SEC v. Joseph M. Elles, No. 1:10-CV-4118, Northern District of Georgia (Dec. 20, 2010) — Complaint

FILED IN CLERK'S OFFICE 
U.S.D.C. Atlanta 
DEC 202010 
IN THE UNITED STATES DISTRICT COURT JAME 
FOR THE NORTHERN DISTRICT OF GEORGIA ~ 
ATLANTA DIVISION 
SECURITIES AND EXCHANGE 
COMMISSION, 
v. 
Plaintiff, 
Civil Action No. 
1: 1 0-Cv -4118 
JOSEPH M. ELLES, 
Defendant. 
COMPLAINT FOR INJUNCTIVE RELIEF 
Plaintiff, Securities and Exchange Commission (the "Commission"), files its 
complaint and alleges that: 
OVERVIEW 
1. This matter involves financial fraud perpetrated by Defendant Joseph M. 
Elles ("Elles") while serving as Executive Vice President of Sales at Carter's, Inc. 
("Carter's"), an Atlanta-based clothing marketer. 
2. From at least 2004 through March 2009, Elles fraudulently manipulated the 
amount 
of discounts Carter's granted Kohl's Corporation ("Kohl's"), its largest 

wholesale customer, in order to induce Kohl's to purchase greater quantities of 
Carter's products. 
.-.111!"­
3. These discounts-typically known in the clothing industry as 
"accommodations"-were intended to help Kohl's defray costs related to 
inventory clearance and sales promotions, and to allow Kohl's to achieve a desired 
profit margin on its sales 
of goods purchased from Carter's. 
4. Elles-unbeknownst to Carter's accounting personnel-granted Kohl's 
quarterly accommodations in excess 
of the amount he was budgeted to give, in 
exchange for Kohl's purchasing increased amounts of Carter's goods. To conceal 
these additional accommodations from Carter's accounting personnel, Elles 
obtained from Kohl's an agreement to defer taking those accommodations, i.e., 
deducting them from invoice payments, until later quarters. 
5. To further conceal his actions, Elles directed his assistant to create false 
accommodation tracking sheets for Carter's accounting department that 
misrepresented the timing 
of when the accommodations were granted. 
6. Elles signed quarterly and annual internal memos to Carter's Chief 
Financial Officer ("CFO") falsely underreporting the magnitude 
of outstanding 
2
 

accommodations granted to Kohl's. Elles engaged in these actions even though, at 
least as early as 2003, he had been clearly instructed that deferring 
accommodations in this manner was improper, caused misstatements in Carter's 
financial reports, and was "illegal." 
7. Accounting rules required the accommodations to be recorded as an expense 
ofthe period in which the related sale was recognized. By arranging for Kohl's to 
delay taking those accommodations and providing false information to Carter's 
accounting personnel, Elles misrepresented to Carter's accounting personnel that 
the accommodations were an expense 
of the later period in which the 
accommodation was deducted by Kohl's from payments to Carter's, rather than an 
expense 
of the period when the sale was actually recognized by Carter's. 
8. Thus, during Elles' scheme, Carter's accommodation expense in certain 
quarters was understated and its income for the corresponding quarter was 
.... 
overstated. 
9. During the course of his misconduct, between May 2005 and March 2009, 
Elles exercised options and sold 200,814 shares of Carter's stock, for a profit 
before tax 
of approximately $4,739,862. 
3 

