SACRAMENTO — It was late 2013, and the pressure was on for Hector Absi, chief operating officer for Marrone Bio Innovations Inc. in Davis.
That September, a month after the developer of bio-based pesticides became a publicly traded company on the NASDAQ exchange, MBI held a conference call with investors in which company officials projected that by year’s end they would double their 2012 sales revenues.
As the person responsible for MBI’s global sales, marketing and business development, Absi “began to worry that the company would not meet its goal of doubling its revenue by merely selling its products. So he found another way,” said Jina Choi, director of the Securities and Exchange Commission’s San Francisco regional office.
Hector Absi. Courtesy photo
According to a 16-count federal grand jury indictment unsealed Wednesday in U.S. District Court, Absi sold MBI products to customers with side agreements that offered “inventory protection,” under which MBI agreed to either repurchase the product from the customer or extend the terms of payment if the customer was still in possession of the product after a specified time period.
Under “generally accepted accounting principles,” revenue from sales that include such agreements cannot be recognized on the company’s books.
Between March 2013 and July 2014, the indictment alleges, Absi conspired with at least one other MBI employee to misrepresent to the company’s accounting department, its external auditors and the investing public that MBI had made sales under such terms. By concealing the practice, Absi caused MBI to report a doubling of its revenue from 2012 to 2013.
Absi also is accused of conspiring with others to backdate the delivery of certain shipments of MBI’s products to enhance reported revenues for the quarter. Absi received a performance-based bonus of $35,000 to $40,000 and exercised more than $200,000 in stock options during the period when MBI’s inflated revenue figures were being reported, U.S. Attorney Benjamin Wagner said.
The 47-year-old Absi, who resigned from MBI in August 2014, was arrested by FBI agents Wednesday morning at his Las Vegas home. He appeared in federal court there later that day to answer to the 16 criminal counts, which include conspiracy, mail fraud, wire fraud, securities fraud and falsifying books or records.
If convicted, Absi faces a maximum of 25 years in prison and $5 million fine.
His next court date is Wednesday, Feb. 24, in U.S. District Court in Sacramento, where a number of class-action lawsuits filed by MBI shareholders have been consolidated and are pending.
“It is critical to the integrity of the securities markets that we criminally prosecute those who act to profit by deceiving those markets and the investing public who rely on the accuracy of publicly filed reports,” Wagner said in a news conference Wednesday announcing Absi’s arrest.
Meanwhile, MBI has paid $1.7 million in civil penalties to settle SEC allegations of securities fraud and internal controls, books and records violations, according to Choi, whose agency also filed a separate civil complaint against Absi.
MBI’s founder and CEO, Pam Marrone, and former chief financial officer Donald Glidewell have agreed to reimburse the company for the financial incentives they received as a result of the increased sales figures. Neither of them face criminal charges.
“This case is a cautionary tale for companies who are new to the public markets. They need to make sure that their desire to meet the market’s expectations is balanced by strong and robust internal controls at all levels of the organization,” Choi said.
The SEC also has filed an administrative complaint charging Julieta Favela Barcenas, a former customer relations manager who worked for Absi, with circumventing internal controls. According to Choi, she has agreed to settle the matter by cooperating with the SEC in the Absi investigation.
Requests for comment at MBI’s offices in South Davis were referred to Linda Moore, the company’s general counsel.
“We honestly thought it was in the best interests of our employees and shareholders to get this done,” Moore said of the settlement. “We are happy to have this over.”
Moore declined to comment on the allegations against Absi.
His resignation in August of 2014 was the first in a series of events that plunged MBI into financial and legal turmoil. Following Absi’s resignation, the company announced an internal investigation into an $870,000 transaction from fall 2013. Share prices dropped a punishing 44 percent in one day with the announcement of the investigation. A month later, about 35 employees were laid off.
At the same time, four different law firms brought class-action lawsuits, alleging that MBI filed false and misleading financial reports. Even as the company brought new products to market, the NASDAQ stock exchange threatened to delist MBI over its accounting irregularities.
In November 2015, MBI restated its earnings for 2013 and the first half of 2014. The company marked down its revenues by $6.7 million as it filed its long-delayed financial statements one day after a deadline imposed by NASDAQ to avoid delisting.
The investigation revealed that some former employees “no longer with the company” had misled management about certain sales transactions. As part of its investigation, MBI managers evaluated all distributor sales transactions on a customer-by-customer basis. Marrone’s audit determined that these employees kept information from its finance department and external auditors on terms with its distributors, including inventory protection arrangements.
As result, Marrone said it earned $6.7 million less in product revenues than previously reported for 2013 and the first six months of 2014. Of this, $2 million was a result of distributors returning unsold inventory after June 2014.
As of November, the company was current with its financial reporting, but still could face delisting because of its low share price. Once traded at $20 a share, it closed at $1.02 on Wednesday.
— Reach Lauren Keene at lkeene@davisenterprise.net or 530-747-8048. Follow her on Twitter at @laurenkeene. Enterprise associate editor Sebastian Oñate contributed to this report.