TIFFANY & BOSCO, P.A. J. James Christian (#023614) Telephone:...

Case 2:09-cv-00406-FJM Document 58 Filed 09/25/09 of 68

1 TIFFANY & BOSCO, P.A.Richard G. Himelrick (#004738)

2 J. James Christian (#023614)

3 Third Floor Camelback Esplanade II2525 East Camelback Road

4 Phoenix, Arizona 85016-4237Telephone: (602) 255-6000

5 Fax: (602) 255-01036 [email protected]

[email protected]

8 Liaison Counsel for Plaintiffs

9 THE ROSEN LAW FIRM P.A.10 Phillip Kim (pro hac vice)

Laurence Rosen (pro hac vice)11 Timothy Brown (pro hac vice)

12 350 Fifth Avenue, Suite 5508New York, NY 10118

13 Telephone: (212) 686-1060

14 Fax: (212) [email protected]

15 [email protected]

16 [email protected]

17 Lead Counsel for Plaintiffs

18 UNITED STATES DISTRICT COURTDISTRICT OF ARIZONA

19

20 JENNIFER BURRITT, ) No. CV-09-00406-PHX-FJMINDIVIDUALLY AND ON BEHALF ) ( Consolidated)

21 OF ALL OTHERS SIMILARLY )

22 SITUATED, ) CLASS ACTION

Plaintiff, )23 vs. ) FIRST AMENDED

24

) CONSOLIDATED CLASS ACTION

NUTRACEA, BRADLEY D. EDSON, ) COMPLAINT FOR VIOLATIONS25 TODD C. CROW, AND DAVID ) OF THE FEDERAL AND ARIZONA

BENSOL, ) SECURITIES LAWS26 Defendants. )27 ) JURY TRIAL DEMANDED

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FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OFFEDERAL AND ARIZONA SECURITIES LAWS


1 Lead Plaintiff Harvey Pensack, and named plaintiffs Jennifer Burritt and

2 Jose Medrano, (collectively “Plaintiffs”), individually and on behalf of all other

3 persons similarly situated, by their undersigned attorneys, allege in this First

4 Amended Consolidated Class Action Complaint (“Complaint”) the following upon

5 knowledge with respect to their own acts, and upon facts obtained through an

6 investigation conducted by their counsel, which included, inter alia: (a) review

7 and analysis of relevant filings made by Nutracea Inc., (“Nutracea” or the

8 “Company”) with the United States Securities and Exchange Commission (the

9 “SEC”); (b) review and analysis of defendants’ public documents, conference calls

10 and press releases; (c) review and analysis of securities analysts’ reports and

11 advisories concerning the Company; (d) information readily obtainable on the

12 Internet; and (e) interviews with witnesses that have first-hand knowledge of the

13 fraud alleged herein.

14 Plaintiffs believe that further substantial evidentiary support will exist for

15 the allegations set forth herein after a reasonable opportunity for discovery. Most

16 of the facts supporting the allegations contained herein are known only to the

17 defendants or are exclusively within their control.

18 NATURE OF THE ACTION

19 1. This is a securities class action on behalf of all persons and entities

20 other than Defendants who purchased the common stock of Nutracea during the

21 period between April 2, 2007 and February 23, 2009, inclusive (the “Class

22 Period”), seeking to recover damages caused by Defendants’ violation of the

23 Sections 10(b) and 20(a), and Rule 10b-5 thereunder, of the Securities Exchange

24 Act of 1934 and for violation of A.R.S. §44-2003(A) and §44-1999 caused by

25 Defendants’ violation of A.R.S. § 44-1991(A)(3). Defendants are Nutracea, its

26 CEO, President and Director Bradley D. Edson (“Edson”); and former CFO Todd

27 C. Crow (“Crow”) (collectively “Defendants”).

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1 2. Defendant Nutracea is a small nutraceutical company engaged in the

2 research and development, manufacturing, sale, and distribution of rice bran

3 foodstuff and nutritional supplements. The Company’s products include rice bran

4 oil, human food additives, and animal food products. The Company sells its

5 products through a number of distribution channels, including infomercials

6 through ITV Global, Inc. (“ITV”) and EXI International d/b/a Famous Discoveries

7 (“Famous Discoveries”).

8 3. During the Class Period a majority of the Company’s sales and

9 revenue were derived from a small number of customers. For fiscal year (“FY”)

10 ended December 31, 2006, five customers accounted for 67% of the Company’s

11 total sales revenue, with one customer, ITV, accounting for 45% of the

12 Company’s total sales. For FY ended December 31, 2007 six customers,

13 including ITV accounted for 59% of the Company’s total product sales revenue

14 (excluding license and royalty fees). Of these six customers, ITV accounted for

15 12% or approximately $2 million of the Company’s total product sales revenue

16 (excluding license and royalty fees) in FY 2007.

17 4. Defendants perpetuated an accounting fraud during the Class Period

18 by materially overstating revenue and net income and underreporting net loss in

19 the Company’s publicly filed financial statements and other public announcements

20 with the purpose and effect of artificially inflating the market price of Nutracea

21 common stock.

22 5. Defendants violated Generally Accepted Accounting Principles

23 (“GAAP”) which enabled the Company to misrepresent its financial performance

24 as follows:

25 a. Overstate its “record” revenue for the fourth quarter (“Q4”)

26 and fiscal year (“FY”) ended December 31, 2006 by $1,551,000, or 43%

27 and 9%, respectively. Net income before incomes taxes for FY 2006 was

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1 overstated by $1,283,000 or by 425% and in Q4 2006 previously reported

2 net income before income taxes of $778,000 was, in truth, a net loss before

3 income taxes of $505,000; 1

4 b. Overstate revenues for both the second quarter (“Q2”) and six

5 months ended June 30, 2007 by $7.6 million or 141% and 103%,

6 respectively. In truth, the originally reported net income before income

7 taxes for Q2 2007 of $2,087,000 was really a net loss before income taxes

8 of $4,714,000—a $6,801,000 or 144% understatement of loss; and the

9 originally reported net income before income taxes of $1,840,000 for the

10 six months ended Q2 2007 was in truth, a net loss of $4,961,000—a

11 $6,801,000 or 137% understatement of net loss; and

12 c. Overstate Q4 and FY 2007 revenue by $1,920,000, or 52%,

13 and $7,970,000, or 56%, respectively, and to under-report net loss before

14 income taxes for 2007 by $5,354,000 or 31%.

15 6. Nutracea has stated that additional restatement adjustments to its

16 previously reported financial statements – on top of those set forth above- will be

17 necessary as the Company is continuing its internal investigation by independent

18 outside counsel and forensic accounting consultants. The internal investigation

19 already has uncovered additional accounting improprieties and has been expanded.

20 7. Defendants perpetrated the accounting fraud by improperly

21 recording revenue on large transactions with affiliated parties near the end of

22 financial reporting periods that included: (a) a sham revenue transaction involving

23 an undisclosed related party where collectability was not reasonably assured; (b) a

24 previously undisclosed “bill and hold” arrangement with ITV that did not meet the

25 requirements for revenue recognition; (c) another sham transaction with an

26

27 1 Percentages used for comparison purposes herein were derived by dividing theamount overstated or understated by the originally reported amount.

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1 undisclosed affiliated joint venture partner, Famous Discoveries, where

2 collectability or payment was not reasonably assured; and (d) $5.0 million in

3 license revenue in separate “round-trip” sham transactions that should not have

4 been recognized because the separate transactions should have been considered a

5 single transaction with multiple deliverables under GAAP and there were various

6 obligations under the arrangement that would have precluded immediate

7 recognition of the revenue.

8 8. On February 23, 2009 the Company issued an announcement stating

9 that its financial statements filed with the SEC and related public announcements

10 for the fiscal year ended December 31, 2007, including the associated second,

11 third, and fourth quarter periods for 2007, and all fiscal quarters in 2008 should

12 not be relied upon. The Company admitted that a restatement was required for

13 those periods as a result of accounting improprieties concerning two large

14 transactions. The Company stated in the announcement that the improprieties

15 were discovered by the Company’s previously undisclosed internal investigation

16 which was being conducted by independent outside counsel and forensic

17 accounting consultants.

18 9. The first improper transaction involved $2.6 million2 in revenue

19 recognized in the second quarter of 2007 in connection with the purported sale of

20 Dr. Vetz PetFlex product. The $2.6 million in question should not have been

21 recognized as revenue at all. While the Company received a $1 million down

22 payment on this transaction, the down payment the Company received was

23 provided to the purchaser through a loan from a consultant to, and former officer

24 of, the Company. The loan, and its related party nature, were concealed from the

25 Company’s auditors and never disclosed publicly by the Company. Moreover, the

26

27 2 The Company’s restatement announcements interchangeably use“$2,601,000” and “$2.6 million” in referring to this transaction.

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1 evidence relied upon by the Company to determine the purchaser’s ability to pay

2 the remaining $1.6 million receivable balance was inaccurate (i.e. false). The

3 Company had originally recorded a $800,000 reserve on this transaction in Q3

4 2007 and in Q4 2007. The Company has now admitted that the entire $2.6 million

5 should not have been recognized as revenue, will be reversed, and has

6 consequently created a $1 million liability for the down payment. These facts are

7 indicative of a sham transaction.

8 10. The second transaction involved a $2 million3 sale of the Company’s

9 RiceNShine product to ITV during December 2007—the end of Q4 and FY 2007.

10 The Company’s February 23, 2009 announcement revealed that the revenue

11 should not have been recognized in December 2007 but in later quarters because

12 the transaction occurred on a “bill and hold” basis and did not meet the

13 requirements for revenue recognition in December 2007. Prior to the February 23,

14 2009 announcement, the Company had not disclosed that it engaged in “bill and

15 hold” arrangement with this transaction—a separate violation of GAAP.

16 11. A “bill and hold” arrangement occurs when a seller charges a buyer

17 for products but retains possession of the goods until they are shipped at a later

18 date. Pursuant to GAAP, revenue is generally recognized under these

19 arrangements when goods are shipped to the buyer or to a designated location

20 selected by the buyer and the other elements of revenue recognition are satisfied,

21 including among other things, the risk of loss has passed to the buyer and

22 collectability is reasonably assured. Additionally, to record a “bill and hold”

23 transaction as revenue under GAAP, the buyer, not the seller, must request that the

24 transaction be on a “bill and hold” basis, and the buyer must have a substantial

25 business purpose for ordering the goods on a “bill and hold” basis. None of these

26

27 3 The Company’s announcements interchangeably use “$1,920,000” and“$2.0 million” in referring to this transaction.

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1 requirements were met. The Company fraudulently induced the customer to back-

2 date a letter to Nutracea’s co-packer requesting a bill and hold arrangement to

3 deceive its auditors, when none in fact existed, solely to inflate Nutracea’s Q4

4 2007 sales figures.

5 12. On April 23, 2009, the Company announced that the scope of the

6 internal investigation was expanded and disclosed that it had discovered more

7 accounting improprieties concerning two additional large transactions.

8 13. The third transaction involved the Company’s improper recognition

9 of $1.6 million4 in revenue on sales of Dr. Vetz PetFlex products in December

10 2006—near the end of the fourth quarter in 2006—to an undisclosed joint venture

11 partner, known as Famous Discoveries. In Q2 2007 the Company recorded an

12 $800,000 reserve for doubtful accounts on the receivable associated with the

13 December 2006 $1.6 million transaction.

14 14. Famous Discoveries entered into a joint venture with Nutracea to

15 sell Dr. Vetz PetFlex products through joint-ownership of Infomaxx LLC

16 (“Infomaxx”), a Delaware company created on December 13, 2006. At the

17 creation of the joint venture, Famous Discoveries owned the trademark Dr. Vetz.

18 Nutracea owned the trademark PetFlex. The purpose of Infomaxx, according to

19 the Company’s 2006 10-K was to “promote infomercials for the marketing of

20 Nutracea’s and [Famous Discoveries’] products.”

21 15. Nutracea and Famous Discoveries created Infomaxx

22 contemporaneous with the improper sale of $1.6 million of Dr. Vetz PetFlex

23 product to Famous Discoveries.

24

25

26 4 The Company’s announcements interchangeably use “$1,551,000” and

27 “$1.6 million” in referring to this transaction.

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1 16. In Q3 2007, the Company reversed the transaction with Famous

2 Discoveries by recording a sales return of $1.6 million. The sales return was a

3 condition of Nutracea’s purchase from Famous Discoveries of its remaining

4 interest in the Infomaxx joint venture.

5 17. The Company’s forensic investigation determined that it had

6 improperly recorded the $1.6 million sale to Famous Discoveries in Q4 2006

7 because at the time Nutracea recorded the sale, there was insufficient evidence that

8 Famous Discoveries had the ability to pay for the goods. Thus, under GAAP, no

9 sale had occurred and no revenue was recognizable.

10 18. According to Nutracea’s April 23, 2009 announcement, the $1.6

11 million sale of Dr. Vetz PetFlex products should have been reversed in 2006

12 instead of 2007 because the Company did not have adequate evidence to conclude

13 that Nutracea could collect the receivable relating to the sale to Famous

14 Discoveries in the quarter in which it was recognized; had insufficient experience

15 in the infomercial market to adequately understand the distribution channel, and

16 the fluctuating nature of sales into this channel or the potential for product return.

17 19. As explained below, this entire transaction with Famous Discoveries

18 was a sham because Nutracea never delivered $1.6 million of Dr. Vetz PetFlex

19 product to Famous Discoveries and the true terms of the transaction were akin to a

20 consignment sale in which no revenue may be recognized under GAAP. Edson

21 knowingly deceived Nutracea’s auditors to believe a true sale on credit, with the

22 buyer promising to pay--had occurred.

