Internal transactions at food giant ADM spark a sprawling criminal probe
DECATUR, Illinois – Late on Nov 4, American agribusiness giant Archer-Daniels-Midland cut its profit forecast for 2024, delayed a quarterly earnings report and said it would restate other recent financial results, too.
The announcement, the second time this year ADM said accounting “issues” were forcing it to restate past earnings, sent shares tumbling. The company’s stock lost $1.6 billion in market value the next day. ADM’s rattled shareholders are asking questions about the mounting accounting troubles – and they aren’t the only ones.
Building upon a criminal investigation first reported by Reuters in February, federal prosecutors in recent months have expanded their inquiries into whether ADM or its employees committed crimes including securities fraud and conspiracy, according to subpoenas reviewed by Reuters and people familiar with the probe. The sprawling scope of the investigation, underway at the U.S. Attorney’s Office for the Southern District of New York, hasn’t previously been reported.
ADM has acknowledged the criminal probe and in a statement said it is cooperating with investigators. The company declined to make senior executives available for interviews or answer detailed questions submitted by Reuters seeking comment for this story.
A spokesperson for the U.S. Attorney’s office declined to comment.
The investigation, like the accounting revisions, is related to internal company transactions that could have inaccurately inflated financial results for ADM’s “Nutrition” division. The unit was launched six years ago to accelerate development of high-value specialty ingredients for the food, beverage and animal feed industries. Chief Executive Juan Luciano and other company leaders were once so optimistic about Nutrition’s future that ADM pegged their incentive pay to the fledgling division’s performance – tens of millions of dollars in stock-based bonuses in recent years.
But Nutrition failed to fulfill its promising projections. Now, the company is backpedaling, acknowledging a disappointing marketplace for some of its products, among other problems. In September, Luciano told an investment conference that Nutrition had a “very bad 2023.”
It’s unclear whether the criminal investigation will lead to charges. The inquiry adds to an ongoing civil probe by the Securities and Exchange Commission. Neither the SEC nor the Department of Justice has accused the company of wrongdoing. Also unknown is whether new political appointments and priorities under incoming President Donald Trump could affect these or other cases federal investigators are pursuing.
A spokesperson for the SEC declined to comment.
A Reuters review of subpoenas and other documents related to the investigations – and interviews with people familiar with the probes, including witnesses interviewed by federal prosecutors in New York – indicates a sustained and far-reaching government effort. Since May, a federal grand jury has summoned more than three dozen current and former ADM employees to Manhattan. Investigators have plied them for testimony and documents related to internal company transactions since the Nutrition division was established in 2018.
At root, the interviews and the documents show, investigators want to know if ADM deliberately boosted Nutrition’s performance by providing it with below-cost goods from other company units.
“Intersegment” transactions, as they are known, are common across many industries and at companies with multiple business lines.
They often involve sales of goods between company divisions – in this case raw materials, such as processed corn and soy, sold by sister units to Nutrition for products like plant protein, used in foods including meatless burgers and snack bars.
Such deals are perfectly legal when priced fairly. For years, ADM told investors that sales between divisions would be priced based on market values. Deviation from market prices, through deep discounts for Nutrition, could have made the once-heralded unit appear more profitable than it in fact was. “If companies make accounting entries to boost earnings of a division for any reason – whether executive compensation or because they’ve touted the unit as the future of the company – it goes from puffery to fraud,” said Bruce Dubinsky, a forensic accountant who worked on federal cases against Enron, the fraudulent energy company, and Bernie Madoff, the New York financier who swindled investors with a Ponzi scheme. Dubinsky isn’t involved in the ADM investigation.
Several ADM employees told Reuters that senior executives pressured them to conduct internal sales to help Nutrition mask costs or meet profit forecasts as the unit fell short of hopes. Two of the employees said they were told to “pull levers” so that Nutrition could reach growth targets that ADM executives had set, but which the employees themselves saw as unrealistic. An internal company email exchange in 2019, meanwhile, shows that ADM’s two other corporate divisions were “asked to donate to Nutrition” by offering it millions of dollars in cost breaks.
