exclude any allegation that could be construed as alleging fraud or intentional or reckless misconduct.
This claim is not based on and does not sound in fraud.
828. Lead Plaintiff COPERA purchased Ahold common shares which were issued pursuant to
the 2001 Global Offering Registration Statement.
829. This Count is brought pursuant to Section 11 of the Securities Act, 15 U.S.C. § 77k, by
COPERA on behalf of itself and those members of the Class who purchased Ahold common stock
and/or ADRs issued pursuant to the 2001 Global Offering Registration Statement in connection with the
September 2001 Global Offering, against Ahold, Deloitte Netherlands, Van der Hoeven, Meurs, de
Ruiter, Tobin, Grize, Andreae, Fahlin, Miller, and the Underwriter Defendants.
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830. As specified in ¶¶ 595-625, herein, the 2001 Global Offering Registration Statement and
December 29, 2000 Registration Statement were materially false and misleading; contained untrue
statements of material fact; omitted to state material facts necessary to make the statements made in the
2001 Global Offering Registration Statement and December 29, 2000 Registration Statement, under the
circumstances in which they were made, not misleading; and failed to disclose material facts.
831. As set forth in ¶ 617, on September 13, 2001, Ahold filed a Form 6-K, which attached a
copy of the Underwriting Agreement and a related Terms Agreement, which were dated September 5,
2001, in connection with the September 2001 Global Offering. As a result of this filing the Registration
Statement for the September 2001 Global Offering became effective as of September 13, 2001.
832. As the issuer, Ahold is strictly liable to COPERA and those members of the Class who
purchased Ahold common stock and/or ADRs issued pursuant to and/or traceable to the 2001 Global
Offering Registration Statement and the December 29, 2000 Registration Statement for the
misstatements in, and the omissions from, the December 29, 2000 Registration Statement, and 2001
Global Offering Registration Statement.
833. Individual Defendants Van der Hoeven, Meurs, de Ruiter, Grize, Tobin, Andreae, Fahlin
and Miller signed the December 29, 2000 Registration Statement, which was incorporated by reference
into the 2001 Global Offering Registration Statement, and/or were members of the Supervisory or
Executive Boards of Ahold at the time of the filing of the 2001 Global Offering Registration Statement
with the SEC.
834. Deloitte Netherlands is named, with its consent, in the 2001 global Offering Registration
Statement as having certified Ahold’s consolidated financial statements for fiscal years 1998, 1999, and
2000, as stated in its audit report, which is included in Ahold’s 2000 Form 20-F and incorporated by
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reference, along with the financial statements included in the 2000 Form 20-F, in the 2001 Global
Registration Statement.
835. The Underwriter Defendants were the underwriters and sellers with respect to the Ahold
common stock and ADRs sold in the September 2001 Global Offering within the meaning of the
Securities Act.
836. In connection with the September 2001 Global Offering and sale of the Ahold common
stock and ADRs, defendants named in this Count, directly or indirectly, used the means and
instrumentalities of interstate commerce and the United States mails.
837. This action was brought within one year after the discovery of the untrue statements and
omissions and within three years after the common stock and ADRs were sold to the public in the
September 2001 Global Offering.
838. By reason of the foregoing, the defendants named in this count have violated Section 11
of the Securities Act and are liable to Lead Plaintiff COPERA and the members of the Class who
purchased common stock and/or ADRs in and/or traceable to the September 2001 Global Offering, each
of whom has been damaged by reason of such violations.
5. COUNT FIVE VIOLATION OF SECTION 12(a)(2) OF THE SECURITIES ACT
839. For purposes of this claim, Lead Plaintiffs repeat and reallege the allegations contained in
paragraphs 827 through 837 of Count IV.
840. This Count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77l,
by COPERA on behalf of itself and the other members of the Class, who purchased Ahold common
stock and/or ADRs in connection with the sale of such securities and/or participation in the solicitation
of purchases of such securities by the defendants named in this Count, pursuant to the September 2001
Prospectus Supplement.
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841. This Count is brought against Ahold, Van der Hoeven, Meurs, and the Underwriters
Defendants (collectively, the “Section 12(a)(2) Defendants”), all of whom offered for sale and/or
participated in the solicitation of purchases of Ahold common shares and/or ADRs to COPERA and
other Class members by means of the September 2001 Prospectus Supplement.