VIOLATIONS
 
10. Elles has engaged and, unless restrained and enjoined by this Court, will 
continue to engage in acts and practices that constitute and will constitute 
violations 
of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 
U.S.C. § 77 q(a)] and Sections 10(b) and 13(b)(5) ofthe Securities Exchange Act 
of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5 
and 13b2-1 thereunder [17 C.F.R. §§ 240.10b-5 and 240.13b2-1]. 
11. Additionally, Elles has engaged, and unless restrained and enjoined by the 
Court, will continue to engage in acts and practices that aid and abet violations 
of 
Sections 13(a) and 13(b)(2)(A) ofthe Exchange Act [15 U.S.C. §§ 78m(a) and 
78m(b)(2)(A)] and Rules 12b-20, 
13a-l, 13a-ll and 13a-13 thereunder [17 C.F.R. 
§§ 240.12-20, 240.13a-l, 240.13a-ll, and 240.13a-13]. 
JURISDICTION AND VENUE 
12. The Commission brings this action pursuant to Sections 20 and 22 ofthe 
Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21(d) and 21(e) 
ofthe 
Exchange Act 
[15 U.S.C. §§ 78u(d) and 78u(e)] to enjoin Elles from engaging in 
the transactions, acts, practices, and courses ofbusiness alleged in this complaint, 
4
 

andtransactions, acts,practices,andcourses ofbusinessofsimilarpurportand 
object, for civil penalties and for other equitable relief. 
13. This Court has jurisdiction over this action pursuant to Section 22 of the 
Securities Act [15 U.S.C. 
§ 77v] and Sections 21(d), 21(e), and 27 of the 
Exchange Act 
[15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. 
14. Elles, directly and indirectly, made use ofthe mails, the means and 
instruments of transportation and communication in interstate commerce and the 
means and instrumentalities 
of interstate commerce in connection with the 
transactions, acts, practices, and courses of business alleged in this complaint. 
15. Certain of the transactions, acts, practices, and courses of business 
constituting violations 
ofthe Securities Act and the Exchange Act occurred in the 
Northern District 
of Georgia. In addition, Carter's is based in the Northern 
District of Georgia. 
16. Elles, unless restrained and enjoined by this Court, will continue to engage 
in the transactions, acts, practices, and courses of business alleged in this 
complaint, and in transactions, acts, practices, and courses 
of business of similar 
purport and object. 
5 

THE DEFENDANT
 
17. Joseph M. Elles, 55 and a resident of Las Vegas, Nevada, was hired by 
Carter's in 1996 as Vice President ofRegional Accounts and, thereafter, promoted 
in 1997 to Executive Vice President 
of Sales-a po~ition he held until his 
termination from Carter's in March 2009. As Executive Vice President of Sales, 
Elles supervised all 
of the individual Vice Presidents who managed Carter's retail 
and mass channel customer accounts, and reported directly to Carter's President. 
Elles was terminated from the Company as 
of March 2009. 
RELATED ENTITIES 
18. Carter's, Inc. (NYSE: CRI) is  an Atlanta-based public issuer and the self­
proclaimed "largest branded marketer in the U.S. of apparel exclusively for babies 
and young children." The Company sells clothing under the 
Carter's and Osh 
Kosh 
brand names, as well as private label apparel, through its own stores and 
oth-er retailers. In fiscal 2009, the Company generated net income of$116 million 
on sales of$1.59 billion. Since October 2003, Carter's common stock has been 
registered with the Commission under Section 12(b) ofthe Exchange Act and 
listed on the NYSE. 
6 

19. Kohl's Corporation (NYSE: KSS) is a public issuer and retailer based in 
Wisconsin. Kohl's operates over a thousand department stores in 49 states. At the 
#--. 
time ofElles' misconduct, Kohl's was Carter's largest wholesale customer in 
terms 
ofvolume ofpurchases. 
THE FRAUDULENT SCHEME 
A. Background 
20. As a standard business practice, Carter's gave certain customers discounts 
off invoices to help those customers defray costs related to inventory clearance 
and sales promotions and to allow customers 
to achieve a desired profit margin on 
their subsequent resales 
of Carter's products. 
21. The granting 
of such accommodations was a common arrangement in the 
clothing industry, and worked as follows. Once an accommodation was agreed 
upon-typically at or near the end of a period-the customer then deducted the 
accommodation amount from its subsequent payments 
to Carter's. 
22. From an accounting standpoint, an accommodation essentially functions as 
an expense that reduces the revenue otherwise realized by Carter's from the sale to 
which the accommodation relates. 
7 

