Monsanto Securities Enforcement Case: Full Rebates for Missing the Target

In the Monsanto securities enforcement case, the company agreed to an $80 million civil penalty from the Securities and Exchange Commission over allegations that it shifted Roundup rebate costs into later years and mislabeled other rebates as marketing expenses. For someone who negotiated customer incentives or closed the books, the telling detail is the promise: the agency alleged that customers could miss their purchase targets and still get the full rebate.

This page follows those promises through Monsanto’s sales programs, customer letters and accounting entries. The broader comparison of rebates and expense recognition follows the same question across businesses: what obligation belonged with the number investors saw?

What Did the SEC Say Monsanto Got Wrong?

The Securities and Exchange Commission alleged that Monsanto materially misstated its consolidated earnings and Roundup business results for fiscal years 2009 through 2011 by improperly accounting for customer rebates. Its February 9, 2016 settled order set out alleged failures in financial reporting, recordkeeping and accounting controls. The action also covered Monsanto’s external reporting lead, a U.S. business analyst and its former U.S. strategic account lead.

The order described a breakdown between what sales promised and what accounting recognized. Some rebates belonged with earlier sales but appeared in a later year’s results. Others appeared as selling, general and administrative expenses instead of reductions in revenue, making Roundup gross profit look better. According to the agency, the improper accounting enabled Monsanto to meet analysts’ consensus earnings-per-share estimate for fiscal 2009.

Monsanto restated its financial reports, correcting its annual reports for 2009 and 2010 and quarterly reports for 2011. The SEC’s account reaches back into the transactions behind those reports, where a customer agreement and the entry describing it could tell different stories.

Why Roundup Needed the Rebates

Monsanto sold Roundup, its glyphosate herbicide, to retailers and distributors rather than directly to growers. According to the order, generic competitors were undercutting Monsanto’s prices in the United States and Canada by more than 70% in fiscal 2009. Retailers holding expensive Roundup inventory faced cheaper competing products and the prospect of Monsanto cutting its own prices.

That inventory explains the sales pitch. Monsanto’s price-protection and rebate programs were meant to make customers’ existing stock profitable and persuade them to buy more. Distributors also had volume agreements under which larger purchases earned larger rebates, which they generally needed to sell Roundup profitably. For a distributor account manager, the rebate promise mattered as much as the invoice price.

How the Roundup Rebate Programs Worked

The Loyalty Bonus Reached Customers Before Its Paperwork

The Securities and Exchange Commission alleged that Monsanto’s sales force began telling U.S. retailers about the loyalty bonus in late May 2009, encouraging them to maximize purchases before the fiscal year ended. The program promised relief on inventory that would lose value when Monsanto lowered prices. The business analyst helped develop the sales talking points, and the external reporting lead approved them. According to the order, approximately 33% of Monsanto’s U.S. Roundup sales for fiscal 2009 occurred in the fourth quarter.

The order described a written program that tied payment to later sales targets and activities, including filling tanks with Roundup and recommending it to growers. The agency alleged that Monsanto prepaid approximately $194 million in rebates before retailers met their targets, then waived the requirements and its right to recover unearned payments. The agency alleged that Monsanto recognized the revenue reductions in fiscal 2010 while ignoring the program’s use to encourage sales in fiscal 2009.

The distinction between the sales conversation and the formal announcement also reached the auditor. According to the order, the external reporting lead told the outside auditor that customers had not heard about the program until August 20, 2009. That statement influenced the auditor’s conclusion about how much earlier selling the program had encouraged. The sales force’s talking points told a different story.

Earnback Paid the Rebate After the Target Was Missed

The agency’s Earnback allegations show how a missed target could become a reason to move a promised rebate into another year. Monsanto reversed rebate amounts it had already recorded when distributors failed to reach their purchase targets, then offered a later program through which they could earn the rebates back. For its largest customers, the order described side agreements that had already promised payment.

According to the order, Customer A had submitted orders sufficient to reach its highest rebate tier. The agency alleged that the account lead asked the distributor to hold pending orders so it would miss its minimum target, while promising the full rebate. Customer A received the top-tier 10.5% rate, a $20.2 million payment, despite missing the minimum target.

The order said the account lead then supplied a confirmation saying Customer A had earned the payment, although it had not met the later program’s volume targets. The order explained what that letter was meant to accomplish:

The order described a separate promise to Customer B of its maximum 9.1% rebate, worth $24.3 million. According to the agency, the business analyst knew the requested confirmation did not comply with the company’s delegation-of-authority policy but took no further action to ensure proper recording. Monsanto paid the rebate under Earnback in December 2009, its next fiscal year.