842. Specifically, each of the defendants named in this Count solicited purchases of the Ahold
common shares and ADRs to be sold by means of the September 2001 Prospectus Supplement by:
a. making the decision to conduct the 2001 Global Offering and to make the sale in the United States and abroad; actively and jointly drafting, revising and/or approving the September 2001 Prospectus Supplement, pursuant to which the 2001 Global Offering was made to the investing public. These written materials were "selling documents" and calculated by these defendants to create interest in the securities offered and were widely distributed by or on behalf of defendants for that purpose;
b. finalizing the September 2001 Prospectus Supplement and causing it to become effective. But for these defendants having drafted, filed, approved and/or and signed the September 2001 Prospectus Supplement, the 2001 Global Offering could not have been made and completed; and
c. by conceiving and planning the 2001 Global Offering and together jointly orchestrating all activities necessary to effect the sale of these securities to the investing public, by issuing the securities, promoting the securities and/or supervising their distribution and ultimate sale to the investing public.
843. Accordingly, each of the defendants named in this Count was a seller or offeror of the
common stock and/or ADRs issued in connection with Ahold’s September 2001 Global Offering.
844. The September 2001 Global Offering was a firm commitment offering.
845. The September 2001 Prospectus Supplement, which was disseminated in connection with
Ahold’s September 2001 Global Offering, contained untrue statements of material facts and omitted to
state other material facts necessary in order to make the statements, in light of the circumstances under
which they were made, not misleading, as set forth ¶¶ 595 through 625 of this Complaint.
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846. In connection with the September 2001 Global Offering and sale of the Ahold common
stock and ADRs, defendants named in this Count, directly or indirectly, used the means and
instrumentalities of interstate commerce and the United States mails.
847. Less than one year has elapsed from the time that COPERA and the other members of
the Class discovered or reasonably could have discovered the facts upon which this Count is based.
Less than three years have elapsed from the time the Ahold common stock and ADRs were sold to the
public in the September 2001 Global Offering.
848. By reason of the conduct alleged herein, the defendants named in this Count violated
Section 12(a)(2) of the Securities Act. Accordingly, COPERA and the other members of the Class who
hold Ahold common stock and/or ADRs purchased from these defendants in the September 2001 Global
Offering, have the right to rescind and recover the consideration that they paid for these Ahold
securities, and hereby elect to rescind and tender their Ahold common stock and/or ADRs to the
defendants named in this Count. Class members who have sold the Ahold common stock and/or ADRs
that they purchased in connection with the September 2001 Global Offering, are entitled to rescissory
damages.
6. COUNT SIX VIOLATION OF SECTION 15 OF THE SECURITIES ACT
849. For purposes of this claim, Lead Plaintiffs repeat and reallege the allegations contained in
¶¶ 827 through 837 of Count IV.
850. This claim is brought on behalf of COPERA and the other members of the Class pursuant
to Section 15 of the Securities Act, 15 U.S.C. § 77o, who purchased Ahold common stock and/or ADRs
in connection with the September 2001 Global Offering, against defendants Van der Hoeven, Meurs, de
Ruiter, Tobin, Grize, Andreae, Fahlin, Resnick, Kaiser, Lee, and Miller.
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851. Each of the defendants named in this Count was a “controlling person” of Ahold within
the meaning of Section 15 of the Securities Act, by virtue of his position as a director and/or senior
officer of Ahold, USF and/or Ahold USA as well as by virtue of his substantial participation in the
wrongful conduct alleged herein. At the time of the September 2001 Global Offering, the defendants
named in this Count, by virtue of their respective positions of control and authority at Ahold, directly
and indirectly, had the power and authority, and exercised the same, to cause the Company to engage in
the wrongful conduct complained of herein.