23. From at least 2004 until March 2009, Elles negotiated Kohl's purchases 
from Carter's and the corresponding amount 
of quarterly accommodations that 
Carter's would give to Kohl's. Elles was the only Carter's employee involved in 
the negotiations. 
24. Elles made sure that all communications with Kohl's ran directly through 
him or his assistant and were made solely at his instruction and with his approval. 
25. Elles made it clear to his assistant that information about the Kohl's account 
was not to be shared with other Carter's employees without his approval. 
B. Carter's Accounting for Accommodations 
26. Under the matching principle of accounting, an expense should be 
recognized when incurred and in the same period as the revenue associated with 
that expense 
is recognized. 
27. Unlike sales, which can typically be verified by purchase orders and 
shipping confirmations, accommodations Carter's afforded its customers were 
oftentimes negotiated amounts that were not finalized until just before or even 
after the last day 
of a fiscal period. This timing is  a result of the fact that the 
8
 

appropriate amount of accommodations frequently could not be known until the 
customer sold Carter's products to the end consumer. 
28. At Carter's, the total accommodations to be given to Kohl's for any given 
period was never finalized until after the last day 
of each of Carter's fiscal periods, 
but before Carter's closed its accounting books for that period. 
29. Carter's accounting department monitored and booked accommodations 
primarily by using information and documents obtained from Carter's sales 
department. 
30. Specifically, when an accommodation was negotiated and granted to Kohl's, 
Elles' assistant filled out an Internal Authorization Form (or "lAP") which set 
forth the details 
of each accommodation, including the customer, the amount, the 
date the form was processed, and the apparel category, budget year and selling 
season to which it related. 
31. This form was then forwarded to Carter's Manager 
of Strategic Planning 
("Manager"), who was responsible for managing the company-wide budget for 
accommodations and tracking any changes therein. After being prepared by his 
9
 

assistant, Elles signed each IAF for Kohl's and arranged for it to be sent to 
Carter's accounting department. 
32. When a customer actually took an accommodation by deducting it from 
payment to Carter's, Carter's accounting personnel would check to see 
if they had 
a matching IAF on file. 
If so, they then cleared the residual charge from the 
customer's account receivable. 
33. 
If there were no matching IAFs on file, accounting personnel would contact 
the Manager or Elles' assistant 
to ask whether the accommodation was authorized 
and, 
if so, the accounting department would request the corresponding IAF. 
Whenever these individuals received such an inquiry, they would go directly to 
Elles and relay Elles' response back to accounting. 
c. Elles' Hidden Accommodations 
34. Unbeknownst to Carter's accounting personnel and senior management, 
since at least 2004 through his departure from Carter's in March 2009, Elles had 
been secretly granting excess accommodations to Kohl's and affirmatively 
concealing those excess accommodations from Carter's accounting personnel. 
10
 

35. Elles extended accommodations to Kohl's above and beyond what he was 
budgeted to give, and arranged for Kohl's to delay taking those accommodations 
for a sufficient amount 
of time such that each accommodation could be 
mischaracterized to Carter's accounting department as an expense 
of the later 
period in which it was taken, rather than an expense 
of the earlier period in which 
the sale was made. 
36. Over the course 
of the fraud, the accommodations to Kohl's that Elles 
secretly deferred to subsequent years grew as follows: 
Approximate Amount of Kohl's 
Carter's 
accommodations secretly deferred from 
fiscal year 
prior year into this year 
2004 
$3,073,000
 
2005 
$3,784,000
 
2006 
$4,404,000
 
2007 
$12,968,000
 
2008 
$18,927,000
 
-2009 
$18,400,000 
37. Whenever Elles and Kohl's negotiated an accommodation, they also agreed 
on how long Kohl's would wait to take the accommodation. The length 
ofthe 
deferral was then documented in an email confirming the accommodations to be 
taken and 
the period's sales to which the accommodations actually related. 
11 

