Marrone Bio Innovations Inc. was a rising star in the Sacramento-area tech community – until it got clobbered by an accounting scandal that exposed serious problems with the financial results it was reporting to investors.
Now the Davis biotech company’s troubles have turned into a criminal case.
Marrone Bio’s former chief operating officer was arrested and charged with fraud Wednesday. A federal grand jury in Sacramento accused him of artificially inflating the company’s reported revenues by millions of dollars, placing him at the heart of a scheme that has dogged Marrone Bio for well over a year.
Hector Absi, 47, the former executive, was charged with securities fraud, falsifying corporate records and other crimes, according to the U.S. attorney’s office in Sacramento. He was arrested at his home in Las Vegas, where he was released after agreeing to surrender his passport and abide by other restrictions following an initial court appearance. He is scheduled to appear in U.S. District Court in Sacramento next Wednesday.
Absi was also sued for fraud by the Securities and Exchange Commission.
Absi was Marrone’s COO from January through August 2014. A month after he left, Marrone disclosed that it was launching an in-house probe into a major accounting problem that resulted in overstatement of profits and revenue. The disclosure sank the young company’s stock price and indirectly led to significant layoffs. Only recently has Marrone begun to recover, although it continues to struggle with issues stemming from the accounting problems.
“All the employees and everyone will feel some closure once this comes out,” said founder and Chief Executive Officer Pam Marrone in an interview. “It’s been difficult for the company.”
Absi could face 25 years in prison and a $5 million fine.
While Absi is the target of the criminal case, the company is still paying for his alleged activities. Marrone Bio announced Wednesday afternoon it has agreed to pay a $1.75 million fine to settle an SEC investigation. The company said the settlement will let Marrone Bio “focus on our business going forward.”
In addition, the SEC said Pam Marrone reimbursed the company $15,234 and former Chief Financial Officer Donald J. Glidewell agreed to reimburse $11,789. The two sums represent incentive-based pay the two earned during the period covered by Absi’s alleged crimes.
Also, the SEC said Marrone Bio’s former customer relations manager, Julieta Favela Barcenas, agreed in an administrative proceeding to cooperate with the investigation into Absi. The SEC said Barcenas helped Absi hide information from company executives.
Marrone Bio still faces legal problems. Five separate class-action lawsuits filed by shareholders have been consolidated into one case pending in U.S. District Court in Sacramento.
The criminal indictment said Absi gave some of Marrone’s outside distributors “inventory protection” that would allow them to sell the company’s products back to Marrone if they weren’t able to sell them. The deals were kept secret from the company’s accounting department. As a result, the accountants “recorded millions of dollars of revenue in (Marrone’s) financial statements that should not have been recorded,” the indictment said.
Marrone Bio makes eco-friendly pesticides and other agricultural products.
The company corrected the financial statements last November, reporting that it had overstated revenues by $6.7 million in 2013 and the first half of 2014. The SEC pegged the overstatement at $4 million. In any event, the overstatement represented a significant amount of money for Marrone Bio, which had $9.1 million in sales for all of 2014.
“This is the whole case that led to our restatement,” Pam Marrone said.
Marrone Bio was founded in 2006 but didn’t make much of a splash until August 2013, when its stock raised $57 million in an initial public offering. The IPO was the first for a Sacramento-area company in seven years.
Barely a year later, Marrone Bio was disclosing to shareholders that it had launched an internal investigation into shortcomings in its accounting. Such a disclosure can hurt any public company. For a company that had only recently gone public and had a fairly thin track record – Marrone Bio has never earned a quarterly profit – the news was devastating.
Its share price fell 44 percent the day of the announcement and has continued falling ever since. It closed Wednesday at $1.02 a share, up 13 cents, on the Nasdaq market.
Absi came to Marrone Bio after several years with Suterra, a biotech company in Bend, Ore. Marrone Bio paid him $712,955 in total compensation during 2013, according to the company’s regulatory filings. That included a $49,668 incentive bonus tied partly to the company’s reported revenue growth, the SEC’s lawsuit said. His compensation for 2014 wasn’t reported.
Besides his incentive bonus, the SEC’s lawsuit said Absi “profited from his scheme” by exercising stock options and then selling the shares at a hefty gain, thanks to the company’s reporting of illusory increases in sales. His profit came to $281,000, the lawsuit said.
The lawsuit added that Absi ramped up his efforts to inflate Marrone Bio’s sales numbers as 2013 drew to a close and he became concerned that the company couldn’t meet its publicly stated target of doubling its revenue.
“To meet the revenue goal and to sell as much product as possible by the end of the year, Absi instructed (a Marrone Bio) sales director to offer inventory protection to distributors,” the suit says. “When the executive questioned Absi’s directive, Absi falsely claimed that (Marrone Bio’s) chief executive officer had authorized the inventory protection.” Offering the buyback protection enabled Marrone Bio to make several big sales in 2013 and 2014, the suit said.
SEC regional director Jina Choi said agreeing to take product back from customers is fine, as long as the revenue from the sale isn’t reported to investors.
“Now there’s nothing wrong with promising your distributors that they can return your product if they can’t sell it. But you can’t book that revenue,” she said at a news conference in Sacramento. “The accounting principles at issue here are simple – you can’t tell the market you sold something when you’ve promised that customers can return it to you at any point. If you could, companies could manipulate their revenues and earnings in all sorts of ways.”
The SEC’s lawsuit also accused Absi of falsifying his corporate expense reports, obtaining reimbursement from Marrone Bio for more than $35,000 worth of clothing, furniture, personal travel and student loan payments.
Lawyers for Absi weren’t immediately available for comment.