“It’s exhausting,” one manager who worked at Nutrition told Reuters. “You’re working feverishly just to basically spin things to hit the number.” The manager, like other current and former employees interviewed for this report, spoke on condition of anonymity.
The criminal investigation poses substantial risk for ADM, a 122-year-old company and global powerhouse in agricultural commodities with annual sales of nearly $100 billion. Based in Chicago, ADM is an icon of the Midwest farm economy and is on Fortune’s list of the 50 biggest U.S. corporations by revenue. In the 1990s, it was roiled by another scandal – a price-fixing scheme that led to a $100 million criminal fine, prison terms for some executives, and “The Informant,” a bestselling book and namesake film starring Matt Damon.
The Nutrition crisis erupted with an ADM announcement in January that the SEC had requested company documents related to its accounting. In March, ADM said its own internal probe had identified what it called a “material weakness” in intersegment accounting. It would restate past earnings, it said, because some internal sales hadn’t been priced at market value. ADM trimmed a combined $228 million from Nutrition’s operating profit between 2018 and 2023. The subsequent revision in November did little to reassure investors that Luciano, who is also ADM chairman, has the crisis under control.
A 63-year-old chemical industry veteran, Luciano has taken personal credit for the launch of Nutrition, which accounts for less than 10% of ADM’s sales. Encouraged by the growing demand for plant-based meat substitutes – and seeking a buffer against the volatility of commodity markets – he touted Nutrition as a motor of future growth.
“I made the ultimate decision,” he told the authors of a 2022 case study published by Harvard Business School. “Nutrition products and services,” he explained, “represented a more stable sector in which we could move closer to our customers and build a broader base for growth.”
So bullish was Luciano that in 2018, as Nutrition ramped up, he told investors he expected it to quickly reach $1 billion in annual profit. He distributed to employees rubber stress balls emblazoned with “1B X 2020,” shorthand for Nutrition reaching a ten-digit profit by this decade.
It has fallen far short: Nutrition’s operating profit peaked at $668 million in 2022, according to the March revisions. Last year, ADM said, the unit’s operating profit fell 36% to $427 million, dampened by production setbacks, lower sales margins and asset write-downs.
Federal investigators want to determine whether ADM’s accounting issues are mere errors or the result of an effort to mislead investors. So far, multiple subpoenas reviewed by Reuters show, the investigation is exploring “below-cost sales” between company divisions, among other practices, and alleged violations of at least six federal laws.
To provide the most detailed account yet of the probe and the corporate moves that led to it, Reuters interviewed 15 current and former ADM employees familiar with the transactions under scrutiny, seven of whom have already been questioned by federal investigators. Reporters also spoke with four other people with knowledge of the probe, reviewed hundreds of pages of documents – including the grand jury subpoenas and internal ADM communications – and consulted experts in corporate accounting, executive compensation and securities law.
Reporters recently visited Decatur, Illinois, ADM’s historic hometown south of Chicago and the hub of its North American operations. The low-rise brick buildings in the revitalized downtown and the still waters of Lake Decatur, a century-old reservoir that supplies ADM’s massive corn processing plant nearby, provide the backdrop for a company scrambling once again to address a major legal crisis.
Luciano, an industrial engineer born into a farming family and educated in his native Argentina, spent 25 years at Dow Chemical, where he rose to become an executive vice president. In 2011, he joined ADM as chief operating officer, a role in which he began steering the company toward innovative new food ingredients.
In 2014, the year before becoming chief executive, Luciano was instrumental in ADM’s $3 billion purchase of WILD Flavors GmbH, a Swiss-German supplier of flavors for the beverage industry. The purchase, the largest in ADM’s history, was one of a string of takeovers that so far have amounted to more than $7 billion in acquisitions for what is now the Nutrition division.
His bet on plant-based proteins, several employees said Luciano told them, was inspired in part by his daughter’s vegetarianism and demand by younger generations for environmental sustainability. There were business motivations, too. Four people who worked with Luciano told Reuters that in meetings he repeatedly mentioned that stock of companies specializing in higher-value food products traded at a premium to that of companies focused on agricultural commodities.