The agency alleged that these promises created obligations in the earlier year and contradicted the reason for reversing the rebates. The target failed. The rebate survived.

The order described the same pattern in the next Earnback program. It said Customers B and C received approximately $48 million in payments that belonged in fiscal 2010, although Monsanto assigned them to fiscal 2011. The agency alleged that, once again, the account lead supplied confirmations saying customers had completed requirements that they had not met.

Canadian Customers Signed Away One Promise for Another

In Canada, the agency alleged that Monsanto persuaded customers to cancel price protection by promising equivalent payments through a replacement loyalty program. Monsanto nevertheless recorded approximately $43 million in rebates in fiscal 2010 that the agency said belonged in fiscal 2009.

The order also described what the auditor was told. The external reporting lead asked about the accounting effect of cancellation without disclosing that customers had already signed cancellation forms, then later represented that the old program remained in effect. For an employee handling those forms, the signed customer record would show what the accounting discussion left out.

Marketing Services Priced to Match Rebates Already Paid

The Securities and Exchange Commission alleged a second accounting maneuver in Canada: Monsanto changed rebates into purported payments for marketing services. According to the order, employees assigned the services an internal value of approximately $18 million, with each customer’s amount exactly matching rebates already paid. An independent marketing company’s estimate put the services’ value at approximately $6 million, but Monsanto did not use it.

According to the order, employees instead created their own estimate, obtained customer certifications, reversed rebate credits and reposted the same amounts as marketing expenses. The agency said there was no evidence beyond the certifications that customers performed the services. One customer refused to sign, and its rebate remained a reduction of revenue. We see the valuation working backward: the payment set the price.

In France and Germany, the order described a program paying customers $5 for each liter of Roundup sold from inventory. Part of the payment was supposedly for marketing services, with the rest intended as price support. The agency alleged that Monsanto received no identifiable benefit from customer services and should have recorded the payments as reductions in revenue. The label changed. The price support did not.

What Monsanto and Its Employees Agreed to Pay

The company’s civil penalty resolved the agency’s allegations about Monsanto’s reporting and accounting. The order imposed separate civil penalties on the employees: $55,000 for the external reporting lead, $30,000 for the U.S. business analyst and $50,000 for the former U.S. strategic account lead.

Monsanto also agreed to retain an independent ethics and compliance consultant with expertise in public-company reporting, accounting controls and rebate programs. The review covered how the Crop Protection business accounted for incentives and whether its compliance function had the resources, independence and access needed to do its work.

How Much Do SEC Whistleblowers Get Paid?

SEC whistleblower awards can range from 10% to 30% of money collected when monetary sanctions exceed $1 million. For an example of what inside knowledge can earn, the agency’s August 2016 announcement described more than $22 million for an employee whose detailed information and extensive assistance helped uncover well-hidden fraud at an unnamed company. We assess your information with you and bring in securities fraud whistleblower lawyers who understand accounting and SEC whistleblower awards.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate program for fraud against the government. We assess which program fits the conduct you know.

What Evidence Is Needed for Whistleblowing?

For rebate accounting, useful whistleblower evidence connects what the customer was promised to the accounting entry and the results investors received. In Monsanto’s case, the agency described sales talking points, negotiated targets, confirmation letters, cancellation forms, service estimates and entries reversing or reclassifying rebates. A person who handled one of those records may understand why its description does not match the deal.

The public-company reporting chain runs from transaction records through accounting entries, the close, financial statements and disclosure review. We compare the customer terms with the period in which the company recognized the obligation, then follow the effect into the reported results. The negotiator may know the promise, the accountant may know the reversal, and the reporting employee may know what the auditor was told.

Do Corporate Whistleblower Laws Deter Accounting Fraud?, a March 2019 working paper hosted by MIT Sloan, studied companies exposed to state whistleblower laws through state pension-fund ownership. It reported a 5% to 9% reduction in measures of accounting-fraud likelihood after exposure to those laws, using financial-statement indicators of manipulation.

The Monsanto order supplies the concrete comparison here: what customers were told, what accounting recorded and what investors ultimately saw. That is where your knowledge of the business can explain a number the public cannot see behind.

You Know What the Customer Was Promised

If you handled rebate terms, customer confirmations or entries that moved costs out of the sales period, talk with our whistleblower experts about the promise behind the number. We build the accounting story with you, bring in securities fraud whistleblower lawyers who know customer-incentive and disclosure cases, and stay beside you through the case.