23 20. The fourth improper transaction involved the Company’s

24 recognition of $5 million in license fee revenue in June 2007—near the end of Q2

25 2007. In June 2007, the Company granted to Pacific Holdings Advisors Ltd

26 (“PAHL”) a perpetual and exclusive license and distribution rights for the

27 production and sale of stabilized rice bran and related products in Southeast Asia.

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1 The one-time fee was due and payable on the fifth anniversary of the

2 commencement of the rice bran production facility established by PAHL or a joint

3 venture of PAHL and the Company. At the time of the June 2007 grant, the

4 Company and PAHL formed Grain Enhancements, LLC.

5 21. In its April 23, 2009 announcement, the Company admitted that the

6 $5 million of license revenue recognized in June 2007 should never have been

7 recognized and its recognition violated GAAP because it should have been

8 considered as one arrangement with multiple deliverables instead of stand-alone

9 transactions, and because the arrangement had various obligations. As explained

10 herein, this transaction is indicative of a sham “round-trip” transaction because

11 when PAHL paid the Company the $5 million in March of 2008, Nutracea

12 immediately paid the $5 million right back to PAHL through an affiliated

13 company controlled by the same principal shareholder (FFOL) that controls

14 PAHL.

15 22. The Company’s violations of certain straightforward and

16 fundamental provisions of GAAP and violations of its own stated revenue

17 recognition polices had the effect of artificially inflating the Company’s stock

18 price during the Class Period.

19 23. Instead of coming clean about the Company’s accounting

20 improprieties, when asked during an investor conference discussing the

21 Company’s Q3 2007 results and the $800,000 reserve posted for the improper $2.6

22 million transaction, Defendant Crow provided a false reassurance to investors

23 claiming that the reserve was taken because the customer was a slow-paying

24 customer. The reality was that the entire $2.6 million of revenue should not have

25 been recognized from the beginning, as there was no evidence of collectability and

26 because of the related party nature of the transaction.

27

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1 24. By engaging in the accounting fraud, Defendants were able to report

2 “record” results and net income, when in fact the Company had suffered a net loss.

3 The fraudulent misrepresentations also enabled the Company to complete a $20

4 million April 2008 stock offering to raise much needed cash.

5 25. In the midst of the fraud, Defendant Edson received a rare cash

6 incentive bonus in April 2008 that exceeded his entire salary for 2007.

7 26. As a result of the accounting fraud, defendant CEO Edson and

8 defendant CFO Crow were replaced. In addition, the Company had difficulty

9 finding a replacement CFO as two other prior candidates inexplicably resigned or

10 refused to start.

11 27. The SEC initially commenced an informal investigation concerning

12 the specific transactions that are the subject of the restatement. The SEC has since

13 converted the informal investigation into a full-blown formal SEC investigation –

14 demonstrating the seriousness of Defendants’ accounting fraud.

15 28. As a result of the Company’s disclosure that its financial statements

16 cannot be relied on and must be restated, the NASDAQ has delisted the

17 Company’s stock from trading on the NASDAQ Bulletin Board.

18 29. The Company’s internal investigation, which has already been

19 expanded once after the discovery of additional accounting improprieties, is

20 ongoing. To date, the Company has cautioned that the internal investigation could

21 yield additional accounting errors and improprieties.

22 30. When the truth of Defendants’ accounting fraud began to enter the

23 market on February 23, 2009, the price of Nutracea’s securities fell over 29%

24 damaging Plaintiffs and the Class.

25 JURISDICTION AND VENUE

26 31. The federal claims herein arise under Section 10(b) and 20(a) of the

27 Exchange Act (15 U.S.C. §78j(b) and §78t(a)) and Rule 10-b5 promulgated

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1 thereunder (17 C.F.R. §240.10b-5). The Arizona securities claims arise under

2 A.R.S. § 44-1991(A)(3), §44-2003(A) and §44-1999.

3 32. This Court has jurisdiction over the subject matter of the federal

4 claims pursuant to §27 of Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331

5 as a substantial part of the conduct complained of herein occurred in this District.

6 33. The Court has jurisdiction over the subject matter of the Arizona

7 claims pursuant to 28 U.S.C. § 1332(d) because the matters in controversy in this

8 civil class action exceed $5 million exclusive of interest and costs, at least one

9 class member is a citizen of a state different than any of the Defendants, and it is

10 believed there are hundreds if not thousands of potential class members.

11 34. The Court also has supplemental jurisdiction over the Arizona

12 claims pursuant to 28 U.S.C. § 1367(a) because the Court has original jurisdiction

13 over the federal claims under 28 U.S.C. § 1331 and the Arizona and federal claims

14 arise from a common nucleus such that the claims would ordinarily be tried

15 together.

16 35. In connection with the acts, conduct and other wrongs alleged

17 herein, Defendants either directly or indirectly used the means and

18 instrumentalities of interstate commerce, including but not limited to, the United

19 States mails, interstate telephone communications and the facilities of the national

20 securities exchange.

21 PARTIES

22 36. Court-appointed Lead Plaintiff Harvey Pensack, a resident of

23 University Park, Florida purchased Nutracea securities during the Class Period and

24 has suffered damages as a result. Lead Plaintiff’s certification, previously filed

25 with the Court, is incorporated herein.

26 37. Named plaintiff Jennifer Burritt, a resident of Long Meadow,

27 Massachusetts, purchased Nutracea securities during the Class Period and has

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1 suffered damages as a result. Her certification, previously filed with the Court, is

2 incorporated herein.

3 38. Named plaintiff Jose Medrano, a resident of La Feria, Texas,

4 purchased Nutracea securities during the Class Period and has suffered damages as

5 a result. His certification, previously filed with the Court, is incorporated herein.

6 39. Defendant Nutracea is a California corporation with its principal

7 executive offices located at 5090 N. 40th Street, Suite 400, Phoenix, Arizona.

8 40. Nutracea, through wholly owned subsidiaries, engages in the

9 manufacture, development and marketing of nutraceuticals and related food

10 products.

11 41. Nutracea claims to preserve naturally, through its proprietary

12 stabilizations processes, the nutritional content of rice bran that otherwise would

13 be lost through the rice milling process or the passage of time. Nutracea’s rice

14 bran is used in a variety of products including nutritional supplements, baked

15 goods, energy bars, animal feed and pet food.

16 42. During the Class Period the Company’s common stock was actively

17 traded on the NASDAQ Bulletin Board under ticket “NTRZ.OB.” The

18 Company’s stock was delisted from the Bulletin Board on May 5, 2009.

19 43. Defendant Bradley D. Edson (“Edson”) during the Class Period was

20 the Company’s Chief Executive Officer, President and a member of the board of

21 directors. As a result of his misconduct in connection with the restatement of the

22 financial statements, Edson was forced to resign from his positions with the

23 Company on March 10, 2009.

24 44. Defendant Todd C. Crow (“Crow”) at all relevant times herein was

25 the Company’s Chief Financial Officer. While Crow attempted to resign as the

26 Company’s CFO in March 2008 following the filing of the Company’s 10-K for

27 2007, and again on April 23, 2008, his proposed replacements refused to assume

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1 the CFO role or left the Company. Eventually, on November 6, 2008, the

2 Company was able to find a willing replacement for Crow in Olga Hernandez-

3 Longan. Ms. Hernandez-Longan, however, inexplicably resigned in July 2009.

4 45. Edson and Crow are collectively referred to hereinafter as the

5 “Individual Defendants.”

6 46. It is appropriate to treat the Individual Defendants as a group for

7 pleading purposes and to presume that dissemination of the false, misleading and

8 incomplete information conveyed in the Company’s public filings, press releases

9 and other publications as alleged herein is the result of collective actions of the

10 narrowly defined group of defendants identified above. Each of the above officers

11 and directors of Nutracea and its subsidiaries and affiliates, by virtue of his

12 position with the Company, directly participated in the management of the

13 Company, were directly involved in the day-to-day operations of the Company at

14 the highest levels, and were privy to confidential proprietary information

15 concerning the Company and its business, operations, growth, financial

16 statements, and financial condition, as alleged herein. Said Defendants were

17 involved in drafting, producing, reviewing and/or disseminating the false and

18 misleading statements and information alleged herein, were aware, or recklessly

19 disregarded, that the false and misleading statements regarding the Company were

20 being issued, and approved or ratified these statements, in violation of the federal

21 securities laws.

22 CONFIDENTIAL WITNESSES

23 47. Confidential Witness No. 1 (“CW1”) is a founder and CEO of

24 Famous Discoveries. CW 1 on behalf of Famous Discoveries primarily negotiated

25 on behalf of Famous Discoveries with defendant Edson about the terms of the

26 purported $1.6 million dollar sale of Dr. Vetz PetFlex products to Famous

27 Discoveries that was made in December of 2006.

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1 48. Confidential Witness No. 2 (“CW2”) is a founder and President of

2 Famous Discoveries. CW2 was also involved in negotiations on behalf of Famous

3 Discoveries with defendant Edson concerning the $1.6 million sale and other

4 transactions solicited by Edson.

5 49. Confidential Witness No. 3 (“CW3” ), is a third-party percipient

6 witness, that personally spoke to Robert Maihos, an officer, director and 50%

7 owner of ITV Direct, Inc. and Direct Marketing Concepts5 about matters related to

8 the Q4 2007 $2.0 million bill and hold transaction. ITV was the customer for the

9 improper $2.0 million bill and hold sale transaction.

10

11 PERTINENT GAAP GUIDELINES

12 50. During the Class Period, each financial statement issued by the

13 Company stated that Nutracea’s financial statements conformed with GAAP, the

14 uniform rules, conventions and procedures that define accepted accounting

15 practices. As set forth in Statement of Financial Accounting Concepts (“SFAC”)

16 No. 1, Objectives of Financial Reporting by Business Enterprises, one of the

17 fundamental objectives of financial reporting is to provide accurate and reliable

18 information concerning an entity’s financial performance. Specifically:

19Financial reporting should provide information about

20 an enterprise’s financial performance during a period.

21Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise.

22 Thus, although investment and credit decisions reflectinvestors’ and creditors’ expectations about future

23 enterprise performance, those expectations are24

25 5 ITV, ITV Direct, and Direct Marketing Concepts were affiliates of each

26 other, shared the same office address, and had overlapping management. Maihos

27 at all relevant times was a control person of ITV.

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1 commonly based at least partly on evaluations of past

enterprise performance.2

3 SFAC No. 1, ¶ 47.

4 51. The SEC requires that public companies prepare and file quarterly

5 and annual financial statements in conformity with GAAP. SEC Rule 4-01(a) of

6 Regulation S-X states that “[f]inancial statements filed with the Commission

7 which are not prepared in accordance with generally accepted accounting

8 principles will be presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-

9 01(a)(1) (emphasis added).

10 52. Management retains responsibility for preparing financial statements

11 that conform with GAAP. The American Institute of Certified Public Accountants

12 (“AICPA”) Professional Standards provide:

13

14The financial statements are management’sresponsibility . . . Management is responsible for

15 adopting sound accounting policies and forestablishing and maintaining internal controls that will,

16 among other things, record, process, summarize, and

17 report transactions (as well as events and conditions)consistent with management’s assertions embodied in

18 the financial statements. The entity’s transactions and

19 the related assets, liabilities, and equity are within thedirect knowledge and control of management. . . .

20 Thus, the fair presentation of financial statements in

21 conformity with generally accepted accountingprinciples is an implicit and integral part of

22 management’s responsibility.

23

24 AIPCA, Professional Standards, vol. 1, AU § 110.02 (1998).

25 53. Restatements are required for material accounting errors that existed

26 at the time financial statements were prepared. See Statement of Financial

27 Accounting (“FAS”) 154, ¶ j.

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1 54. Changes in accounting principles or changes in accounting estimates

2 do not result in a restatement of financial statements, rather such changes result in

3 “retrospective application.” FAS 154, ¶B10. A restatement is “the process of

4 revising previously issued financial statements to reflect the correction of an error

5 in those financial statements.” FAS 154, ¶J.

6 55. An accounting “error” is a term of art and results from, among other

7 things, an error in recognition, measurement, or mistakes in the application of

8 GAAP. SFAS 154, ¶ h.

9 56. Under FAS 154, errors result from (i) mathematical mistakes, (ii)

10 mistakes in application of GAAP, or (iii) oversight or misuse of facts that existed

11 at the time the financial statements were prepared.

12 57. Under GAAP, revenue should not be recognized until it is realized

13 or realizable and earned. SFAC No. 5, ¶¶ 83-84.

14 58. SEC Staff Accounting Bulletin (“SAB”) 104 states that revenue is

15 generally realized or realizable and earned when all the following criteria are met:

16 a. Persuasive evidence of an arrangement exists;

17 b. Delivery has occurred or services have been rendered;

18 c. The seller’s price to the buyer is fixed or determinable; and

19 d. Collectability is reasonably assured.

20 59. When a right of return exists in a sales transaction, Statement of

21 Financial Accounting Standards No. 48 mandates that revenue from a sales

22 transaction to a reseller or customer “shall be recognized at the time of sale only if

23 all of the following conditions are met:”

24 a. “The seller’s price to the buyer is substantially fixed or

25 determinable at the date of sale;

26

27

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1 b. “The buyer has paid the seller, or the buyer is obligated to

2 pay the seller and the obligation is not contingent on the resale of the

3 product;

4 c. “The buyer’s obligation to the seller would not be changed in

5 the event of theft or physical destruction or damage of the product;

6 d. “The buyer acquiring the product for resale has economic

7 substance apart from that provided by the seller;

8 e. “The seller does not have significant obligations for future

9 performance to directly bring about resale of the product by the buyer.

10 f. “The amount of future returns can be reasonably estimated

11 (paragraph 8).”

