The Official Committee of Unsecured Creditors -- a group of the largest creditors of Archway Cookies -- has alleged 16 counts of fraud against Archway & Mother's Cookie Co.; Catterton Partners, an equity company that owned Archway; Insight Group Holdings, Archway's management firm; and a number of former managers, board members and company executives.
The complaint, which was filed Tuesday with the U.S. Bankruptcy Court for the District of Delaware, accused the debtors in the Archway case of "a widespread accounting fraud that permeated throughout the debtors' management."
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The committee claims the parties committed fraudulent transactions and reporting to "inflate sales amounts and asset values in order to secure additional financing." Allegedly, Archway and Catterton management issued inflated sales figures to Wachovia Capital Finance Corp. for more than a year to encourage continued funding.
The committee maintains Insight was made aware of the accounting irregularities and did not take any action to correct the activity.
According to the filing, which refers to the parties as "Insiders," "throughout June and July 2008, the Insiders had multiple discussions concerning the fraudulent scheme and how the Insiders could avoid having the scheme exposed, or at least having its discovery delayed, until after the refinancing or sale of the Debtors' operations had taken place."
Archway closed abruptly Oct. 3 and filed for bankruptcy Oct. 6. On Dec. 2, it closed on the sale of its assets to Lance Inc., which has since reopened the bakery.
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Impact for former Archway employees
Former Archway employee Jeff Austen of Perrysville thinks the committee's allegations of fraud against Archway will be beneficial to his class action lawsuit against the company.
Austen filed the lawsuit Oct. 15 with New York-based firm Outten & Golden LLP. The action maintains the company acted in violation of the Worker Adjustment and Retraining Notification Act, which requires companies give employees 60 days notice before a plant closing and holds companies liable for up to 60 days wages and benefits for all affected employees.
Archway officials initially claimed the company filed bankruptcy due to "unforseeable business circumstances" -- an exemption under the WARN Act. With the new allegations of accounting fraud coming to the surface, Austen believes the company could be held accountable to its former workers.
The class action lawsuit is scheduled to be heard in court Feb. 6.