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March 1, 2002


The opinion of the court was delivered by: Denise Cote, United States District Judge.


On September 4, 2001, defendant Laurie Cummings ("Cummings") pleaded guilty to three counts of an indictment in connection with her participation in a conspiracy to conceal trade promotion underaccruals at Aurora Foods Inc. ("Aurora") between 1998 and 2000. Aurora has requested an award of restitution of $66,855,985 for losses it incurred as a result of the crimes, and Cummings has opposed the award of any restitution. For the reasons that follow, restitution in the amount of $2,583,840 may be awarded to Aurora for losses it sustained when it was required to file restated financial statements for 1998 and 1999, after the unlawful concealment of the underaccrual was discovered.


Defendant Cummings was a partner in Dartford Partners ("Dartford"), a company that held approximately eleven percent of the stock of Aurora. Aurora is a Delaware company engaged primarily in the acquisition and marketing of private brand name food products. Aurora conducted an initial public offering and was listed on a public stock exchange on July 1, 1998. Dartford was engaged to manage Aurora until July 2000, and Cummings was the Chief Financial Officer of Aurora from the time Aurora went public.

Between 1998 and 2000, Aurora's trade promotion expenses — financial incentives offered to encourage retailers to obtain and sell Aurora's products — substantially exceeded the amounts that had been allocated to promotion reserves. By at least June or July of 1999, management at Aurora was aware that the company's trade promotion account was very substantially underaccrued. In furtherance of a decision to prevent disclosure of the underaccrual, Cummings engaged in a series of internal manipulations of Aurora's financial records. Specifically, Cummings and others under her direction made inadequate accruals for known trade promotion expenses, failed to record accrued trade promotion expenses, and reclassified trade promotion expenses as receivables. This reclassification of expenses to receivables amounted to many millions of dollars by February 2000. Cummings took steps to conceal these manipulations and the underaccrual from Aurora's auditors and failed to disclose the underaccrual to Chase Manhattan Bank ("Chase") in connection with Aurora's application for a loan to purchase Lender's Bagels. In addition, Cummings signed and filed with the Securities and Exchange Commission ("SEC") quarterly reports (Forms 10-Q) that reflected the manipulated financial figures and concealed the trade promotion underaccrual.

On or about February 18, 2000, Aurora announced that it had uncovered evidence of inappropriate accounting practices in 1998 and 1999, and that it would issue a restated financial statement for those years. Cummings resigned from her position as CFO of Aurora on February 17, 2000. In a restatement issued in April 2000, Aurora revealed that the company had understated trade promotion expenses by $28.5 million in 1998, and by $15.2 million in the first three quarters of 1999.

A superceding indictment filed on August 2, 2001, charged Cummings in ten counts. Pursuant to a plea agreement signed on September 4, 2001, Cummings agreed to plead guilty to Counts One, Two and Ten. Count One charged Cummings with a violation of 18 U.S.C. § 371, namely, conspiracy to (a) commit securities fraud in violation of 15 U.S.C. § 78j(b) and 78ff and 17 C.F.R. § 240.10b-5; (b) file false and misleading documents with the SEC in violation of 15 U.S.C. § 78ff; (c) falsify Aurora's books and records in violation of 15 U.S.C. § 78m(b)(2)(A), 78m(b)(5) and 78ff and 17 C.F.R. § 240.13b2-1; (d) make false and misleading statements to Aurora's auditors in violation of 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2; (e) defraud financial institutions in violation of 18 U.S.C. § 1344; and (f) make false statements to financial institutions in violation of 18 U.S.C. § 1014. Count Two charged Cummings with securities fraud in violation of 15 U.S.C. § 78j(b) and 78ff; 17 C.F.R. § 240.10b-5; and 18 U.S.C. § 2. Count Ten charged her with making false statements in connection with a credit application in violation of 18 U.S.C. § 1014. Cummings's plea agreement did not address the issue of restitution, other than noting that the maximum sentence for each of the three counts to which she agreed to plead guilty included "mandatory restitution to any victims of the offense." She was also advised of the duty to pay restitution at the time of her plea.

Civil class action suits against Aurora were brought by shareholders and certain subordinated bondholders in the Northern District of California. Aurora settled the suits by providing a settlement package consisting of stock and cash. Aurora contributed stock worth approximately $10 million to the settlement package, and its D&O insurance companies contributed approximately $26 million in cash. Each D&O insurer executed a waiver of all rights to subrogation or reimbursement from Aurora.

Aurora obtained the stock necessary to settle the suit with the shareholders pursuant to a settlement agreement between Aurora, Cummings, co-defendant Ian Wilson ("Wilson") and co-conspirator Ray Chung ("Chung"). Pursuant to this agreement, Wilson, Chung and Cummings agreed to transfer 2,751,053 shares of Aurora common stock to Aurora. The settlement was "intended as and constitute[s] a settlement and compromise of disputed claims including to facilitate the settlement of the" civil class action. The agreement contained a mutual release of any and all claims or rights "of any type, kind or nature whatsoever . . . which any Party has or may hereafter have or may anytime have had against the other" relating to the fraud.