12

13“Sales revenue and costs of sales that are not recognized at the time of salebecause the foregoing conditions are not met shall be recognized either

14 when the return privilege has substantially expired or if those conditions

15subsequently are met, whichever occurs first.” FAS no. 48, ¶ 6.

1660. Under a “bill and hold” arrangement, the seller of goods bills a

17 customer for products but does not ship the products until a later date. According

18 to SAB 104, revenue may be recognized on a “bill and hold” arrangement only

19 when delivery of the product is made to the purchaser’s place of business or

20 another site specified by the purchaser and the other general GAAP requirements

21 for revenue recognition are met. In order to comply with GAAP when delivery

22 has not occurred in a “bill and hold” arrangement, under SAB 104 revenue cannot

23 be recognized until:

24a. the risks of ownership must have passed to the buyer;

25b. the customer must have made a fixed commitment to

26purchase the goods, preferably in written documentation;

27

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1 c. the buyer, not the seller, must request that the transaction be

2 on a “bill and hold” basis;

3 d. the buyer must have a substantial business purpose for

4 ordering the goods on a “bill and hold” basis;

5 e. there must be a fixed schedule for delivery of the goods;

6 f. the date for delivery must be reasonable and must be

7 consistent with the buyer's business purpose (e.g., storage periods are

8 customary in the industry);

9 g. seller must not have retained any specific performance

10 obligations such that the earning process is not complete;

11 h. the ordered goods must have been segregated from the seller's

12 inventory and not be subject to being used to fill other orders; and

13 i. the equipment [product] must be complete and ready for

14 shipment.

15 61. Pursuant to SAB 104, “[i]f a company has different policies for

16 different types of revenue transactions ... the policy for each material type of

17 transaction should be disclosed.”

18 62. The Company stated publicly that the Company complied with its

19 revenue recognition policies and GAAP. Specifically, the Company’s Form 10-K

20 filed with the SEC on April 2, 2007 states that: (i) “[r]evenues from product sales

21 are recognized when products are shipped and when risk of loss has transferred to

22 buyer. Deposits are deferred until either the product has shipped or conditions

23 relating to sale have been substantially performed”; (ii) as to purchase orders with

24 multiple deliveries, the Company stated that each delivery “is generally considered

25 to be a separate unit of accounting for the purpose of revenue recognition and, in

26 all instances, persuasive evidence of .... collectability, must be determined or

27 accomplished...” (emphasis added); and (iii) as to grants of exclusive use of the

2818



1 Company’s labels in specific territories, the Company stated it follows EITF-00-

2 21 Revenue Recognition with Multiple Deliverables, and confirmed that the

3 Company follows SAB 104 in recognizing revenue. Nearly identical disclosures

4 were contained in the Company’s 10-K filed with the SEC on March 17, 2008.

5 SUBSTANTIVE ALLEGATIONS OF FRAUD

6 A. Defendants Engaged in a Series of Accounting Improprieties Designed

7 to Inflate the Company’s Financial Results in Violation of GAAP and

8 the Company’s Own Stated Accounting Policies

9 63. The Company failed to satisfy the criteria established under SAB

10 104. The $2.6 million in revenue it recorded in Q2 2007 for the sale of Dr. Vetz

11 PetFlex products should not have been recorded because there was no evidence of

12 collectability and the down payment for the sale was provided by a related party –

13 a Company consultant who is also a former officer of the Company. As disclosed

14 in the Company’s February 23, 2009 and April 23, 2009 announcements, the

15 recognition of the $2.6 million revenue was “improper”, must be reversed, and all

16 associated financial statements restated because the applicable criteria for revenue

17 recognition were not met. The February 23, 2009 announcement revealed that the

18 $1 million deposit received in connection with the sale was provided to the

19 purchaser from a consultant to and former officer of the Company.

20 64. The Company also recorded a $1 million liability on its balance

21 sheet pending its resolution of “certain issues relating to the $1 million.”

22 65. In addition to the suspicious circumstances surrounding the

23 previously undisclosed related party nature of the $2.6 million sale (it was funded

24 by a consultant and former Nutracea officer), the Company also violated its own

25 stated revenue recognition policy that required deferral of revenue from down-

26 payments for sales of items that had not been shipped or were subject to

27 conditions relating to the sale that had not yet been substantially performed.

2819



1 66. The Company failed to satisfy SAB 104 with respect to the $2

2 million of revenue recorded on the purported sale of RiceNShine product near the

3 end of Q4 and FY 2007, as it was an improper “bill and hold” transaction. The

4 Company admitted in its February 23, 2009 announcement that the sale “did not

5 meet the accounting requirements for recognition of revenue in bill and hold

6 transactions and that the transaction should not have been recognized as revenue

7 in the Company’s 2007 results.”

8 67. Additionally, Nutracea’s recognition of this transaction as revenue in

9 December 2007 was done in a fraudulent manner. In June 2006, CW3 had a

10 telephone call with Robert Maihos of ITV. During the call, Mr. Maihos made the

11 following representations to CW3 about the nature of the $2 million sale Nutracea

12 recorded in Q4 2007:

13 a. ITV ordered approximately 150,000 of RiceNShine (“RnS”)

14 from Nutracea in the 4th quarter of 2007.

15 b. The order was for fully completed individual units of a new

16 30 serving size of RnS and totaled approximately $2 million.

17 c. ITV maintains their own warehouse facilities and there was

18 no business reason to have Nutracea or their co-packer (Innovative Health

19 Products “IHP”) to hold units in storage for them or otherwise fail to ship

20 the full order as soon as it was produced.

21 68. Mr. Maihos made the following statements to CW3 during the

22 telephone call, which clearly show that Nutracea knowingly and falsely recorded

23 the revenue in Q4 2007 by manufacturing a bill and hold transaction.

24 a. ITV received the 1 st units of their order in January 2008. In

25 February 2008 Nutracea informed ITV that an ingredient in the formulation

26 was out of stock and Nutracea would not be able to continue to produce

27 units for a period of several weeks.

2820



1 b. IHP suffered another production problem in April 2008

2 involving spoilage of IHP’s stored inventory of the key ingredient that

3 came from Nutracea. This caused an additional delay as Nutracea and IHP

4 resolved which of those two parties bore responsibility and the cost of

5 replacement.

6 c. Maihos stated that ITV did not receive any RnS shipments in

7 February 2008, and the next shipments came in early March 2008.

8 Shipments then periodically arrived into June and the order had still not

9 been filled in total as of the date of the June 2008 telephone call.

10 d. In latter half of December of 2007 an executive of Nutracea

11 emailed to Maihos a letter and asked him to sign it and send it to IHP. The

12 letter was prepared by Nutracea. The letter sought to have ITV make

13 certain knowingly false claims related to the order and to have ITV falsely

14 represent their recognition that their order had been completed to

15 specification in 2007 and that ITV requested the units be held in storage by

16 IHP into 2008 (the “Bill and Hold Letter”).

17 e. Because Maihos had not signed the letter as requested by

18 Nutracea, Maihos was once again contacted by a Nutracea executive in

19 February 2008 asking him to sign the Bill and Hold Letter. Following this

20 second request by Nutracea, Mr. Maihos executed a copy of the letter and

21 back-dated the letter to December 2007 at the request of Nutracea, and sent

22 the Bill and Hold Letter to IHP.

23 f. The RnS production problems (described above) disrupted

24 ITV’s business as it had to place new customer orders on backorder and

25 accordingly were unable to “up-sell” the more profitable expedited

26 shipment options.

27

2821



1 g. Maihos stated that under no circumstances did ITV have any

2 liability to Nutracea or IHP for this RnS order until the finished product

3 was manufactured to specification and made available to them and ITV had

4 no liability to IHP related to the order.

5 69. These representations are corroborated by an email issued by ITV to

6 certain of its members on February 22, 2008. That email, which is posted on a

7 website forum named ITV Ventures, on the same date, states as follows:

8 FRIDAY, FEBRUARY 22, 20089

10New Rice ‘n Shine® is Out of Stock

11 Due to amazing demand of the new 30-day supply ofRice ‘n Shine®, we are currently backordered on all

12 flavors. We anticipate receiving new inventory within

13 approximately 2 weeks. Unfortunately, due tomanufacturer’s limitations we cannot provide a more

14 specific date at this time. Please be assured we will

15 ship your order as soon as we receive inventory.

16 While the option of cancelling this order is available to

17 you up until the date the product ships, it’s importantto know that any items that do not ship due to a

18 backorder situation will not negatively affect your

19 OAP or monthly volume levels. However, ordercancellations may affect these things.

20

21 If you have any questions please send an e-mail [email protected] .

22

23 We apologize for any inconvenience this may cause.

24 Sincerely,

25The ITV VenturesTM Team

26

27

2822



1 http://ventures.fallback.com/phpbb/viewtopic.php?p=337&sid=7c5c3ef3f4

2 d9741883fac24c1bd4e308

3 70. The Company also violated SAB 104 for the $2.0 million bill and

4 hold transaction because SAB 104 required Nutracea to disclose, and it never did

5 disclose, its practice of recognizing revenue for bill and hold arrangements.

6 71. Not until August 11, 2008, when the Company filed its Form 10-Q

7 for Q3 2008, did the Company reveal that it had engaged in “bill and hold”

8 arrangements. Through its initial omission, the Company led investors to believe

9 that it had not engaged in such arrangements in prior periods.

10 72. The Company violated GAAP mandates of SAB 104 and FAS 48

11 with respect to the $1.6 million in revenue Nutracea recorded in connection with a

12 purported sale of Dr. Vetz PetFlex products to Famous Discoveries in December

13 2006 near the end of Q4 and FY 2006. The Company admitted in its April 23,

14 2009 announcement that it had “improperly accounted for” this transaction

15 because the Company did not have sufficient evidence as to the collectability of

16 the sale, was too inexperienced in the infomercial market to adequately understand

17 the distribution channel, could not account for the customer’s fluctuating sales,

18 and was not sufficiently aware of the potential of product return.

19 73. The Company also violated SAB 104 in this regard because it never

20 disclosed its revenue recognition policy with respect to transactions in which there

21 was a right of return. The only mention of a right of return with respect to revenue

22 recognition was selectively disclosed in the Company’s August 11, 2008 10-Q.

23 However, even there the right of return was mentioned only in connection with

24 “bill and hold” arrangements.

25 74. The December $1.6 million transaction with Famous Discoveries

26 was also a sham. According to CW 1 (the CEO and one of the founders of Famous

27 Discoveries) CW 1 was the person that primarily engaged in negotiating the

2823



1 arrangement. CW 1 states that Famous Discoveries did not commit to buy or take

2 delivery of $1.6 million worth of Dr. Vetz PetFlex products. According to CW 1,

3 the true nature of Famous Discoveries’ arrangement with Nutracea merely allowed

4 Famous Discoveries to market the Dr. Vetz PetFlex product in an effort to obtain

5 firm purchase orders from customers. Once firm purchase orders were obtained

6 by Famous Discoveries or payment was made to Famous Discoveries from its

7 customers, Nutracea would ship the Dr. Vetz PetFlex products to Famous

8 Discoveries so that Famous Discoveries could ship the products to its customers

9 when Famous Discoveries was paid. According to CW 1 the $1.6 million of Dr.

10 Vetz PetFlex products were never shipped to Famous Discoveries. Rather the

11 product was stored at a warehouse under the full control of Nutracea.

12 75. CW 1 explained that Famous Discoveries had no obligation to

13 purchase the product if Famous Discoveries was unable to sell the Dr. Vetz

14 PetFlex product and had “no risk” associated with the arrangement.

15 76. CW 1 stated that he negotiated the terms of this arrangement with

16 defendant Edson.

17 77. CW 1 stated that Famous Discoveries’ business model did not call

18 for Famous Discoveries to take on large amounts of inventory prior to Famous

19 Discoveries either receiving a firm purchase order from a customer or payment

20 from a customer.

21 78. CW2, another founder of Famous Discoveries and its President,

22 confirmed that CW 1 had primarily engaged in negotiations with defendant Edson

23 and that the purported $1.6 million arrangement was CW 1’s responsibility.

24 79. CW2, further stated he was involved in certain negotiations with

25 Edson for additional potential purchases of product from Nutracea and received

26 various proposals from Edson about Nutracea selling its products to Famous

27 Discoveries at or around the time of the $1.6 million transaction. During CW2’s

2824



1 discussions with Edson, CW2 told Edson that Famous Discoveries was a small

2 company and that Famous Discoveries did not want to take on large trade payables

3 for inventory because Famous Discoveries wanted to ensure that its ability to

4 obtain financing for operations was not impeded. Thus, CW2 rejected Edson’s

5 numerous proposals to sell Nutracea product to Famous Discoveries on credit.

6 CW2 confirmed that the terms of the $1.6 million transaction that Nutracea

7 described to its auditors and the public – a $1.6 million sale on credit – are wholly

8 inconsistent with the manner in which Famous Discoveries operated its business at

9 that time.

10 80. Nutracea also violated SAB 104 and EITF-00-21 Revenue

11 Recognition with Multiple Deliverables, which is the same as the Company’s own

12 revenue recognition policy, with respect to $5 million in revenue recognized in

13 June 2007--near the end of Q2 2007. According to the Company’s April 23, 2009

14 announcement, the perpetual and exclusive distribution rights payment of $5

15 million “should have been considered as one arrangement with multiple

16 deliverables instead of stand-alone transactions.” The Company admitted that the

17 recognition of the $5 million license fee “did not qualify as revenue to the

18 Company under Generally Accepted Accounting Principles.”

19 81. Additionally, in this transaction, PAHL paid $5.0 million to

20 Nutracea for a license to market and distribute certain products.

21 Contemporaneously, a Nutracea subsidiary, Medan LLC, purchased capital stock

22 for $10.675 million in two transactions ($8.175mm and $2.5 mm) from of an

23 Indonesian company from Fortune Overeas Ltd. (“FFOL”) and Nutracea recorded

24 the value of the stock on its balance sheet at $10.675 million. FFOL is owned and

25 controlled by PAHL. Essentially, the $5.0 million license fee was immediately

26 returned to PAHL through the purchase of the Indonesian company’s stock. As

27 part of the restatement, Nutracea was forced to write-down the value of the second

2825



1 stock purchase from $8.175 million to $3.175 million and reverse the $5.0 million

2 license fee revenue it had recorded.

