The DOJ resolved a financial fraud action involving O’Reilly Automotive Inc. and CSK Auto Corporation by entering into a deferred prosecution agreement. Under the terms of the agreement CSK Auto took responsibility for the conduct of its employees who perpetrated a large financial fraud which falsified the financial results of the company and ended with bankruptcy. CSK Auto also agreed to pay a criminal fine of $20.9 million.

The underlying fraud took place from 2001 through 2006. During that period, senior executives at the company conspired to manipulate its earnings, according to the court papers. That was done by manipulating certain vendor allowances the company received in connection with the purchase of auto parts. Specifically, suppliers of auto parts provided rebates in return for the company marketing their products. As part of the scheme millions of dollars in rebates were recognized on anticipated sales which never in fact occurred. The executives involved concealed this by using collections from later years to cover shortfalls in earlier years and then moving uncollectible balances to subsequent years. As a result, about $52 million in uncollectable receivables were concealed for fiscal years 2002 through 2004. In a further effort to conceal the scheme by the executives in July 2005 by billing the vendors for about $30 million in allowances, about half of which they knew were not owed.

O’Reilly Automotive acquired CSK after the scheme was disclosed to the government. It is also a party to the non-prosecution agreement. That agreement reflects the extensive cooperation and remedial efforts of the company.

Criminal charges were also brought against Don Watson, the former CFO of the company, Edward O’Brien, the former controller and Gary Opper, the former director of credits and receivables. Mr. Watson pleaded guilty to conspiracy to commit securities and mail fraud. Messrs. O’Brien and Opper each pleaded guilty to obstruction of justice for making material false statements during an internal investigation of CSK’s accounting practices. Each is due to be sentenced later this year. See, e.g., U.S. v. Watson, CR 09-372-2 (D. Ariz.).

The SEC, which originally referred this matter to the Justice Department, brought an action against the executives involved. SEC v. Fraser, CV 09-00443 (D. Ariz. Filed March 6, 2009). That case is pending.

The Commission also brought an action under SOX 304 against the former CEO of the company, Maynard Jenkins, to recover certain incentive based compensation he was paid. The action does not claim that Mr. Jenkins was involved in the fraud. The SEC recently rejected a recommendation by the Enforcement Division to settle the case for less than half of the amount claimed in the complaint. Further settlement discussions are scheduled. SEC v. Jenkins, CV-09-01510 (D Ariz. Filed July 22, 2009).

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
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