THE SEC’S FIRST NON-PROSECUTION AGREEMENT
The Commission entered into its first non-prosecution agreement, marking a significant step forward with the reorganization and rejuvenation of the Enforcement program. Carter’s, Inc., an Atlanta based clothing store, entered into an agreement with the Commission regarding a financial fraud alleged to have been perpetrated by its former Executive Vice President of Sales, Joseph M. Elles.
The agreement is substantially similar to those which have long been utilized by the Department of Justice. Essentially, it requires the company to cooperate with the Commission during its continuing investigation and in any subsequent proceedings. Carter also agreed to use its best efforts to secure the full and complete cooperation of its current and former directors, officers, employees and agents. Cooperation includes providing full, truthful testimony, non-privileged documents, information and other materials.
Other significant features of the agreement include:
• No admission of liability;
• The company cannot deny the underlying conduct except in legal proceedings to which the SEC is not a party; and
• The agreement only applies to the SEC, although if there are other self-regulatory or governmental proceedings the Commission may, in its discretion, forward a letter detailing he cooperation of the company in this case.
In exchange for the cooperation, the Commission agreed not to institute an enforcement action. If the agreement is violated, the SEC may however, elect to bring such an action.
The agreement reflects both the underlying conduct and the cooperation of the company. As the Commission made clear in its press release, “[t]he non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct.” The underlying conduct is detailed in the complaint against Mr. Elles. Essentially, Mr. Elles manipulated certain standard industry rebates which were given to a major customer. Specifically, Mr. Elles is alleged to have granted larger discounts than appropriate to induce larger sales. To conceal his actions, he created false documents. As a result, the revenues of the company were overstated from between 5% and 19.2% from the first quarter of fiscal 2006 through the third quarter of 2008. He also exercised millions of dollars worth of stock options prior to the disclosure of his scheme which caused the stock price to drop significantly. The case, alleging violations of the antifraud provisions of the federal securities laws, is in litigation. SEC v. Elles, Civil Action No. 1:10-CV-4118 (N.D. Ga. Filed Dec. 20, 2010).
The agreement also reflects the cooperation of the company. When the underlying conduct was discovered, the company promptly self-reported, made a full and complete investigation and fully cooperated with the Commission. In this regard, the agreement is reminiscent of Seaboard, in which the Commission elected not to bring an enforcement action where the company discovered an isolated financial fraud in a subsidiary, self-reported and fully cooperated with the Commission (here).
The agreement here represents a significant step forward for the SEC’s enforcement program. The new cooperation initiatives announced earlier this year are an important part of the efforts to rejuvenate the enforcement program (here). The idea was to facilitate investigations by fostering cooperation. The agreement with Carter demonstrates that those efforts are moving forward in a very positive manner.