3 B. The Companv Issued False and Misleading Statements of Material

4 Fact Concerning its Business During the Class Period

5 82. Defendants knew or recklessly disregarded numerous facts known to

6 them before and during the Class Period concerning, inter alia, that the

7 Company’s revenue recognition practices did not comply with GAAP, that the

8 Company’s revenue recognition practices did not comply with the Company’s

9 own stated policy of revenue recognition, and that the Company overstated its

10 reported revenue, net income, and understated its net loss for fiscal years

11 December 31, 2006 and 2007 and related interim quarterly periods.

12 Notwithstanding the foregoing, the Defendants made the following materially

13 false and misleading statements of material fact:

14 i. False and Misleading April 2007 Announcements

15 83. The Class Period begins on April 2, 2007 when the Company issued

16 a false and misleading press release entitled “Nutracea Announces Record Fourth

17 Quarter and Record Fiscal Year” referring to those ended December 31, 2006.

18 The announcement reported net income of $778,000 on $5,196,000 of revenue for

19 Q4 2006 and net income before income taxes of $1,585,000 on $18,090,000 of

20 revenue for FY 2006.

21 84. In commenting on the “record” results, defendant Edson is quoted in

22 the press as saying “We are pleased to report our fourth consecutive record quarter

23 and record year, notably our first full year of profitability.”

24 85. In conjunction with the Company’s April 2 press release, that same

25 day the Company filed its annual report for fiscal 2006 on Form 10-K with the

26 SEC that repeated the same net income and revenue amounts for Q4 and FY 2006.

27 The Form 10-K was signed by defendants Edson and Crow and separately

2826



1 certified by them pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) attesting

2 that the 10-K did not “contain any untrue statement of material fact or omit to state

3 a material fact necessary to make to make the statements made, in light of the

4 circumstances under which such statements were made, not misleading ....”

5 86. The April 2, 2007 press release and 10-K were materially false and

6 misleading at the time the statements were issued as evidenced by the Company’s

7 April 23, 2009 admission that the Company:

8 a. improperly recorded revenue in violation of GAAP on a $1.6

9 million sale of its Dr. Vetz PetFlex product to Famous Discoveries in

10 December 2006 because the receivable on this sale lacked evidence it was

11 collectable, and because of the Company’s inexperience in the infomercial

12 market to adequately understand the distribution channel, and the

13 fluctuating nature of the sales, and potential for product returns;

14 b. the recognition of such revenue violated the Company’s own

15 revenue recognition and accounting policies as set forth above; and

16 c. consequently, the Company’s “record” revenue for Q4 2006

17 was overstated by $1,551,000 or by 43% and net income before income

18 taxes originally reported in the amount of $778,000 for Q4 2006 was in

19 actuality a net loss of $505,000. The “record” revenue of $18,090,000 for

20 FY 2006 was overstated by $1,551,000 or by 9% and net income before

21 income taxes for FY 2006 was overstated by $1,283,000 or 425%.

22 87. The excuse for this error in the Company’s April 23, 2009

23 announcement is materially false and misleading.

24 a. The December 2006 $1.6 million sale of the product was

25 made to Famous Discoveries. As described above, the true nature of the

26 transaction was a consignment sale in which Famous Discoveries would

27 pay for the goods only if and when it was able to sell them to a customer.

2827



1 Under GAAP, such a consignment sale did not permit recognition of

2 revenue by Nutracea.

3 b. On April 17, 2006 the Company issued a press release

4 announcing that it had entered into a private label agreement with Famous

5 Discoveries whereby Famous Discoveries would market Nutracea’s

6 PetFlexTM under the brand name Dr. Vetz PetFlex in infomercials, TV

7 shopping channels and retail internet distribution channels. The

8 announcement touted Famous Discoveries’ experience and track record in

9 direct response marketing, and claimed that Famous Discoveries had sold

10 $950 million in products through television alone. Famous Discoveries

11 owned the trademark Dr. Vetz at that time.

12 c. On December 13, 2006, Nutracea created a Nevada

13 Corporation called Nutramercials, Inc. a wholly–owned subsidiary of

14 Nutracea. On the same date, Nutracea and Famous Discoveries entered

15 into a joint-venture by creating a Delaware LLC, called Infomaxx, LLC

16 (“Infomaxx”). The Company and Famous Discoveries each owned 50% of

17 Infomaxx.

18 d. According to the Company’s 2006 10-K, Infomaxx was

19 created to promote infomercials for the marketing of Nutracea’s and

20 Famous Discoveries’ products in, among other things, infomercials.

21 e. The Company’s excuse that it did not have sufficient

22 experience in the infomercial market as a reason for the restatement was

23 false and misleading. Famous Discoveries was an expert in the infomercial

24 market and the Company had a distribution agreement with them dating

25 back to April 2006. Additionally, over 50% of Nutracea’s sales in 2006

26 were made to ITV, another infomercial customer. Nutracea was also in the

27 infomercial market with its relationship with ITV dating back to August of

2828



1 2005. In 2005 ITV accounted for 54% of the Company’s revenues, and in

2 2006 ITV accounted for 45% of the Company’s revenues. Thus,

3 Defendants’ excuse that it did not have experience in the infomercial

4 market was false.

5 f. The Company’s excuse that it did not have adequate evidence

6 to determine its joint venture partner Famous Discoveries could pay the

7 $1.6 million receivable at the time of the sale was false as the Company

8 certainly had access to information concerning Famous Discoveries’

9 financial condition when it entered into the Infomaxx joint venture with

10 Famous Discoveries in December 2006—the same month the $1.6 million

11 sale was recorded as revenue, and months before when it entered into the

12 private label agreement with Famous Discoveries in April of 2006.

13 Moreover, as explained above, the true nature of the transaction was a

14 consignment sale. Under GAAP, the revenue was not recognizable by

15 Nutracea for the consignment sale regardless of Famous Discoveries

16 ability to pay, as Famous Discoveries was not obligated to ever pay for the

17 goods unless and until it has sold the goods to a customer and received

18 payment. According to CW2, he told Edson at the time of the $1.6 million

19 transaction that Famous Discoveries was a small company and did not want

20 to take on large payables as it would impede its ability to obtain financing

21 for operations.

22 88. Following these false earnings announcements, on April 11, 2007

23 the Company announced that its Chief Operating Officer Ike Lynch resigned from

24 the Company, but would remain a consultant to the Company.

25

26 ii. False and Misleading May 2007 Statements

27

2829



1 89. On May 15, 2007 the Company issued a false and misleading press

2 release entitled “Nutracea Announces First Quarter Results” relating to the period

3 ended March 31, 2007. The Company reported a net loss before income taxes of

4 $247,000 on $2 million in revenue for Q 1 2007.

5 90. In conjunction with the Company’s May 15, 2007 press release, that

6 same day the Company filed its Q1 2007 results with the SEC on Form 10-Q

7 containing the same net income and revenue for Q1 2007. The 10-Q was signed

8 by defendants Edson and Crow and separately certified by them pursuant to SOX,

9 attesting that the 10-Q did not “contain any untrue statement of material fact or

10 omit to state a material fact necessary to make to make the statements made, in

11 light of the circumstances under which such statements were made, not misleading

12 ....”

13 91. The Company admitted in its April 23, 2009 announcement that its

14 Q1 2007 financial results should not be relied upon and had to be “restated.”

15 Thus, the Company’s Q 1 2007 10-Q and related public announcements were false

16 when made.

17 92. The May 15, 2007 press release provides a false excuse why the

18 Company’s first quarter revenue and income did not meet its prior publicly

19 announced estimates. The press release states in relevant part:

20

21The shortfall in revenues was primarily attributable to$2.6 million of purchase orders for product we

22 produced from three new customers, for which we did

23not recognize revenues for reasons including thetiming of the acceptance of delivery by customers and

24 product labels not being completed by the third partyco-packer. We anticipate that this revenue will be

25 recognized in the second quarter.

26 93. Defendant Edson also falsely reassured investors in the same press27 release that the revenue shortfall was merely the result of timing. He is quoted as28

30



1 saying in relevant part: “Despite the revenue shortfall, which should be viewed as

2 a timing issue, ...”

3 94. The Company Q1 2007 10-Q also provided similar false

4 reassurances. The 10-Q states in relevant part:

5

6 During quarter ended March 31, 2007 we received

$2,600,000 of purchase orders for product that we

7 produced for to three [sic] new customers but we did

8 not recognize revenues for reasons including the

timing of the acceptance of delivery by the customers

9 and labels not being completed by the third-party co-packer. The labeling is the responsibility of the

10 customer. We anticipate recognizing the revenue from

11 these orders in the second quarter of 2007 when we

12receive payment.

1395. During the May 16, 2007 earnings conference call, Defendant Edson

14 falsely reassured investors that he communicated with the Company’s auditors

15 about the Company’s revenue recognition polices to ensure the Company’s

16 revenue recognition complied GAAP and no mistakes were made. Edson stated in

17 relevant part:

18 <JONATHAN MORELAND>: Okay, uhhhmm.

19 Lastly, what can be done about this, this uh, timingissue, uh, has anything been done make su... to guard

20 against it happening again in the future, or is it just the

21 way it goes?

22 <BRAD EDSON>: Well, I think it’s an unfortunate

23 issue, and, ah, really caught us off-guard. I, I will tellyou that I take these things very seriously. I had

24 intense discussions with our auditors, and I’m

25 gonna do everything that I can with our accountingstaff to make sure that our paperwork on orders,

26 ah will comply with all of the rules and regulations

27 so that we don’t have a recognition issue, uh,because we obviously wanna book all the revenue

2831



1 we can in the quarter that we expended the aeh, the

time and the effort and the money, so we’re gonna

2 do everything we can. I understand the importance

3 of it, uhm, you know, people make mistakes, but I

will tell you I usually don’t make a mistake twice.4

5 (emphasis added).

6 96. During the same call Edson falsely reassured investors as follows:

7 ....What I will assure you is that in conjunction with

8 our accountants, we now are every clear on what ourpurchase orders will state, so that there won't be any in

9 the future, any of these revenue recognition items

10 because of some of these intricacies of the accountingrules.

11

1297. Defendants’ May 2007 reassurances were false. As reported by the

13 Company in its February 23, 2009 8-K, this $2.6 million in revenue should have

14 not been recorded because there was no evidence supporting the purchaser’s

15 ability to pay and because of the related party nature of the transaction.

16 Defendants manufactured the $2.6 million sale a as a desperate measure to meet

17 the Company’s revenue and income projections. Additionally, Edson’s

18 reassurance that he did not make a mistake “twice” and that he was intensely

19 involved in ensuring revenue is properly recorded evidences his culpability in

20 improperly recording the $2.6 million of false revenue. The February 23, 2009 8-

21 K states in relevant part:

22 The Company recognized revenue in the second

23 quarter of 2007 on a $2.6 million sale of its Dr. VetzPetFlex brand product with respect to which the

24 applicable criteria for revenue recognition were not

25 met. Based upon facts discovered during the AuditCommittee investigation, the Company has now

26 concluded that a $1.0 million down payment

27 received by the Company in that transaction wasprovided to the purchaser through a loan from a

2832



1 person who at the time was a consultant to and a

former officer of NutraCea, and that the evidence

2 originally relied upon to determine and support the

3 purchaser’s ability to pay the remaining $1.6

million receivable balance was subsequently

4 determined to be inaccurate.

5 (emphasis added).

6 98. The $2.6 million sale should never have been recorded as revenue.

7 The February 23, 2009 8-K states in relevant part:

8Based on the findings of the Audit Committee's

9 investigation to date, the Company currently estimates

10 that $4.6 million of the approximately $22.2 million ofpreviously reported revenue for 2007 is expected to be

11 affected by the restatement. With respect to the

12 transaction in the second quarter of 2007, approximately $2.6 million of the adjustment is not

13 expected to be recorded as revenue. However, with

14 respect to the Company’s reported results for the 2007year, when the purchaser did not pay the $1.6 million

15 receivable balance, the Company established an

16 $800,000 reserve against the receivable balance in thethird quarter of 2007 and an additional reserve of

17 $800,000 in the fourth quarter of 2007. That reserve is

18 expected to be reversed, which would reduce theCompany’s reported expense for 2007 by $1.6 million.

19 * * * *

20 The Company preliminarily estimates that theadjustments will also .... (iii) reflect a deferred

21 liability of $1.0 million pending resolution of

22 certain issues relating to the $1.0 million downpayment provided in connection with the Dr. Vetz

23 PetFlex transaction in the second quarter of 2007

24 which the Company has determined no revenueshould have been recognized.

25(emphasis added).

2699. According to the Company’s April 23, 2009 announcement

27concerning the accounting entries for the restatement of this transaction, the

2833



1 company simultaneously increased and decreased the costs of good sold for this

2 transaction by $557,000. Essentially, the Company determined that the products

3 that were purportedly sold were now worthless and wiped them from its books,

4 along with the $2.6 million in revenue.

5 iii. False and Misleading August 2007 Statements

6 100. On August 14, 2007 the Company issued a false and misleading

7 press release entitled “Nutracea Announces Record Second Quarter and Six

8 Months” for the period ended June 30, 2007. The announcement reported for Q2

9 net income before income taxes of $2,087,000 on Q2 revenue of $12,996,000.

