SEC SETTLES JENKINS SOX 304 CASE
The Commission settled its first strict liability no-fault SOX 304 action by agreeing to a settlement under which defendant Maynard L. Jenkins, the former CEO and Chairman of CSK Auto Corporation, would repay $2.8 million of the approximately $4.1 million sought in the complaint. SEC v. Jenkins, CV-09-01510 (D. Ariz. Filed July 22, 2009. Prior to Jenkins the SEC had asserted claims based on SOX 304 against corporate executives who were involved in alleged wrongful conduct. The action against Mr. Jenkins was the first in which the SEC acknowledged that the defendant from which repayment was sought had not engaged in any wrongful conduct.
The action arose from a massive financial fraud at CSK Auto from 2001 through 2006. During that period senior executives at the company falsified the earnings. The scheme centered on the manipulation of certain rebates paid to the company. Specifically, suppliers of auto parts paid rebates to CSK. In return the company marketed their products. Millions of dollars in rebates were recognized on anticipated sales which never in fact occurred. The executives involved concealed this fact. As a result about $52 million in uncollectable receivables were concealed for the fiscal years 2002 through 2004. As part of the cover-up, in July 2005 the executives involved in the fraudulent scheme billed vendors about $30 million in allowances, about half of which were not owed.
During period of the scheme Mr. Jenkins was the CEO the company. The company restated its financial statements twice as a result of the scheme. The Commission brought an action against Mr. Jenkins was based on SOX 304. That section provides for the repayment by the CEO and CEO of certain incentive based compensation if there is a restatement of the company financial statements from wrongful conduct. According to the Commission’s complaint, Mr. Jenkins was CEO during the time period of the scheme but he was not involved in it. He was however paid bonuses during the period totaling $2,091,020. In addition, during the 12 month period after the company filed its annual reports for fiscal 2002 and 2004, Mr. Jenkins realized profits of approximately $2,018,893 from the sale of CSK stock.
CSK Auto was acquired by O’Reilly Automotive after the fraudulent scheme was reported to the government. Subsequently, the company resolved possible criminal charges with a non-prosecution agreement. Criminal charges were brought against the former CFO of the company, Don Watson, the former controller, Edward O’Brien, and the former director of credits and receivables, Gary Opper. 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 materially false statements during an internal investigation of CSK’s accounting practices. U.S. v. Watson, CR 09-372-2 (D. Ariz.). The Commission also brought actions against the company and the individuals involved. CSK settled. In the Matter of CSK Auto Corp., Adm. Proc. File No. 313485 (Filed May 26, 2009). The action is pending as to the remaining defendants. SEC v. Fraser, CV 09-00443 (D. Ariz. Filed March 6, 2009).