Although Aurora is not a party to this criminal proceeding, a victim is accorded a presence, albeit "only a limited presence" at sentencing. United States v. Grundhoefer, 916 F.2d 788, 793 (2d Cir. 1990). Aurora has requested restitution in the amount of $66,855,985 for damages it suffered as a result of the defendant's fraud. Specifically, Aurora requests restitution for damages incurred (1) in preparing its April 2000 restated financials for 1998 and 1999; (2) as a result of Aurora's default on senior debt instruments; (3) as a result of Aurora's default on subordinated bonds; (4) as a result of Aurora's liquidity crisis caused by the extra costs of preparing the restatement and paying its debt obligations; and (5) in connection with the settlement of the class action lawsuits. Specifically, Aurora alleges the following losses:

(1) Restatement: In preparing the restatement, Aurora paid $2,256,251 in accounting fees, $311,917 for assistance from Deloitte & Touche, and $15,672 for printing charges.

(2) Default on Senior Debt Instruments: Aurora paid $11,662,794 to senior debt holders in exchange for agreements not to accelerate the debt after Aurora's default. Aurora also paid $411,704 in legal fees to amend the debt agreements. In addition, Aurora was forced to accept a higher rate of interest and, by August 31, 2001, had paid $16,399,628 in additional interest on the instruments.

(3) Default on Subordinated Bonds: Aurora transferred 6,965,736 shares to holders of subordinated bonds in exchange for waivers of the bondholders' right to accelerate repayment after Aurora's default. As of September 27, 2001, the shares were valued at $25,773,223. Aurora was also obligated to pay $817,345 and $98,102 in legal and accounting fees in connection with the agreements; $26,195 for an information agent; $51,425 in printing costs; $180,000 for tax advice; and $4,428,649 for financial advice.

(4) Liquidity Crisis: To generate cash to service its debt and pay operational expenses, Aurora entered into an agreement with Chase, pursuant to which Chase purchased accounts receivable at a discount in exchange for $50 million. As of the date of its submission, Aurora had paid $5,081,853 in discounts and an addition $250,000 for a fairness opinion. Aurora also obtained additional financing at a cost of $1,159,578.

(5) Settlements: Class action shareholders and certain bondholders*fn1 received approximately $26 million in cash and $10 million in common stock in settlement of their claims. Aurora was responsible for the stock component of this settlement. Aurora notes that it received stock from Cummings and other defendants in settlement of its claims, and that "[d]epending on the market price for Aurora shares" at the time that they are distributed, "there is a possibility that Aurora may be left with a net positive recovery from the shares received." Recent submissions by the parties indicate that the net gain to Aurora may be as much as $3.8 million.

Cummings's Presentence Report ("PSR") reflects a guidelines calculation of fifty-seven to seventy-one months of incarceration; two to three years supervised release for counts one and two and three to five for count ten; a fine of $10,000 to $2,000,000; and "full restitution to the victim . . . in the amount of $66,855,985," jointly and severally with her co-defendants. The PSR recommends that restitution be paid in monthly installments of 10% of Cummings's gross monthly income commencing thirty days after judgment or release from custody if a sentence of imprisonment is imposed.

Cummings contends that Aurora is not a "victim" under 18 U.S.C. § 3663 ("Section 3663"), 3663A ("Section 3663A"), or 3664 ("Section 3664").*fn2 Second, Cummings argues that even if Aurora is a victim, the damages Aurora cites are not "losses" for which restitution may be awarded. Third, Cummings maintains that Aurora waived all right to receive restitution when it executed a settlement agreement releasing Cummings from civil liability for her participation in the fraud.


1. Statutory Framework

"Federal courts have no inherent power to order restitution. Such authority must be conferred by Congress." United States v. Helmsley, 941 F.2d 71, 101 (2d Cir. 1991).*fn3 In addition to the court's authority to order restitution as a condition of probation or supervised release under 18 U.S.C. § 3563(b)(2) and 3583(d), see United States v. Bok, 156 F.3d 157, 166 (2d Cir. 1998), restitution is authorized by the MVRA, see United States v. Spambanato, 876 F.2d 5, 7 (2d Cir. 1989) (per curiam).*fn4

Section 3663 allows a sentencing court to impose an order of restitution when imposing sentence for offenses under Title 18, certain drug offenses and certain violations of transportation laws. It provides:

The court, when sentencing a defendant convicted of an offense under [Title 18], [certain sections of] the Controlled Substances Act . . ., or [certain sections of] Title 49 [the transportation laws], . . . may order, in addition to . . . any other penalty authorized by law, ...

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