10 The press release noted these figures represented year over year gains from the

11 prior periods that had reported Q2 2006 net income of only $399,000 and Q2 2006

12 revenue of $4,166,000.

13 101. The Q2 2007 revenue and net income also returned the Company to

14 profitability for the six months ended June 30, 2007 which was also reported in

15 the announcement. For the six months ended June 30, 2007, the Company

16 reported revenue of $14,993,000 and net income before income taxes of

17 $1,840,000.

18 102. In the press release, Defendant Edson commented that “Nutracea has

19 delivered a solid quarter of sales growth and initiatives.”

20 103. In conjunction with the Company’s August 14, 2007 press release,

21 the Company had filed its Q2 2007 results on Form 10-Q with the SEC three days

22 earlier on Saturday August 11, 2007. The 10-Q contained the same false revenue

23 and income numbers as the press release. The 10-Q was signed by defendants

24 Edson and Crow and separately certified by them pursuant to SOX, attesting that

25 the 10-Q did not “contain any untrue statement of material fact or omit to state a

26 material fact necessary to make to make the statements made, in light of the


2834



1 104. The August 14, 2007 press release and corresponding 10-Q were

2 materially false and misleading at the time issued as evidenced by the Company’s

3 April 23, 2009 announcement which revealed that the Company:

4 a. improperly recorded revenue in violation of GAAP and the

5 Company’s revenue recognition policy because both required the $5

6 million license fee received from the PAHL to be treated a one transaction

7 with multiple deliverables and because the arrangement had various

8 obligations the as set forth above;

9 b. improperly recorded revenue in violation of GAAP and the

10 Company’s revenue recognition policy in recording $2.6 million sales of

11 Dr. Vetz PetFlex products due to the lack of evidence of collectability and

12 the related party nature of the transaction as set forth above;

13 c. the Company’s failure to disclose its revenue recognition

14 policy for product sales that had a right of return in violation of GAAP; and

15 d. consequently, the Company’s reported revenue for Q2 2007

16 was overstated by $7.6 million or 141%. Net income before income taxes

17 for Q2 was overstated by at $6,801,000 or 144% and turned the originally

18 reported net income before income tax of $2,087,000 to a net loss before

19 income tax of $4,714,000. For the six months ended Q2 2007, revenue was

20 overstated by $7.6 million or 103% and the Company originally reported

21 net income before income taxes $1,840,000 was in reality a net loss before

22 income tax of $4,961,000— an overstatement of $6,801,000 or 137%.

23 iv. False and Misleading November 2007 Statements

24 105. On November 14, 2007, during an investor conference call

25 concerning the Company’s Q3 ended September 30, 2007 financial results,

26 defendant Crow provided investors false reassurances as to the legitimacy of the

27 Company’s $2.6 million of revenue recognized in the Q2 2007 for its sale of Dr

2835



1 Vetz PetFlex products. A question was posed by an analyst as to the Company’s

2 provision for $800,000 in doubtful accounts as follows:

3<Michelle Stein> And also, where does the $800,000

4provision for doubtful accounts come from?

5<Todd Crow> That was – we have a customer that

6 essentially is a slow paying customer and keeping

7 compliance with our collection policy if it’s a slow payand it’s not meeting the terms of agreed payment

8 schedules then we establish a 50% reserve.9

<Michelle Stein> And what was the reason for the

10 slow pay, was everything delivered, or is it simply –11

<Todd Crow> Everything [sic] was delivered, several

12 inquiries were made, but there was a lack of response

13 from that particular customer at our reporting time asto when we’ll start to receive payments on that trade

14 receivable.

15 106. Crow’s statement about a slow paying customer was knowingly

16 false and misleading. The reality was that there was no evidence supporting the

17 customer’s ability to pay, not that the customer was slow to pay. As explained

18 above, this $800,000 reserve should have never been recorded because the

19 underlying revenue should not have been recorded in the first place in Q2 2007

20 because of the related party nature of the transaction and the fact that there was no

21 evidence of collectability at that time.

22 107. On November 14, 2007 the Company issued a false and misleading

23 press release entitled “Nutracea Announces 2007 Third Quarter and Nine Month

24 Financial Results” for the period ended September 30, 2007. The announcement

25 reported revenue for the nine months ended Q3 2007 of $16.5 million and a net

26 loss before income taxes of $3 million.

27

2836



1 108. In conjunction with the Company’s November 14, 2007 press

2 release, that same day the Company filed its Q3 2007 financial statements on

3 Form 10-Q with the SEC that repeated the same net loss and revenue numbers for

4 the nine months ended September 30, 2007. The 10-Q was signed by defendants

5 Edson and Crow and separately certified by them pursuant to the SOX attesting

6 that the 10-Q did not “contain any untrue statement of material fact or omit to state

7 a material fact necessary to make to make the statements made, in light of the


9 109. The November 14, 2007 press release and corresponding 10-Q were

10 materially false and misleading because the cumulative results for the nine months

11 ended September 30, 2007 included the inflated revenue and net income reported

12 by the Company in Q2 2007 as set forth above. After taking into consideration the

13 Q2 2007 misstatements, revenue for the nine months ended September 30, 2007

14 was overstated by $6,050,000 or 58%. Net loss before income taxes for the nine

15 months ended September 30, 2007 was understated by $5,518,000 or 65%.

16 v. False and Misleading March 2008 Statements

17 110. On March 17, 2008 the Company filed its Q4 and FY ended

18 December 31, 2007 financial results on Form 10-K with the SEC. For the fiscal

19 year ended 2007 the Company’s net loss before income before income tax of

20 $11,891,000 on revenue of $22,161,000. For Q4 2007, the 10-K reported revenue

21 of $5,648,000 and a net loss of $8,882,000.

22 111. The Form 10-K was signed by defendants Edson and Crow and

23 separately certified by them pursuant to SOX, attesting that the Form 10-Q did not

24 “contain any untrue statement of material fact or omit to state a material fact

25 necessary to make to make the statements made, in light of the circumstances

26 under which such statements were made, not misleading ....”

27

2837



1 112. The March 17, 2008 10-K was materially false and misleading at

2 the time the statements were issued as evidenced by the Company’s February 23,

3 2009 and April 23, 2009 announcements which revealed that the Company:

4 a. improperly recorded $1,920,000 million revenue on “bill and

5 hold” arrangement from the sale of RiceNShine product to ITV during Q4

6 2007 in violation of GAAP;

7 b. failed to disclose it was employing a “bill and hold” revenue

8 recognition policy in violation of GAAP;

9 c. as set forth above, improperly recorded revenue, in violation

10 of GAAP and Company policy, for the $5 million of license revenue from

11 PAHL and the $2.6 million sale; and

12 d. consequently, the Company’s reported revenue for FY 2007

13 were overstated by $7,970,000 or 56% and net loss before income taxes

14 was understated by $5,354,000 or 31%. Q4 2007 revenue was overstated

15 by $1,920,000 or by 52%.

16 113. As explained above in detail, in latter half of December of 2007 an

17 executive of Nutracea prepared and emailed to Robert Maihos of ITV the Bill and

18 Hold Letter asking Maihos to sign it and send it to IHP. The letter sought to have

19 ITV make certain knowingly false claims related to the order and to have ITV

20 falsely represent their recognition that their order had been completed to

21 specification in 2007 and that ITV requested the units be held in storage by IHP

22 into 2008. Because Maihos did not sign the Bill and Hold Letter, a Nutracea

23 executive made a second request in February 2008 asking Maihos to sign the

24 letter. Maihos agreed and back-dated the letter to a date in December 2007 at the

25 request of Nutracea and sent the letter to IHP.

26 114. A day after Crow signed the Company’s annual report as CFO, on

27 March 18, 2008 the Company filed an 8-K with the SEC announcing that effective

2838



1 March 31, 2008 defendant Crow would resign as the Company’s CFO. The 8-K

2 also noted that on March 14, 2008 the Company had appointed Ken Mueller as

3 CFO effective March 31, 2008.

4 115. Three days later, on March 21, 2008 the Company filed an 8-K/A

5 with the SEC announcing that “Todd Crow has agreed not to resign effective

6 March 31, 2008 and will continue to be chief financial officer for Nutracea until

7 the search for his replacement was completed.” The announcement also stated

8 that Mr. Mueller’s employment agreement would be rescinded because “Mr.

9 Mueller, due to personal reasons, did not commence employment as specified in

10 the Employment Agreement.”

11 116. On April 23, 2008 the Company issued a press release announcing

12 that it had appointed Jeffrey Sanders as CFO to replace defendant Crow effective

13 May 13, 2008. Defendant Crow would remain on as a consultant to assist in the

14 transition. Notably, the effective date of Mr. Sanders appointment as CFO was

15 one day after the Company filed its Q1 2008 results on Form 10-Q, that would

16 have required him to sign that 10-Q and to execute a SOX certification.

17 117. On July 21, 2008 the Company filed a Form 8-K with the SEC

18 announcing that on July 18, 2008 Jeffrey Sanders had formally tendered his

19 resignation as CFO effective July 21, 2008. The 8-K states that Defendant Crow

20 would replace Sanders until a new CFO could be hired because Crow had

21 remained actively employed by Nutracea in connection with financial and

22 accounting matters after Mr. Sanders was initially appointed. According to the 8-

23 K, Mr. Sanders purportedly resigned because the CFO position at Nutracea was

24 not a good fit for him and it was difficult for him to adjust to working in a small

25 company. Mr. Sanders’ resignation occurred less than three weeks before he

26 would have been required to sign and execute a SOX certification for the

27

2839



1 Company’s Q2 2008 Form 10-Q, which was filed with the SEC on August 11,

2 2008.

3 118. On November 7, 2008 the Company issued a press release stating

4 that defendant Crow had yet again retired as CFO and would be replaced by Olga

5 Hernandez-Longan. According to the corresponding 8-K filed by the Company on

6 November 13, 2008, Crow’s retirement was effective November 6, 2008. The 8-K

7 also disclosed that the Company’s Senior Vice President and Corporate Secretary,

8 Margie Adelman had resigned, effective November 11, 2008.

9 119. On July 15, 2009 the Company announced that effective July 9,

10 2009 its CFO, Olga Hernandez-Longan, had resigned her position effective July

11 31, 2009.

12

13 C. Truth Begins to Emerge

14i. February 23, 2009 Announcements

15120. In the morning of February 23, 2009, before the market opened, the

16 Company issued a press release, and later filed a corresponding 8-K with the SEC,

17 entitled “Nutracea to Restate Financial Statements for 2007 and 2008.” Through

18 the announcement, the public first learned certain details of the accounting fraud

19 to overstate revenue and income. In the announcement, the Company announced

20 for the first time that it would restate its financial statements for the fiscal year

21 ended December 31, 2007 and the associated second, third and fourth quarters of

22 2007, and all of the quarters of 2008. The press release states in relevant part:

23NutraCea to Restate Financial Statements for 2007 and

24 2008

25PR Newswire PHOENIX, Feb. 23

26 Internal Review Indicates Improper Revenue

27Accounting Related to Two Transactions

2840



1 PHOENIX, Feb. 23 /PRNewswire-FirstCall/ --

NutraCea (OTC Bulletin Board: NTRZ), a world

2 leader in stabilized rice bran (SRB) nutrient research

3 and technology, today announced that based on the

preliminary findings and recommendations of the

4 Audit Committee of its Board of Directors, it willrestate its financial statements for the fiscal year ended

5 December 31, 2007. This includes the associated

6 second, third and fourth quarters in 2007, and all of the

7quarters in 2008.

8 -- NutraCea (the "Company") currently estimates that$4.6 million of the approximately $22.2 million of

9 previously reported revenue for 2007 will be affected

10 by the restatement.

11 -- Approximately $2.6 million of the total adjustment

12 is expected not to be recorded as revenue.

13 -- Approximately $2.0 million of the remaining

14 amount reported as 2007 revenue is expected to bereversed and recorded as revenue during 2008 and

15 possibly 2009.

16

17 121. The announcement also revealed for the first time the existence of an

18 internal review, that the review had commenced in December 2008, and that the

19 Company had retained independent outside counsel and forensic accounting

20 consultants to assist. The press release states in relevant part:

21During December 2008, the Audit Committee

22 commenced an internal review of certain matters with

23respect to the Company's accounting and reportingpractices, and retained independent outside counsel

24 and forensic accounting consultants to assist in this

25analysis.

26

27

2841



1 122. The announcement revealed two transactions the Company

2 improperly recorded as revenue in 2007 that were a part of the accounting fraud to

3 inflate revenue and earnings. The press release states in relevant part:

4

5 Based on its review to date, the Audit Committee has

determined that the Company improperly recognized

6 revenue on two transactions in 2007 with entities that

7 are not currently customers of the Company. * * * *

8 $2.6 Million Sale of Dr. Vetz PetFlex in 2Q 2007impacted by Customer Credit Issues That Change

9 Applicability of Revenue Recognition Criteria.10

The Company recognized revenue in the second

11 quarter of 2007 on a $2.6 million sale of its Dr. Vetz

12 PetFlex brand product. In this sale, the applicablecriteria for revenue recognition were not met. Based

13 upon facts discovered during the Audit Committee

14 investigation, the Company has now concluded that a$1.0 million down payment received by the Company

15 in that transaction was provided to the purchaser

16 through a loan from a person who at the time was aconsultant to and a former officer of NutraCea, and

17 that the evidence originally relied upon to determine

18 and support the purchaser's ability to pay theremaining $1.6 million receivable balance was

19 subsequently determined to be inaccurate. When the

20 purchaser did not pay the $1.6 million receivablebalance, the Company established an $800,000 reserve

21 against the receivable balance in the third quarter of

22 2007 and an additional reserve of $800,000 in thefourth quarter of 2007. That reserve is expected to be

23 reversed. Therefore, the net impact is expected to

24include both a reduction of revenue in 2007 by $2.6million, as well as the reduction of the Company's

25 reported expense for 2007 by $1.6 million.

