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Former Carter's Executive With Fraud
And Insider Trading
December 21, 2010
— The Securities and Exchange Commission on Monday charged a former
Executive Vice President of children's clothing marketer Carter's Inc.
for engaging in financial fraud and insider trading.
The SEC alleges
that Joseph M. Elles's misconduct caused an understatement of Carter's
expenses and a material overstatement of its net income in several
financial reporting periods.
The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct.
non-prosecution agreement reflects the relatively isolated nature of the
unlawful conduct, Carter's prompt and complete self-reporting of the
misconduct to the SEC, its exemplary and extensive cooperation in the
investigation, including undertaking a thorough and comprehensive
internal investigation, and Carter's extensive and substantial remedial
actions. This marks the first non-prosecution agreement entered by the
SEC since the announcement of the SEC's new cooperation initiative
earlier this year.
in secretly awarding excessive discounts deceived and damaged Carter's
investors," said Robert Khuzami, Director of the SEC's Division of
Enforcement. "While that was the wrong thing to do, Carter's did the
right thing by promptly self-reporting the misconduct, taking thorough
remedial action, and extensively cooperating with our investigation, for
which it received the benefits of a non-prosecution agreement. In such
circumstances, incentivizing appropriate corporate response to
misconduct through the use of non-prosecution agreements is in the best
interest of companies, shareholders and the SEC alike."
William P. Hicks,
Associate Director of Enforcement in the SEC's Atlanta Regional Office,
added, "Elles deceived accounting personnel at Carter's and caused
financial misstatements to investors. After his misconduct inflated the
company's earnings, Elles exercised options for the purchase of Carter's
common stock and sold the resulting shares for his personal gain."
the SEC's complaint filed in U.S. District Court for the Northern
District of Georgia, Elles conducted his scheme from 2004 to 2009 while
serving as Carter's Executive Vice President of Sales. The SEC alleges
that Elles fraudulently manipulated the dollar amount of discounts that
Carter's granted to its largest wholesale customer, a large national
department store in order to induce that customer to purchase greater
quantities of Carter's clothing for resale.
According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Elles conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of discounts that Carter's granted to its largest wholesale customer, a large national department store in order to induce that customer to purchase greater quantities of Carter's clothing for resale.
concealed his misconduct by persuading the customer to defer subtracting
the discounts from payments until later financial reporting periods. He
created and signed false documents that misrepresented to Carter's
accounting personnel the timing and amount of those discounts.
The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the company's initial disclosure relating to the fraud on Oct. 27, 2009, immediately after which the company's common stock share price dropped 23.8 percent.
discovering Elles's actions and conducting its own internal
investigation, Carter's was required to issue restated financial
results for the affected periods.
The SEC's 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.
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