The creation of the Nutrition division in 2018 appeared to be in sync with the times. Consumer demand was surging for plant-based milks, patties, nuggets and pet foods. Beyond Meat, a fast-growing vendor of meat substitutes, would have one of the most successful initial public offerings in the United States the following year, its shares surging 163% at their debut.
Initially, Nutrition appeared to prosper, reporting annual profit growth of more than 20% and impressing Wall Street analysts. ADM’s two other divisions, Carbohydrate Solutions and Agricultural Services and Oilseeds, remained focused on the company’s traditional trading and processing of farm goods.
Soon, employees told Reuters, friction began to emerge among the three divisions as executives at each sought to maximize their earnings. As early as 2019, internal communications reviewed by Reuters show, managers of the other two units faced pressure to subsidize Nutrition.
In September of that year, Rachel Hudson, then chief financial officer of the carbohydrates unit, emailed a small group of colleagues from that division. She wrote that she had spoken with Dan Nisser, her counterpart at the oilseeds unit, because both had been asked to “donate to Nutrition.”
Nisser, she wrote, was looking for ways to lower prices for Nutrition by around $2 million. She asked her colleagues if they could come up with similar breaks. “He’s thinking $2M,” Hudson wrote, referring to possible discounts Nisser was considering for Nutrition. “Are we selling them any sweeteners for formulations where we could give them a rebate?”
The messages don’t make clear who requested the rebates or whether the ask led to specific transactions. Hudson, a longtime ADM executive who was also corporate treasurer, died in 2021. Nisser left the company last year and didn’t respond to Reuters requests for comment.
To outsiders, the picture still looked good. For 2020, ADM reported growth in operating profit at Nutrition of 37%. ADM shares began climbing, as if confirming Luciano’s hunch about stock values. “The market was rewarding them,” said Seth Goldstein, a Morningstar analyst who follows the company.
ADM’s board in 2020 took a rare step: It linked half of senior executives’ long-term incentive pay to Nutrition’s performance, pegging their stock-based bonuses to average profit growth at the unit over multiple years. Compensation experts say it’s unusual for a company to tie so much incentive pay to the results of a small division. ADM, in a 2021 regulatory filing, said it did so to “emphasize our focus to significantly grow the Nutrition segment.”
Before long, the landscape shifted.
Consumer demand for plant-based proteins appeared to plateau. Wall Street euphoria for companies selling meat substitutes cooled. Even Beyond Meat’s market value, which reached $14 billion in 2019, would crater, eventually falling by 97%. Beyond Meat executives recently said the market for plant-based proteins has been more turbulent than initially anticipated by investors.
Luciano continued to talk up Nutrition’s future. In January 2021, he told investors on a conference call the division was expected to grow its operating profit by an average of 15% per year and “deliver solid revenue expansion.”
Within the company, doubts emerged.
One employee familiar with intersegment transactions told Reuters that high costs and production snags related to some Nutrition products were eroding profits. As a result, the employee added, ADM executives found workarounds, including one transaction in 2021 through which the company transferred about $20 million from the oilseeds division to Nutrition. The transaction, among those being reviewed by investigators, was justified in internal company communications, the employee added.
Reuters hasn’t seen those communications and couldn’t determine further details about the transaction.
That same year, according to two other employees and documents reviewed by Reuters, the carbohydrates division was ramping up discounts for Nutrition on some products. One was dextrose, a simple corn-based sugar that Hudson, the late executive, mentioned in her 2019 email. Reuters couldn’t determine the extent of the discounts, but the two employees said they helped Nutrition’s metrics for 2021.
In December of that year, ADM told investors that Nutrition was still flying high. It predicted operating profit for the unit of as much as $1.5 billion by 2025 – never mind that Nutrition still hadn’t even come close to the $1 billion touted by Luciano on stress balls years before. ADM reported profit growth at Nutrition of 20% for 2021; the company would this year revise the figure down to 13%.
Challenges grew. By the middle of 2022, according to the two employees and documents reviewed by Reuters, the carbohydrates division lost millions of dollars on sales of discounted ingredients to Nutrition. Despite the assist, Nutrition posted profit growth of just 6% for 2022.