26 Revenue from $2.0 Million Sale of RiceNShine in 4Q

27 2007 Improperly Recognized due to Bill and Hold

2842



1 Requirements: Revenue to be Recognized in 2008 and

Possibly 20092

3 The Company also determined that a $2.0 million sale

of its RiceNShine product in December 2007 did not

4 meet accounting requirements applicable torecognition of revenue in bill and hold transactions and

5 that the transaction should not have been recognized as

6 revenue in the Company's 2007 results. However, theCompany expects that approximately $2.0 million in

7 revenue will be recognized in the Company's for 2008

8 and possibly 2009.

9

10123. The Company also cautioned in the announcement that the internal

11 review is continuing and that “[f]urther investigation and assessment may result in

12 additional matters that require restatement for the periods referenced ..., or for

13 additional fiscal periods.”

14124. The announcement also contained previously undisclosed details

15 about an informal inquiry instituted against the Company by the SEC that the

16 Company learned of in mid-January concerning, among other things, the

17 transactions implicated in the restatement. The announcement states in relevant

18 part:

19 Subject To Informal Inquiry Including Requests for

20 Documents

21 NutraCea received a letter mid-January 2009 from the

22 SEC indicating that it has opened an informalinquiry and another in February 2009 requesting

23 that NutraCea voluntarily produce documents

24 relating to a number of transactions, including thetransactions mentioned above. NutraCea is in the

25 process of responding to the request for documents,

26 and is working closely with Perry-Smith LLP, theCompany's independent registered accounting firm.

27 NutraCea voluntarily reported to the Securities and

2843



1 Exchange Commission that the Audit Committee was

conducting an internal review of certain matters.2

3 (emphasis added)

4 125. Market reaction to the February 23, 2009 press release was swift.

5 The adverse news of the accounting restatement caused the price of Nutracea

6 common stock to fall from the prior day’s closing price of $.35 per share to $.29

7 per share, or 17% on February 23, 2009 and an additional decline of 14% the

8 following day. In total, the February 23, 2009 press release caused Nutracea’s

9 stock price to fall 29% on February 23, and 24 from $.35 to $.25.

10 126. On March 10, 2009 the Company issued a press release announcing

11 that defendant Edson had tendered his resignation as Company CEO, President,

12 and Board Member. Upon information and belief, Edson was forced out as a

13 result of the accounting fraud.

14 ii. April 23, 2009 Announcement

15 127. On April 23, 2009 the Company filed an 8-K with the SEC

16 announcing additional restatement adjustments discovered during the Company’s

17 now expanded internal review. The 8-K states in relevant part:

18 Following the date of the Original Filing, the AuditCommittee expanded its review to include the

19 Company's accounting treatment of additional

20 transactions in 2006, 2007 and 2008 ("SubsequentReview"). Based upon the Subsequent Review, the

21 Audit Committee determined on April 23, 2009 that

22 the Company also would restate its financialstatements for the year ended December 31, 2006,

23 including the fourth quarter of 2006, and the first

24 quarter of 2007, and that these financial statementsshould not be relied upon. Similarly, related press

25 releases, reports and shareholder communications

26 describing the Company's financial statements forthese periods should no longer be relied upon. The

27 Company intends to restate the financial statements

2844



1 referenced above in its Annual Report on Form 10-K

for the fiscal year ended December 31, 2008.2

In connection with the Subsequent Review, the

3 Company determined that it improperly accounted for

4 the following transactions in 2006, 2007 and 2008:

5 • The Company recorded revenue of $1.6 millionin the fourth quarter of 2006 from the December 2006

6 sale of Dr. Vetz Pet Flex product to an infomercial

7 customer. The Company recorded an $800,000 reservefor this receivable in the second quarter of 2007. In the

8 third quarter of 2007 the customer returned the product

9 and the Company recorded a sales return of $1.6million and reversed the reserve it had recorded in the

10 second quarter of 2007. The Company has now

11 determined that it will reverse this sale in 2006 insteadof in 2007 because (i) the Company does not have

12 adequate evidence to conclude that the receivable

13relating to this sale was collectable in the quarter it wasrecognized and (ii) the Company did not have

14 sufficient experience in the infomercial market to

15adequately understand the distribution channel, thefluctuating nature of sales into this channel or the

16 potential for product return. The effect of the reversal

17will be to (1) reduce total revenue by $1.6M in 2006,(2) reduce cost of sales by $268K in 2006, (3) reduce

18 net income by $1.4M in 2006 and (4) increase net

19income by $1.4M in 2007.

20 • In June 2007 the Company granted to PacificHoldings Advisors Limited ("PAHL") perpetual and

21 exclusive license and distribution rights (the

22 "License") for the production and sale of stabilizedrice bran and stabilized rice bran derivative products in

23 certain countries in Southeast Asia. PAHL agreed to

24pay the Company a $5 million one-time license fee("Licence Fee"), which was due and payable on the

25 fifth anniversary of the commencement of stabilized

26rice bran production at a facility established by PAHLor a joint venture of PAHL and the Company. The

27 Company recorded this $5 million License Fee in the

2845



1 second quarter of 2007. Contemporaneous with the

grant of the License, the Company and PAHL jointly

2 formed Grain Enhancements, LLC ("GE"). Pursuant to

3 GE's limited liability company agreement, PAHL

sublicensed its rights under the License to GE.4

Upon further analysis of these transactions, the

5 Company has concluded that the License Fee did not

6 qualify as revenue to the Company under generally

accepted accounting principles. Through our

7 Subsequent Review of the transactions, including the

8 License and other agreements that the Company

entered into in connection with the formation of GE,

9 we determined that the transactions should have been

10considered as one arrangement with multipledeliverables instead of stand-alone transactions. The

11 various obligations under this one arrangement wouldhave precluded immediate revenue recognition of the

12 License Fee. Accordingly, this transaction will be

13 reversed, which will decrease the Company's licensefee revenue in 2007 by $5 million and increase the

14 Company's net loss in 2007 by $5 million.

15 . On March 2008, Medan, LLC, a wholly-owned

16 subsidiary of the Company, purchased ("First

17Purchase") from Fortune Finance Overseas LTD("FFOL") for $8.175 million 9,700 outstanding shares

18 of capital stock of PT Panganmas Int Nusantara, anIndonesian company ("PIN"). In June 2008, Medan

19 purchased directly from PIN 3,050 additional shares of

20 PIN capital stock for $2.5 million. Following thesepurchases, Medan and FFOL own 51% and 49%,

21 respectively, of PIN's outstanding capital stock. The

22 capital contributions that the Company made to Medan

23funded the purchase of the PIN shares.

24The determination of the purchase price of the PINshares was based upon a feasibility study of the PIN

25 project that the Company obtained from a third partyvaluation firm. Based upon this study, the Company

26 recorded the value of the PIN shares on its balance

27 sheet at $10.675 million, which was the price the

2846



1 Company paid for the PIN shares. Upon further

review, the Company has determined that there was

2 not sufficient evidence at the time of their acquisition

3 to support the $10.675 million valuation for the PIN

shares. Accordingly, the Company has decided to

4 restate its consolidated balance sheet to reduce thevalue of the PIN shares by $5 million to $5.675

5 million as outlined below.

6 • In March 2008, PAHL paid to the Company $5

7 million for its License Fee described above. A

8principal shareholder of FFOL is also a principalshareholder of PAHL, and the Company's receipt of

9 payment for the License Fee was made at the same

10time the Company decided to make the First Purchaseof the PIN shares. Based in part upon the related

11 ownership of FFOL and PAHL, the timing of the

12payments, the sub-license of PAHL's rights under theLicense to GE and the Company's current

13 determination of the value of the PIN shares, theCompany now believes the First Purchase of the PIN

14 shares and the payment of the License Fee should be

15 viewed as a combined event with related parties,causing the Company to account for the First Purchase

16 of the PIN shares as a payment of $3.175 million

17 instead of $8.175 million.

18 128. The April 23, 2009 8-K also contained a table summarizing the

19 impact of the additional restatement adjustments and the previously identified

20 restatement adjustments in the February 23, 2009 8-K. The following is a

21 pertinent excerpt of a table from a corresponding press release the Company

22 issued to the 8-K.

23 12/31/06 12/31/07

24 Total revenue as reported $18,090,000 $22,161,000

25 Decrease/Increase in total revenue

26 - $1.6 million sale(1,551,000) 1,551,000

27 Decrease in total revenue (2,601,000)

2847



1 - $2.6 million sale

2 Decrease in license revenue- Grain Enhancements

(5,000,000)

3Decrease in total revenue – ITV (1,920,000)

4Increase in total revenue – ITV

5

6 Total revenue as restated 16,539,000 14,191,000

7 Cost of goods sold as reported 9,130,000 9,898,000

8 Decrease/Increase in cost of goods sold- $1.6 million sale

(268,000) 268,000

9Decrease in cost of goods sold

10 - $2.6 million sale(557,000)

11 Increase in cost of goods sold

12 - $2.6 million sale write-off557,000

13 Decrease in cost of goods sold – ITV (1,283,000)

14 Increase in cost of goods sold – ITV

15 Cost of goods sold as restated 8,862,000 8,883,00016

Gross profit as reported 8,960,000 12,263,00017

Gross profit as restated 7,677,000 5,308,00018

19

20 Operating expenses as reported 7,913,000 27,393,000

Decrease in bad debt expense21

(1,601,000)- $2.6 million sale

22

23Operating expenses as restated 7,913,000 25,792,000

24Other Income (expense) as

25 reported/restated

538,000 3,239,000

26 Net income (loss) before income tax as

1,585,000 (11,891,000)27 reported

2848



1 Net income (loss) before income tax as 302,000 (17,245,000)restated

2

3 129. In the 8-K the Company cautioned that the review was ongoing and

4 that “[fJurther investigation and assessment may result in additional matters that

5 require restatement” for the periods already restated any other periods. The

6 announcement also revealed that the Company would take a whopping $32.33

7 million goodwill impairment charge as a result of the decrease of the Company’s

8 stock price and the decline of cash flow and current projected sales from the

9 Company’s RiceX business. The impairment charge is expected to be taken in the

10 Company’s yet to be filed annual report for 2008.

11 130. The 8-K also revealed that the Company’s previously announced

12 (February 23, 2009) SEC informal inquiry has been elevated to a formal

13 investigation.

14 131. As a result of the restatement, on May 5, 2009, the Company’s stock

15 was delisted from the NASDAQ Bulletin Board and began trading in the OTC

16 Pink Sheets.

17 132. To date, the Company has yet to file final restated financial

18 statements with the SEC.

19ADDITIONAL ALLEGATIONS DEMONSTRATING FALSITY AND

20 SCIENTER

21 133. The magnitude of Nutracea’s accounting errors relative to its overall

22 operations coupled with continuing discovery of additional accounting errors

23 through the Company’s subsequent investigation demonstrate a cogent and

24 compelling strong inference of scienter.

25 134. Nutracea’s admission that its previously issued financial statements

26 during the Class Period: (i) did not comply with GAAP; (ii) required a

27 restatement; and (iii) violated the Company’s own revenue recognition policy

2849



1 demonstrates that Nutracea’s financial statements were knowingly false and

2 misleading when issued.

3 135. The Company overstated revenues as high at 141% during the Class

4 Period and either overstated net income or understated net loss as high as 425%.

5 Such large percentages that enabled the Company to post its “record” results

6 during the Class Period demonstrate scienter.

7 136. That the accounting errors enabled the Company to post record

8 revenue and net income results in some periods, when in fact the Company had

9 incurred a net loss, and the fact that the improperly recorded transactions were

10 posted on the eve of the end of the reporting periods support a strong inference of

11 scienter.

12 137. That the Company had a handful of large customers which

13 accounted for a majority of its sales revenue along with the fact that the misstated

14 revenue herein involved large transactions, support an inference that Defendants

15 had knowledge of details of the transactions that were improperly recorded as

16 revenue, and/or recklessly disregarded such information. For example, the $2.0

17 million December 2007 sale involved ITV. In the fourth quarter of 2007 the $2.0

18 million revenue that was recorded represented nearly 34% of Nutracea’s reported

19 revenue of $5.3 million. ITV accounted for a significant portion of the

20 Company’s sales revenue during the Class Period. Sales to ITV in FY 2006 were

21 45% of the Company’s sale revenue. Moreover, Company sales made to ITV

22 were subject to commission payments paid to Patricia McPeak, the Company’s

23 former CEO and founder as reported by the Company in its SEC filings during the

24 Class Period. Thus, Defendants were aware of and monitored closely the sales

25 activity between itself and ITV.

26 138. A strong inference of scienter is demonstrated by the fraudulent Bill

27 and Hold Letter that Nutracea created and backdated in an effort to justify its

2850



1 improper bill and hold treatment on the $2.0 million December 2007 sale to ITV

2 detailed above by CW3.

3 139. A strong inference of scienter is also demonstrated by the sham $1.6

4 million sale to Famous Discoveries Nutracea recorded in December 2006. As

5 explained by CW 1 and CW2, this transaction was a sham because Famous

6 Discoveries never took delivery of $1.6 million of product nor did Famous

7 Discoveries have any obligation to pay Nutracea if they could not sell the product.

8 Defendant Edson, on behalf of Nutracea, negotiated this improper transaction with

9 Famous Discoveries. Edson knowingly intended to permit Nutracea to unlawfully

10 recognize this $1.6 million transaction as revenue in direct violation of GAAP.

