Archway & Mother's Cookie Co. Inc. is being investigated for accounting irregularities, according to court documents filed by the company's legal team last week.
Lawyers for the battered Battle Creek-based cookie company, whose two U.S. subsidiaries filed for Chapter 11 bankruptcy on Oct. 6, said in a preliminary statement that initial investigations by auditors Ernst & Young and a consulting firm revealed evidence that Archway might have padded its sales to inflate earnings.
Archway's Battle Creek headquarters and its Ashland, Ohio, manufacturing plant were shut down three days before Archway officially declared bankruptcy, putting about 160 employees out of work.
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Other potential accounting indiscretions, according to court documents, include the improper reclassification of expenses to the company's balance sheet, falsification of borrowing calculations and "an additional one-time accounting irregularity (that) appears to include a large, year-end sale."
As a result of the accounting investigation, employees of Archway's management company, Insight Holdings, all resigned their positions with Archway to "avoid any appearance of impropriety," the court documents said.
Catterton Partners, the Greenwich, Conn.-based private equity firm which owns Archway, hired Insight to run Archway's day-to-day operations after Catterton acquired the business in 2005, according to several interviews with former Archway employees.
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Archway apparently learned of these possible irregularities when two separate whistle-blower employees wrote letters in May and July to Insight Holdings, the lawyers' statement said.
Insight provided Alvarez and Marsal North America LLC — the restructuring consulting firm hired by Archway to assist in a possible sale of the Mother's brand this summer — and Ernst & Young copies of the letters. Alvarez and Ernst & Young began separate investigations.
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Mark Przygocki, 50, a former district manager out of Wyandotte, said he was pressured in late 2007 by vice presidents at Archway's Battle Creek headquarters to take large loads of cookies and hide them at his church while the company recorded them as sold.
Sometimes, he said, these "phantom cookies" would be sold at a substantial discount to wholesalers and dollar stores. In some instances, he said he was instructed to record a full-price sale.
"They padded their books every which way but loose," said Przygocki, a second-generation employee whose father took a route with Archway in 1958.
Przygocki said Insight Holdings terminated his employment at Archway in May, around the time the audit and investigation were said to have commenced.
John Hansen, a former independent distributor in Tucson, Ariz., said Insight terminated his contract in 2006 because he raised concerns about the company's false reporting of sales and business strategy in two letters addressed to Insight's Keith Lively.
Hansen said he was routinely sent more cookies than he could sell, and that stale product began to pile up in his warehouse.
Hansen said he was surprised to learn that Archway had cited rising fuel costs and material costs as reasons why it couldn't provide the statutory 60-day notice to laid-off workers.
The 60-day notice is required by the federal Worker Adjustment and Retraining Notification (WARN) Act.
"If I could see this coming two years ago, there's no way (Archway) can say they didn't see it coming two weeks ago," he said.
Archway — which according to court documents laid off 673 full-time employees across the country in the wake of its bankruptcy proceedings — has said rising fuel costs, rising material costs and the credit crunch left the company unable to provide the 60-day notice to laid-off workers.
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Archway's case has drawn interest from class-action lawyers.
Jack Raisner and René Roupinian of the New York-based law firm Outten and Golden LLP said they have fielded calls from Archway employees who are seeking back pay and benefits because of the company's alleged violation of the WARN Act.
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Raisner and Roupinian, though, challenged Archway's contention that its business troubles were unforeseeable.
"Rising fuel costs are not sufficient for WARN notification," Raisner said. "That is totally predictable and foreseeable. The exemption is intended to be something dramatically unexpected, and on its face, this doesn't really articulate a WARN defense."
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