852. As set forth herein, Defendants Van der Hoeven, Meurs, de Ruiter, Grize, Tobin,
Andreae, Fahlin, and Miller were members of the Supervisory or Executive Boards of Ahold at the time
of the filing of the 2001 Global Offering Registration Statement with the SEC. Specifically, during the
Class Period, defendant Van der Hoeven served on Ahold’s Executive Borad and as Ahold’s Chief
Executive Officer; defendant Meurs served on Ahold’s Executive Borad and as Ahold’s Executive Vice
President and Chief Financial Officer; defendant de Ruiter served as Chairman of Ahold’s Supervisory
Board and served on the Audit and Remuneration Committee of the Supervisory Board; and, beginning
on or about September 1, 2001 through the end of the Class Period, defendant Miller served on Ahold’s
Executive Borad and, during the Class Period, defendant Miller served as Chief Executive Officer of
USF; defendant Andreae served on Ahold’s Supervisory Board from 2001 through the end of the Class
Period; and defendant Andreae served on Ahold’s Executive Borad from 1997 through the end of the
Class Period. In addition, defendant Resnick served as Chief Financial Officer of USF (from October
2000 through the end of the Class Period); defendant Kaiser served as USF’s executive marketing
manager and operated as defendant Miller’s “right-hand man,” with the title “Executive Vice President-
Sales, Marketing and Procurement;” and defendant Lee served as a USF purchasing executive and
defendant Kaiser’s “right-hand man.” Finally, during the Class Period, defendant Tobin served on
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Ahold’s Executive Borad (from 1998 through September 1, 2001) and, thereafter, on Ahold’s
Supervisory Board, responsible for Ahold’s U.S. Operations (Tobin also served as President and CEO of
Ahold USA at the time of the acquisition of USF and held that position through September 1, 2001); and
defendant Grize served on Ahold’s Executive Borad (from September 1, 2001 through the end of the
Class Period) and served as President and CEO of Ahold USA from September 1, 2001 through the end
of the Class Period. As such, these defendants were provided with and/or had unfettered access to, the
false and misleading 2001 Global Offering Registration Statement prior to the time that the 2001 Global
Offering Registration Statement was disseminated to COPERA and to the other members of the Class
who subscribed to purchase Ahold common stock and/or ADRs in connection with that offering. Each
of these Individual Defendants had the ability to prevent the statements included in the 2001 Global
Offering Registration Statement from being issued and/or to cause such statements to be corrected.
853. By reason of the foregoing, pursuant to Section 15 of the Securities Act, these defendants
are liable to COPERA and to the other members of the Class to the same extent that Ahold is liable for
the Company’s violation of Section 11 of the Securities Act in connection with the September 2001
Global Offering.
854. Moreover, since the misrepresentations and omissions in the 2001 Global Offering
Registration Statement, complained of herein are the work of the defendants named in this Count, these
defendants are jointly and severally liable under section 15 of the Securities Act as control persons.
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XXI. PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs, on behalf of themselves and on behalf of the Class, pray for
relief and judgment, as follows:
A. Declaring that this action is a proper class action and certifying Lead Plaintiffs as
class representatives under Rule 23 of the Federal Rules of Civil Procedure;
B. Awarding compensatory damages against all of the defendants, jointly and
severally, in favor of Lead Plaintiffs and the other members of the Class for all losses and damages
suffered as a result of defendants’ wrongdoing alleged herein, in an amount to be determined at trial,
together with interest thereon;
C. Awarding Lead Plaintiffs and the Class their reasonable costs and expenses
incurred in this action, including a reasonable allowance of fees for Lead Plaintiffs’ attorneys and
experts;
D. Awarding Lead Plaintiffs and the other members of the Class such other and
further relief as the Court may deem just and proper.
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XXII. JURY DEMAND
Lead Plaintiffs hereby demand a trial by jury on all claims so triable.
Dated: February 17, 2004
ENTWISTLE & CAPPUCCI LLP
By: /s/
Andrew J. Entwistle, Esq. (AE-6513) Stephen D. Oestreich, Esq. (SO-8933) Robert N. Cappucci, Esq. (RC-2193) Johnston de F. Whitman, Jr., Esq. (JW-5781) Jeffrey A. Klafter, Esq. (JK-0953) (Of Counsel) Asuncion C. Hostin, Esq. (MD Bar No. 24008) 299 Park Avenue, 14th Floor New York, New York 10171 Telephone: (212) 894-7200 Facsimile: (212) 894-7272 Lead Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC Andrew Radding, Esq. (Bar No. 00195) Gregory M. Kline, Esq. (Bar No. 14363) ADELBERG, RUDOW, DORF & HENDLER, LLC 600 Mercantile Bank & Trust Building 2 Hopkins Plaza Baltimore, MD 21201 (410) 539-5195 Liaison Counsel for Lead Plaintiffs, the Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC
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OF COUNSEL Max W. Berger, Esq. Dan Berger, Esq. Bernstein Litowitz Berger & Grossmann LLP 1285 Avenue of the Americas New York, New York 10019 (212) 554-1400 Counsel for Union Asset Management Holding AG Robert Kaplan, Esq. Joel B. Strauss, Esq. Kaplan Fox & Kilsheimer LLP 805 Third Avenue, 22nd Floor New York, New York 10022 (212) 687-1980 Jeffrey A. Barrack, Esq. Barrack, Rodos & Bacine 2001 Market Street Philadelphia, Pennsylvania 19103 (215) 963-0600 Counsel for District of Columbia Retirement Board Sherrie R. Savett, Esq. Barbara A. Podell, Esq. Berger & Montague, P.C. 1622 Locust Street Philadelphia, Pennsylvania 19103 (215) 875-3000 Counsel for the City of Philadelphia Board of Pensions and Retirement
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