11 Otherwise, Edson would not have misrepresented what was in truth a

12 consignment, as a completed sale to a customer with full ability to pay.

13 140. Additionally the relative size and significance of the improperly

14 recorded revenue transactions supports a strong inference of scienter. For

15 example, the $5 million license fee revenue and the formation of the joint venture

16 were important events for the Company and major news. Thus, Defendants were

17 aware of the terms and conditions of the $5 million license fee revenue and

18 recklessly disregarded the terms and conditions in improperly recording the

19 transaction as revenue in violation of GAAP and the Company’s own accounting

20 policies.

21 141. The $5.0 million license revenue transaction is strongly indicative of

22 scienter because it is a sham “round trip” transaction. According to the April 23,

23 2009 announcement, PAHL paid the $5.0 million license fee to Nutracea in March

24 2008, and Nutracea immediately paid the $5.0 million to another company

25 controlled by the same principal shareholder (FFOL) that also controls PAHL. In

26 effect, upon receipt, Nutracea immediately returned the $5.0 million license fee to

27 PAHL - rendering the whole arrangement nothing more than a sham round trip

2851



1 transaction. The April 23 announcement also states that “the Company now

2 believes the First Purchase of the PIN shares [from FFOL] and the payment of the

3 License Fee should be viewed as a combined event with related parties.” Proper

4 application of GAAP in the planned restatement will require the Company to

5 reverse these purchase transactions to the full extent of the $5.0 million license

6 fee.

7 142. Defendants were also motivated to artificially inflate the Company’s

8 stock price and engage in the accounting fraud.

9 a. On April 25, 2008 the Company issued a press release

10 announcing that it had entered into definitive agreements to sell 22,222,223

11 shares of Nutracea common stock and warrants to purchase up to 6,666,666

12 of Nutracea common stock to certain institutional investors for aggregate

13 gross proceeds of $20 million. The announcement stated that the private

14 offering was to close on April 30, 2008 and that the shelf registration

15 statement had been declared effective on April 8, 2008. Deducting

16 expenses, net proceeds to the Company from this offering were

17 $18,775,000.

18 b. This offering was commenced and completed only a few

19 weeks after the Company had filed its materially false and misleading Q4

20 and FY 2007 results with the SEC on March 17, 2008. As set forth above

21 the Company had overstated Q4 and FY 2007 revenues by 52% and 56%,

22 respectively. Moreover, the Company had also understated net loss by 31%

23 for FY 2007. Thus, Defendants had a clear financial motive to engage in

24 the accounting fraud and these facts support a strong inference of scienter.

25 c. On April 25, 2008, defendant Edson was awarded a

26 discretionary bonus of $280,000 in cash. This cash bonus exceeded his

27 salary for 2007 of $255,769. According to the Company’s proxy

2852



1 statements filed during the Class Period, the Company did not ordinarily

2 pay cash bonuses.

3 143. The SEC’s formal investigation of the Company supports a strong

4 inference of scienter. The Company has admitted that the formal SEC

5 investigation focuses specifically on the transactions that are the subject of the

6 restatement and that form the basis of the securities fraud claims herein.

7 144. Defendants have a pattern of concealing material information from

8 investors, further demonstrating scienter. Nutracea failed to disclose that it issued

9 to Edson – through his relatives - 1,000,000 shares of the Company’s restricted

10 common stock in connection with a consulting agreement he entered into with the

11 Company on July 14, 2004.

12 145. It was not until September 17, 2007, in response to a letter the

13 Company received and the portions of that correspondence being publicly released

14 on internet message boards that the Company revealed that Edson’s family

15 members received 1,000,000 shares of restricted common stock in FY 2004. The

16 stock was issued in connection with a consulting agreement Nutracea had entered

17 into with Edson on July 14, 2004 for a six month term, prior to Edson becoming

18 President of the Company in December 14, 2004.,

19 146. Defendant Edson has also concealed in Nutracea’s proxy statements

20 and annual reports that he was Chief Executive of Campers Club of America, Inc.

21 from 1991 through 1997 and that this company filed for bankruptcy in 2002.

22 147. The suspicious circumstances of the departures of Defendants Edson

23 and Crow from the Company support a strong inference of scienter. Upon

24 information and belief, Edson’s departure from the Company was not innocent.

25 Rather he was forced to resign on March 10, 2009 in the wake of the disclosure of

26 the accounting fraud on February 23, 2009.

27

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1 a. That Nutracea paid to Edson much less severance

2 compensation than his employment agreement provided for indicates that

3 the board forced Edson out of the Company as a result of misconduct in

4 connection with the accounting fraud.

5 b. On March 10, 2009, Nutracea filed an 8-K with the SEC

6 announcing the terms of Edson’s severance. According to the

7 announcement, Edson was to receive: six months of his salary or $156,050,

8 with $78,205 payable March 9, 2009, and the remaining half payable in

9 three consecutive monthly payments beginning on April 1, 2009; COBRA

10 payments until October 31, 2009; $15,000 a month for two months of

11 consulting services; and no impact on his prior stock and warrants.

12 c. Pursuant to Edson’s employment agreement filed as an

13 exhibit to the Company’s 2004 annual report filed on Form 10KSB and the

14 pertinent amendment to the agreement Nutracea filed with the SEC on

15 Form 8-K on January 15, 2008, had Edson been terminated without cause

16 or resigned with “good reason,”6 then Edson would have been entitled to

17 his salary for the remaining term (not less than 12 months) payable

18

19

20 6 The employment agreement defines “good reason.” “Good Reason shallmean: (i) the assignment to Employee of duties inconsistent with the position

21 and nature of Employee's employment, the reduction of the duties of EmployeeWhich is inconsistent with the position and nature of Employee's employment, or

22 the change of Employee's title indicating a change in the position and nature of23 Employee's employment; (ii) a reduction in compensation and benefits of

Employee without Employee's written consent; (iii) the failure by Employer to24 obtain from any successor, an agreement to assume and perform this

25 Agreement; or (iv) in the event that the current Chief Executive Officer of theEmployer for any reason no longer holds. Such position, the failure of the

26 Board of Directors of Employer to appoint Employee as Chief Executive

27 Officer of Employer; or(v) a corporate "Change In Control" (as definedbelow.)”

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1 immediately, plus bonuses throughout the expiration of the term of the

2 agreement.

3 d. Edson’s 2004 employment agreement was amended and

4 renewed on January 8, 2009 for another three year-term. The term of his

5 employment agreement began on January 1, 2008 and ended on December

6 31, 2010.

7 e. Had Edson been terminated without cause or resigned with

8 “good reason” Edson would have been entitled to at least 21 months of his

9 salary, or $596,410.27. 7

10 f. Clearly, Edson’s severance package, consisting of $186,050

11 cash to be paid on a schedule, as opposed to being paid $596,410.27 at the

12 time of his separation and potential bonuses of at least $550,000 based on

13 the Company’s guidance for 2009 and Edson’s bonuses tied to that

14 performance, clearly shows that Edson was forced out of Nutracea for

15 misconduct in connection with the accounting fraud.”

16 148. Upon information and belief, Crow’s departure from the Company

17 as CFO and the Company’s difficulty in finding a willing replacement resulted

18 from the accounting fraud and that these “resignations” were not innocent. During

19 the Class Period the Company had three CFOs (Mueller, Crow, and Sanders), two

20 of whom left their posts before they were obligated to sign any financial

21 statements. Likewise Olga Hernandez-Longan, Crow’s recent successor, also

22

23 7 The figure was calculated as follows. According to the severance

24 announcement, Edson’s base salary in 2009 was $312,100. His base salary for the

25 period 2010 would have been $343,310 because his employment contract required10% raise annually. Thus, for 2009 Edson salary from March 10, 2009 through

26 December 31, 2009 (296 days) would have been $253,100.27, along with his

27 salary he would have earned in 2010, Edson had $596,410.27, of base salary underhis employment agreement.

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1 resigned as CFO on July 9, 2009, effective July 31, 2009, before having to sign

2 any financial statements. No reason was provided announced by Nutracea for this

3 resignation. Thus from Crow’s first resignation in March of 2008 to July of 2008,

4 the Company had four different CFOs. This revolving door at Nutracea supports a

5 strong inference of scienter.

6 149. That the Company secretly used its “consultant” who is a former

7 Company officer to funnel a $1 million loan to a customer to enable a $2.6 million

8 sale transaction in violation of GAAP shows bad faith and intentional wrongdoing.

9 Defendants knowingly failed to disclose in its financial statements the $1 million

10 related party loan to its customer in violation of GAAP. Defendants also

11 improperly recognized the $2.6 million transaction as revenue in Q2 2007. This

12 under-the-table loan, hidden from the auditors and the public in violation of

13 GAAP supports an inference of scienter. Defendants violated Regulation S-K

14 Item 404 and FAS 57 by failing to disclose this related party transaction. Upon

15 information and belief, the undisclosed consultant and former officer was Ike

16 Lynch, who had resigned as Chief Operating Officer on April 11, 2007 and had

17 continued to remain at the Company as a consultant. During Q2 2007, Mr. Lynch

18 is the only such consultant disclosed in the Company’s filings.

19 150. Defendant Crow’s false reassurance to investors during the Q3 2007

20 conference call that the $800,000 reserve for $2.6 million transaction resulted

21 from a “slow paying” customer likewise shows his fraudulent intent to mislead

22 investors and cover-up the improperly recorded sales transactions. Crow’s

23 statements also demonstrate that Crow had actual knowledge of the specific

24 payment terms of the $2.6 million transaction and knew or should have known

25 that it should not have been recognized as revenue pursuant to GAAP.

26 151. As explained above, during the Company’s Q1 2007 earnings

27 conference call, Defendant Edson falsely assured investors that he had “intensive”

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1 communications with Nutracea’s auditors to ensure revenue from the $2.6 sale is

2 properly recognized, acknowledged that proper revenue recognition was

3 important, and then stated that while people make mistakes, that he does not make

4 “mistakes twice.” Edson thus had actual knowledge of the true terms of the $2.6

5 million transaction that violated GAAP. Not only was this a false reassurance, it

6 also demonstrates that he actively monitored and was involved in the Company’s

7 decision to recognize revenue for this as well as the other fraudulent transactions.

8 LOSS CAUSATION/ECONOMIC LOSS

9 152. During the Class Period, the Defendants engaged in a scheme to

10 deceive the market and a course of conduct that artificially inflated Nutracea’s

11 stock price and operated as a fraud or deceit on purchasers of Nutracea stock by

12 misrepresenting the Company’s financial performance through the accounting

13 fraud to inflate revenue and earnings. Once the Defendants’ misrepresentations

14 and fraudulent conduct were disclosed to the market, Nutracea’s stock price

15 dropped. As a result of Defendants’ fraud during the Class Period, Plaintiffs and

16 other members of the Class suffered economic loss.

17 153. Defendants’ false and misleading statements had the intended effect

18 and caused Nutracea stock to trade at artificially inflated levels throughout the

19 Class Period.

20 154. As investors and the market became aware of Nutracea’s prior

21 misstatements and omissions and that Nutracea’s actual financial performance was

22 not as represented, Nutracea’s stock price reacted negatively, damaging investors.

23 APPLICABLITY OF PRESUMPTION OF RELIANCE:

24 FRAUD-ON-THE-MARKET

25 155. At all relevant times, the market for Nutracea’s common stock was

26 an efficient market for the following reasons, among others:

27

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1 a. Nutracea’s stock met the requirements for listing, and was

2 listed and actively traded on the NASDAQ Bulletin Board, a highly

3 efficient and automated market;

4 b. During the Class Period, on average 5.25 million shares of

5 Nutracea stock were traded on a weekly basis based on trading data

6 available from Bloomberg LP. During the Class Period approximately 139

7 million shares were outstanding (average of the figures reported in

8 Nutracea’s 2006 and 2007 10-Ks). Approximately 3.7% of the all

9 outstanding shares were bought and sold on a weekly basis, demonstrating

10 a very strong presumption of an efficient market;

11 c. As a regulated issuer, Nutracea filed with the SEC periodic

12 public reports and was eligible to file S-3 registration statements, and did

13 file an S-3, with the SEC during the Class Period;

14 d. Nutracea regularly communicated with public investors via

15 established market communication mechanisms, including regular

16 disseminations of press releases on the national circuits of major

17 newswire services and other wide-ranging public disclosures, such as

18 communications with the financial press and other similar reporting

19 services;

20 e. Nutracea was followed by several securities analysts,

21 employed by major brokerage firms who wrote reports that were

22 distributed to the sales force and certain customers of their respective

23 brokerage firms during the Class Period, including Northland Securities,

24 and BI Research. Each of these reports was publicly available and entered

25 the public marketplace. The following investment funds and investment

26 advisory companies, also actively followed Nutracea’s stock during the Class

27 Period, including but not limited to, Insider Asset Management, H4 Capital

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1 Management, Emerald Advisors, Bifrost Capital, Pinnacle Fund, First Financial,

2 Hanna Bay Capital Management, Southwell Partners, Ignite Capital, and

3 Neuberger Berman;

4 f. During the Class Period numerous institutional investors bought,

5 sold or held Nutracea’s stock, including but not limited to, Voyager Asset

6 Management Inc., Mead Adam & Co., State Bank & Trust, and Parsons Capital

7 Management, Inc. At least over 30 NASD member firms were active market-

8 makers in Nutracea stock at all times during the Class Period according to

9 the NASDAQ OTC Bulletin Board Market Maker Price Movement

10 Reports; and

11 g. Unexpected material news about Nutracea was rapidly

12 reflected in and incorporated into the Company’s stock price during the

13 Class Period.

14 156. As a result of the foregoing, the market for Nutracea’s common

15 stock promptly digested current information regarding Nutracea from all publicly

16 available sources and reflected such information in Nutracea’s stock price. Under

17 these circumstances, all purchasers of Nutracea’s common stock during the Class

18 Period suffered similar injury through their purchase of Nutracea’s common stock

19 at artificially inflated prices, and a presumption of reliance applies.