Although lower than projected, that 6% gain was enough to attain a three-year performance average that triggered big bonuses. ADM gave its seven highest-paid executives stock-based performance bonuses worth $69 million when their shares vested in early 2023. For 2022, Luciano’s total pay package rose to $24.7 million including nearly $18 million in stock, regulatory filings show.
ADM’s earnings revisions haven’t affected those payouts.
The SEC first requested documents regarding the intersegment sales in June 2023, ADM said when announcing the regulatory probe and a delay to its earnings report early this year. The company suspended Vikram Luthar, its chief financial officer. Luthar, who later resigned, didn’t respond to requests for comment.
It’s not rare for the SEC to work with federal prosecutors on business investigations, but it’s unclear what role the SEC played, if any, in referring the accounting irregularities to them. The criminal investigation, subpoenas show, has been led by prosecutors involved in high-profile proceedings including the successful case against Sam Bankman-Fried, the crypto-currency buccaneer convicted for fraud at the helm of FTX, the bankrupt exchange he founded.
In March, after its first earnings revision, ADM downplayed the changes. It assured investors they had no impact on the company’s overall profits for any part of the six-year period, and only reflected corrections of accounting for transactions between its own divisions.
At an internal meeting, Luciano sought to reassure employees, too. “We can only focus on continuing to act with integrity,” he said, according to a recording reviewed by Reuters.
That same month, agents with the Federal Bureau of Investigation began knocking on doors around Decatur. ADM’s operations there still employ about a tenth of its global workforce of 42,000. Agents served subpoenas to current and former employees.
An FBI spokesperson declined to comment.
In the months since, many of those subpoenaed have traveled to New York, where investigators have been questioning witnesses and collecting evidence, according to documents and people familiar with the probe. Documents reviewed by Reuters also show that prosecutors are seeking communications between ADM and Ernst & Young, ADM’s longtime auditor. The documents don’t detail what exactly the prosecutors are looking for in those communications.
Reuters couldn’t determine if agents have interviewed Luciano, other senior executives or anyone from EY, as the auditor is known. A spokesperson for EY declined to comment.
In conference rooms blocks away from Wall Street in lower Manhattan, prosecutors in hours-long interviews have asked witnesses whether ADM bosses pressured them to beef up Nutrition’s performance, according to several of those interviewed so far. The questions have delved into intersegment transactions involving products like lysine, an amino acid that was at the heart of the price-fixing scandal three decades ago.
Nutrition buys ingredients for lysine, an animal feed additive, from ADM’s carbohydrates division. Prosecutors are asking whether those purchases were made with steep discounts, people familiar with the questioning told Reuters.
They have also asked whether the oilseeds unit cut favorable deals to Nutrition for “white flake,” a protein-rich soy product. Some oilseed employees were so concerned about the prices at which they sold the ingredient that they began to refer to the transactions as “white flakegate,” one person familiar with the investigation said.
Investigators have also asked about other ADM accounting practices, according to subpoenas and interviews with some of those questioned. Prosecutors, for instance, have questioned whether ADM properly wrote down impaired inventories – products or supplies that the company can sell but for a value lower than previously expected. Although inventory values can drop for many reasons, from spoilage to falling demand, failing to recognize an impairment can skew a company’s balance sheet.
At least one line of questioning also applies to activity that didn’t involve Nutrition, subpoenas show.
As Reuters reported earlier this year, investigators are asking whether the carbohydrates division properly accounted for some of its trading in ethanol, the biofuel made from corn and other crops. ADM is among the biggest producers worldwide of the fuel, which makes up around 10% of the gasoline sold at U.S. filling stations.
It’s unclear how long the ongoing probes will last. ADM has said little about them beyond prepared comments. In a recent statement, it said “the company is unable to predict the final outcome of these investigations with any reasonable degree of certainty.”
ADM stock is now trading at just over half the value it reached in 2022. At the September investment conference, Luciano said: “I have not personally lost my aspirations for what the Nutrition business can achieve.”
Still, he recognized missteps. “Some things we did to ourselves,” Luciano said.
