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Krispy Cream

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Krispy Kreme Dougnuts: Empty Calories or Empty Profits?
Case Study of the Impact of Sarbanes-Oxley Act ("SOX")

Krispy Kreme Doughnuts (KKD), a once high flying growth stock has been hampered as of late with shareholder lawsuits. When sales growth and earnings began to drop significantly in 2003, the company blamed its problems on the popularity of low-carbohydrate diets like Atkins and South Beach at the time. But the SEC began probing Krispy Kreme's accounting for franchise buybacks and is now facing shareholder lawsuits for inflating profits. Senior management officials allegedly knew of the problems, but continued to pad sales figures by doubling doughnut shipments to wholesale customers at the end of fiscal quarters, according to lawsuits.

Inflated Sales:

The suit alleges that between January 2003 and last May, when Krispy Kreme issued a profit warning, "the company issued false and misleading statements, including false financial results" and "repeatedly ratcheted upward its public quarterly and fiscal year revenue and earning projections ... all in the face of slowing sales and market saturation."
In addition, the lawsuit claims,CEO Scott Livengood, former COO officer John W. Tate and former CFO Randy S. Casstevens - "unloaded more than 475,000 shares of Krispy Kreme stock for proceeds of $19.8 million", while fully aware sales were declining since January 2003. The charges, leveled by two unidentified "confidential witnesses" who are former employees of the company, is included in a recent filing in the lawsuit.

According to one witness cited, Krispy Kreme double-shipped wholesale customer orders at the end of quarters on four separate occasions while the witness worked for the company.

Testimony by a former sales manager at a Krispy Kreme outlet in Ohio, said a regional manager ordered that retail store customers be sent double orders on…...

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