20 PLAINTIFFS’ CLASS ACTION ALLEGATIONS

21 157. Plaintiffs bring this action as a class action pursuant to Federal Rules

22 of Civil Procedure 23(a) and (b)(3) on behalf of all persons and entities other than

23 Defendants who purchased the common stock of Nutracea during the period

24 between April 2, 2007 and February 23, 2009, inclusive (the “Class”)

25 158. The members of the Class are so numerous that joinder of all

26 members is impracticable. Throughout the Class Period, Nutracea’s securities

27 were actively traded on the OTC.BB . While the exact number of Class members

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1 is unknown to Plaintiffs at this time and can only be ascertained through

2 appropriate discovery, Plaintiffs believe that there are at least thousands members

3 in the proposed Classes. Members of the Class may be identified from records

4 maintained by Nutracea or its transfer agent and may be notified of the pendency

5 of this action by mail, using a form of notice customarily used in securities class

6 actions.

7 159. Plaintiffs’ claims are typical of the claims of the members of the

8 Class, as all members of the Class are similarly affected by Defendants’ wrongful

9 conduct in violation of federal law and Arizona law that is complained of herein.

10 160. Plaintiffs will fairly and adequately protect the interests of the

11 members of the Class and has retained counsel competent and experienced in class

12 and securities litigation.

13 161. Common questions of law and fact exist as to all members of the

14 Class and predominate over any questions solely affecting individual members of

15 the Class. Among the questions of law and fact common to the Class are:

16 a. whether the federal securities laws and Arizona state

17 securities laws were violated by Defendants' acts as alleged herein;

18 b. whether statements made by Defendants to the investing

19 public during the Class Period misrepresented material facts about the

20 business, operations and management of Nutracea; and

21 c. to what extent the members of the Class have sustained

22 damages and the proper measure of damages.

23 162. A class action is superior to all other available methods for the fair

24 and efficient adjudication of this controversy since joinder of all members is

25 impracticable. Furthermore, as the damages suffered by individual Class members

26 may be relatively small, the expense and burden of individual litigation make it

27 impossible for members of the Class to redress individually the wrongs done to

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1 them. There will be no difficulty in the management of this action as a class

2 action

3

4

5 FIRST CLAIM

6 Violation of Section 10(b) Of

7 The Exchange Act Against and Rule 10b-5

8 Promulgated Thereunder Against All Defendants

9

10 163. Plaintiffs repeat and reallege each and every allegation contained

11 above as if fully set forth herein.

12 164. During the Class Period, Defendants carried out a plan, scheme and

13 course of conduct which was intended to and, throughout the Class Period, did: (1)

14 deceive the investing public, including Plaintiffs and other Class members, as

15 alleged herein; and (2) cause Plaintiffs and other members of the Class to purchase

16 and sell Nutracea’s securities at artificially inflated and distorted prices. In

17 furtherance of this unlawful scheme, plan and course of conduct, Defendants, and

18 each of them, took the actions set forth herein.

19 165. Defendants (a) employed devices, schemes, and artifices to defraud;

20 (b) made untrue statements of material fact and/or omitted to state material facts

21 necessary to make the statements not misleading; and (c) engaged in acts,

22 practices, and a course of business that operated as a fraud and deceit upon the

23 purchasers of the Company’s securities in an effort to maintain artificially high

24 market prices for Nutracea’s securities in violation of Section 10(b) of the

25 Exchange Act and Rule 10b-5 thereunder. All Defendants are sued either as

26 primary participants in the wrongful and illegal conduct charged herein or as

27 controlling persons as alleged below.

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1 166. Defendants, individually and in concert, directly and indirectly, by

2 the use, means or instrumentalities of interstate commerce and/or of the mails,

3 engaged and participated in a continuous course of conduct to conceal adverse

4 material information about the business, operations and future prospects of

5 Nutracea as specified herein.

6 167. These Defendants employed devices, schemes and artifices to

7 defraud while in possession of material adverse non-public information and

8 engaged in acts, practices, and a course of conduct as alleged herein in an effort to

9 assure investors of Nutracea’s value and performance and continued substantial

10 growth, which included the making of, or participation in the making of, untrue

11 statements of material facts and omitting to state material facts necessary in order

12 to make the statements made about Nutracea and its business operations and future

13 prospects in the light of the circumstances under which they were made, not

14 misleading, as set forth more particularly herein, and engaging in transactions,

15 practices and a course of business that operated as a fraud and deceit upon the

16 purchasers of Nutracea’s securities during the Class Period.

17 168. Each of the Individual Defendants’ primary liability, and controlling

18 person liability, arises from the following facts: (1) the Individual Defendants

19 were high-level executives, directors, and/or agents at the Company during the

20 Class Period and members of the Company’s management team or had control

21 thereof; (2) each of these Defendants, by virtue of his responsibilities and

22 activities as a senior officer and/or director of the Company, was privy to and

23 participated in the creation, development and reporting of the Company’s financial

24 condition; (3) each of these defendants enjoyed significant personal contact and

25 familiarity with the other Defendants and was advised of and had access to other

26 members of the Company’s management team, internal reports and other data and

27 information about the Company’s finances, operations, and sales at all relevant

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1 times; and (4) each of these Defendants was aware of the Company’s

2 dissemination to the investing public of information that they knew or recklessly

3 disregarded to be materially false and misleading.

4 169. Defendants had actual knowledge of the misrepresentations and

5 omissions of material facts set forth herein, or acted with reckless disregard for the

6 truth in that they failed to ascertain and to disclose such facts, even though such

7 facts were available to them. Such Defendants’ material misrepresentations and/or

8 omissions were done knowingly or recklessly and for the purpose and effect of

9 concealing from the investing public Nutracea’s operating condition and future

10 business prospects and supporting the artificially inflated price of its securities.

11 As demonstrated by Defendants’ overstatements and misstatements of the

12 Company’s financial condition throughout the Class Period, Defendants, if they

13 did not have actual knowledge of the misrepresentations and omissions alleged,

14 were reckless in failing to obtain such knowledge by deliberately refraining from

15 taking those steps necessary to discover whether those statements were false or

16 misleading.

17 170. As a result of the dissemination of the materially false and

18 misleading information and failure to disclose material facts, as set forth above,

19 the market price of Nutracea’s securities was artificially inflated during the Class

20 Period. In ignorance of the fact that market prices of Nutracea’s publicly-traded

21 securities were artificially inflated, and relying directly or indirectly on the false

22 and misleading statements made by defendants, or upon the integrity of the market

23 in which the securities trade, and/or on the absence of material adverse

24 information that was known to or recklessly disregarded by Defendants but not

25 disclosed in public statements by Defendants during the Class Period, Plaintiffs

26 and the other members of the Class acquired Nutracea securities during the Class

27 Period at artificially high prices and were or will be damaged thereby.

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1 171. At the time of said misrepresentations and omissions, Plaintiffs and

2 other members of the Class were ignorant of their falsity, and believed them to be

3 true. Had Plaintiffs and the other members of the Class and the marketplace

4 known the truth regarding Nutracea’s financial results, which were not disclosed

5 by defendants, Plaintiffs and other members of the Class would not have

6 purchased or otherwise acquired their NutraCea securities, or, if they had acquired

7 such securities during the Class Period, they would not have done so at the

8 artificially inflated prices that they paid.

9 172. By virtue of the foregoing, Defendants have violated Section 10(b)

10 of the Exchange Act, and Rule 1 0b-5 promulgated thereunder.

11 173. As a direct and proximate result of Defendants’ wrongful conduct,

12 Plaintiffs and the other members of the Class suffered damages in connection with

13 their respective purchases and sales of the Company’s securities during the Class

14 Period.

15 174. This action was filed within two years of discovery of the fraud and

16 within five years of each Plaintiff’s purchase of securities giving rise to the cause

17 of action.

18 SECOND CLAIM

19 Violation of Section 20(a) Of

20 The Exchange Act Against the Individual Defendants



23 176. The Individual Defendants acted as controlling persons of Nutracea

24 within the meaning of Section 20(a) of the Exchange Act as alleged herein. By

25 virtue of their high-level positions, agency, and their ownership and contractual

26 rights, participation in and/or awareness of the Company’s operations and/or

27 intimate knowledge of the false financial statements filed by the Company with

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1 the SEC and disseminated to the investing public, the Individual Defendants had

2 the power to influence and control, and did influence and control, directly or

3 indirectly, the decision-making of the Company, including the content and

4 dissemination of the various statements that Plaintiffs contend are false and

5 misleading. The Individual Defendants were provided with or had unlimited

6 access to copies of the Company’s reports, press releases, public filings and other

7 statements alleged by Plaintiffs to have been misleading prior to and/or shortly

8 after these statements were issued and had the ability to prevent the issuance of the

9 statements or to cause the statements to be corrected.

10 177. In particular, each of these Defendants had direct and supervisory

11 involvement in the day-to-day operations of the Company and, therefore, is

12 presumed to have had the power to control or influence the particular transactions

13 giving rise to the securities violations as alleged herein, and exercised the same.

14 178. As set forth above, Nutracea and the Individual Defendants each

15 violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in

16 this Complaint.

17 179. By virtue of their positions as controlling persons, the Individual

18 Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct

19 and proximate result of Defendants’ wrongful conduct, Plaintiffs and other

20 members of the Class suffered damages in connection with their purchases of the

21 Company’s securities during the Class Period.

22 180. This action was filed within two years of discovery of the fraud and

23 within five years of each Plaintiff’s purchase of securities giving rise to the cause

24 of action.

25

26 THIRD CLAIM

27 Violation of A.R.S. § 44-1991(A)(3) & 44-2003(A)

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1 Against All Defendants



4 182. This claim is brought against all Defendants for civil liability

5 pursuant to A.R.S. §44-2003(A) for their violation of A.R.S. § 44-1991(A)(3).

6 183. Defendants, individually and in concert, directly and indirectly,

7 engaged and participated in a continuous course of business under which they hid

8 adverse information concerning Nutracea’s actual revenue, net income, and assets.

9 Defendants knew or recklessly ignored that disclosure of Nutracea’s fraud would

10 reduce the value of Nutracea stock.

11 184. The course of business through which Defendants disclosed

12 information about Nutracea and marketed Nutracea stock without disclosing the

13 misstatements alleged herein violated A.R.S. § 44-1991(A)(3).

14 185. Individual Defendants aided, abetted, and culpably made and

15 participated in Nutracea’s violations of A.R.S. § 44-1991(A)(3). Under A.R.S. §

16 44-2003(A), Defendants are liable for their own and for Nutracea’s violations of §

17 44-1991(A)(3).

18 186. Because of the securities violations described in this Claim,

19 Plaintiffs and the Class are entitled to, and by this complaint demand, statutory

20 rescission under A.R.S. § 44-2001(A).

21 187. This action was filed within two years after the discovery of the facts

22 on which liability is based, or after the discovery should have been made by

23 exercise of reasonable diligence.

24 FOURTH CLAIM

25 Violation of A.R.S. § 44-1999(B) against Individual Defendants

26

27

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3 189. Individually or as a group, or both, Individual Defendants were

4 statutory control persons with the power to control Nutracea.

5 190. With respect to the Nutracea’s violation of A.R.S. § 44-1991 (A)(3)

6 described in the Third Claim, the Individual Defendants are jointly and severally

7 liable to Plaintiffs as controlling persons of Nutracea under A.R. S. § 44-1999.

8 191. Because of the securities violations described in this Claim,

9 Plaintiffs and the Class are entitled to, and by this complaint demand, statutory

10 rescission under A.R.S. § 44-2001(A).

11 WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

12 (a) Determining that this action is a proper class action, designating

13 Plaintiffs as a class representative under Rule 23 of the Federal Rules of Civil

14 Procedure and Lead Plaintiffs’ counsel as Class Counsel;

15 (b) Awarding compensatory damages in favor of Plaintiffs and

16 Class members against all Defendants, jointly and severally, for all damages

17 sustained as a result of Defendants’ wrongdoing, in an amount to be proven at

18 trial, including interest thereon;

19 (c) Awarding rescission or damages in favor of Plaintiffs on their

20 Arizona claims against all Defendants, jointly and severally, for all such relief

21 Plaintiffs are entitled as a result of Defendants’ wrongdoing, in an amount to be

22 proven at trial, including interest thereon;

23 (d) Awarding Plaintiffs and the Class their reasonable costs and

24 expenses incurred in this action, including counsel fees and expert fees; and

25 (d) Such other and further relief as the Court may deem just and

26 proper.

27

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1 JURY TRIAL DEMANDED

2 Plaintiffs hereby demand a trial by jury.

3

4 Dated: August 14, 2009 Respectfully submitted,

5

6 THE ROSEN LAW FIRM P.A.

7

8 /s/ Phillip Kim

Phillip Kim (pro hac vice)

9 Laurence Rosen (pro hac vice)

10Timothy Brown (pro hac vice)350 Fifth Avenue, Suite 5508

11 New York, NY 10118Telephone: (212) 686-1060

12 Fax: (212) 202-3827

13 Lead Counsel for Plaintiffs

14

15 TIFFANY & BOSCO, P.A.

16 Richard G. Himelrick (#004738)J. James Christian (#023614)

17 Third Floor Camelback Esplanade II

18 2525 East Camelback RoadPhoenix, Arizona 85016-4237

19 Telephone: (602) 255-6000

20 Fax: (602) 255-0103

21 Liaison Counsel for Plaintiffs

22

23

24

25

26

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