Joseph M. Elles, 55 and a resident of Las Vegas, Nevada, was hired by Carter's in 1996 as Vice President of Regional Accounts and, thereafter, promoted in 1997 to Executive Vice President of Sales-a position he held until his termination from Carter's in March 2009. As Executive Vice President of Sales, Elles supervised all of the individual Vice Presidents who managed Carter's retail and mass channel customer accounts, and reported directly to Carter's President. Elles was terminated from the Company as of March 2009.
Carter's, Inc. (NYSE: CRI) is an Atlanta-based public issuer and the self proclaimed "largest branded marketer in the U.S. of apparel exclusively for babies and young children." The Company sells clothing under the Carter's brand names, as well as private label apparel, through its own stores and oth-er retailers. In fiscal 2009, the Company generated net income of $116 million on sales of$1.59 billion. Since October 2003, Carter's common stock has been registered with the Commission under Section 12(b) ofthe Exchange Act and listed on the NYSE.
Kohl's Corporation (NYSE: KSS) is a public issuer and retailer based in Wisconsin. Kohl's operates over a thousand department stores in 49 states. At the time of Elles' misconduct, Kohl's was Carter's largest wholesale customer in terms ofvolume of purchases
See Kohl's webpage promoting Carter's products
The Complaint alleges that Elles concealed his misconduct by persuading Kohl's to defer subtracting the discounts from payments until later financial quarters. In furtherance of this alleged scheme, Elles is charged with creating and signing false documents that misrepresented to Carter's accounting personnel the timing and amount of those discounts.
The SEC contends that accounting rules require that "accomodations" be recorded as an expense in the period when the related sale is recognized. When properly implemented, an accommodation essentially functions as an expense that reduces the revenue otherwise realized by Carter's from the sale to which the accommodation relates.
In contrast, Elles' alleged scheme misrepresented that the expense occurred in a later fiscal quarter when Kohl's deducted the payments from Carter's, rather than in the earlier quarter when the sale was recognized. Consequently, it is alleged that Elles caused the understating of expenses in some quarters and the subsequent overstatement of income in the corresponding quarters.Paragraph 36 of the Complaint sets forth the value of the secretly deferred "accomodations" from the immediately prior fiscal year into the year noted:
2009: $18,400,000Not only is Elles charged with the financial manipulations cited above, but between May 2005 and March 2009, he exercised options and sold 200,814 shares of Carter's stock, realizing a pre-tax profit of $4,739,862. Each of these stock sales occurred prior to Oct. 27, 2009, when Carter's initially disclosed the fraud, after which the company's common stock share price dropped 23.8 percent. After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods
Summing It Up
The Complaint alleges that Elles violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles.
The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct. In agreeing to the the non-prosecution agreement, the SEC noted that the considerations compelling that undertaking reflected
[A]grees not to take any.action or to make or permit any public statement through present or future attorneys, employees, agents, or other persons authorized to speak for it, except in legal proceedings in which the Commission is not a party, denying, directly or indirectly, the factual basis of any aspect of this Agreement. . .
. . .
Prior to issuing a press release concerning this Agreement, the Respondent agrees to have the text of the release approved by the staff of the Division.