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ConAgra to stand trial for alleged fraud at agribusiness unit

(Sunday, July 6, 2003 -- CropChoice news) -- Eric Schroeder, Bakingbusiness.com, 07/02/03: LINCOLN, NEB.-- The U.S. Court of Appeals for the 8th Circuit this week ordered a trial in a lawsuit filed by Jemmco Investment Management on behalf of shareholders against ConAgra Foods, Inc. for alleged fictitious sales and misreported earnings at United Agri Products, a wholly owned subsidiary of ConAgra that supplies fertilizer, seed and other farm products.

The lawsuit, filed on behalf of shareholders of ConAgra stock between Aug. 28, 1998, and May 23, 2001, alleges ConAgra and several of the company's officers and directors violated federal securities laws by recognizing sales when delivery of goods had not yet taken place, recording rebates as income in violation of generally accepted accounting principles, making "sales" to non-existent customers, boosting its profits by maintaining inadequate reserves for bad debts and delaying the writing off of uncollectible accounts receivable.

ConAgra allegedly manipulated $287 million in revenue during the three years in question.

The District Court in the original claim dismissed the suit, claiming the defendants' misrepresentations were immaterial as a matter of law and that the plaintiffs suffered no loss attributable to the defendants. But the U.S. Court of Appeals reversed the judgment, saying "certain ConAgra officers were allegedly aware of U.A.P.'s fraud and either encouraged it or turned a blind eye to it."

ConAgra attempted to deflect the allegations by saying that "a reasonable investor would not care about the misrepresentations because the amount of money in question is insignificant relative to the company's size, and because the earnings misrepresented were, for the most part, received by the company, just not at the time the company initially claimed," according to court records.

But in issuing its most recent ruling, the U.S. Court of Appeals stated, "We believe that the District Court erred in deciding on a motion to dismiss that the plaintiffs had failed to plead either transaction or loss causation. A reasonable investor might be concerned about one of ConAgra's subsidiaries reporting earnings not yet received, especially if this was done under orders from ConAgra's senior management. The fraud-on-the-market theory then would allow the fact finder to presume that the stock's price reflected the inflated earnings, and it makes sense to conclude that the plaintiffs were harmed when they paid more for the stock than it was worth. This is a sufficient allegation."

Shares of ConAgra rose 16c to $23.76 per share in Tuesday trade.