Atlanta based closing manufacturer Carter’s, Inc. continues to spawn enforcement activity. It began with a non-prosecution agreement. Under the arrangement the Commission agreed not to prosecute the company in return for its cooperation. As part of the arrangement, announced in December 2010, the company was not required to admit liability. The agreement was significant because it was the first Commission non-prosecution agreement.
The non-prosecution agreement is also significant because it helped define the circumstances under which the then new cooperation initiative would be used. The fraud at the company involved the manipulation of certain industry standard rebates given by Carter’s to Kohl’s Corporation. Specifically, Joseph Elles, then EVP of sales at the company, granted Kohl’s larger than typical rebates which were deferred, concealed and improperly recorded in the books and records of the company. That caused the revenue of the company to be overstated by 5% to 19.2% beginning in the first quarter of fiscal 2006 and continuing through the third quarter of 2008. He also exercised millions of dollars of stock options prior to the disclosure of the scheme which ultimately caused the stock price to drop significantly.
The limited nature of the fraud gives definition to the kind of situation in which the Commission will consider resolving a case with a non-prosecution agreement. Indeed, the facts are reminiscent of those in the Seaboard release where the SEC also declined to prosecute the company in a financial fraud case based on its cooperation.
Unlike the company, Mr. Ellis was named as a defendant by the Commission in a complaint centered on the financial fraud. SEC v. Elles, Civil Action No. 1:10-CV-4118 (N.D. Ga.). He has also been named as defendant in a 32 count criminal indictment charging securities and wire fraud. U.S. v. Elles, 11 CR 445 (N.D. Ga.). Both cases are pending.
Eric Martin, another employee of Carter’s, was subsequently named as a defendant in a separate Commission enforcement action. SEC v. Martin, Case No. 1:12-CV-02922 (N.D. Ga.). That case alleges that Mr. Martin repeatedly traded on inside information while he was at the company. In some trades he was successful while in others he was not. That case is also pending.
Now Carter’s Inc. is at the center of another Commission enforcement action. This time the defendant is Joseph Pacifico who served as president of the company from 2004 through 2009. During that time period Mr. Elles reported to him. In March 2009, after Mr. Elles’ employment was terminated and he had a consulting arrangement with the company, Mr. Pacifico learned about the fraud. Nevertheless, on April 28, 2009 he executed a representation letter stating that $22 million was the budget for 2009 accommodations being given to Kohl’s for the year. At the time he signed the letter he knew, according to the complaint, that $18 million in accommodations to Kohl’s had been carried over from the prior year as a result of the fraudulent activity of Mr. Elles. Mr. Pacifico also knew the letter would be relied on by the accounting department and used in the preparation of the financial statements.
Subsequently, Mr. Pacifico approved individual accommodation payments to Kohl’s. At the time he represented to accounting personnel that the payments related to the current period when in fact he knew they did not, meaning they were improperly booked.
The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5). The case is pending. SEC v. Pacifico, Case No. 1:12-cv-03636 (D. Ga. Filed Oct. 18, 2012)