D. Falsified IAFs 
38. Elles hid his scheme by generating, on a delayed basis, falsified lAPs. 
These falsified lAPs led Carter's accounting department to improperly recognize 
each accommodation in a later period. 
39. For each deferred accommodation, Elles typically told his assistant to wait 
to generate the corresponding lAP until about a week before Kohl's was scheduled 
to take the accommodation in the later quarter. 
40. Elles further told his assistant 
to complete the lAP by falsely filling in the 
line items denoted, "BUDGET YEAR" and "SEASON/YEAR," with the dates, 
respectively, that corresponded to the agreed upon deferral date, rather than the 
date 
of the sales to which the accommodation related. These two fields in the lAP 
were used by the accounting department to match the accommodation to the 
appropriate period's sales. 
41. By completing the IAFs using false dates, i.e., dates consistent with the 
agreed upon deferral date rather than the period 
of the sales to which each 
accommodation actually related, Elles tricked Carter's accounting department into 
recognizing each accommodation in a later period. In effect, this allowed Elles to 
12
 

"borrow" accommodations budgeted for future periods and grant them to Kohl's in 
earlier periods. 
E. Elles Lies to Carter's Personnel 
42. In addition to falsifying lAPs, Elles told outright lies to Carter's senior 
officers and accounting personnel when questioned about certain discounts. 
43. In late March 2007, near the end 
of the first quarter of Carter's fiscal year, 
Kohl's deducted $5.75 million against a payment to Carter's. Elles knew that this 
deduction represented an accommodation that was entirely related to goods 
shipped and sold in fiscal 2006, but that Kohl's had agreed to defer taking this 
accommodation until fiscal 2007. 
44. Nevertheless, when questioned about this deduction, Elles told the Manager 
that the $5.75 million accommodation had been deducted in error and that "Kohl's 
[was] going to repay [the amount]." 
45. The next day, Elles changed his story. Specifically, he told the Manager 
that the amounts had not been taken in error, and instead Kohl's had merely 
included incorrect date information with the payment. 
13
 

46. Elles then had his contact at Kohl's send Elles an email reiterating that 
explanation, which Elles then forwarded to the Manager knowing that he would in 
tum provide the email to Carter's accounting department. 
47. Elles took two additional steps to further bolster his falsehood. First, he 
directed his assistant to create fraudulent IAFs to confirm the explanation he had 
given. Specifically, he had his assistant create and give to accounting a series 
of 
falsified IAFs that set forth accommodation amounts totaling $5,750,000. 
48. Second, Elles repeatedly represented in contemporaneous meetings with 
senior Carter's personnel that he had authorized Kohl's taking 
of the $5.75 million 
accommodation because Kohl's had "asked [him] for a favor" and that Kohl's had 
wanted to take the accommodation amount early in 2007 for its 
own reasons. 
49. On each ofthese occasions, Elles falsely told his colleagues that he and 
Kohl's had agreed in advance on an annual sales plan for Kohl's and the level of 
accommodations that Carter's would grant in support of those sales, and Kohl's 
simply wanted to take the deductions earlier in the year. 
14
 

50. Moreover, when specifically asked by Carter's senior management whether 
any portion 
of the $5.75 million spike in accommodations related to fiscal 2006, 
Elles said "no." 
51. As a result 
of the concerns generated by Kohl's $5.75 million 
accommodation deduction in March 2007 and Elles' explanation for why it was 
taken, Carter's required that Elles obtain from Kohl's a representation letter 
confirming the agreement that Elles claimed existed between Carter's and Kohl's 
on the total amount 
of accommodations Carter's would allow Kohl's to deduct for 
the entire year. 
52. The representation letters were written by accounting personnel 
using­
unbeknownst to them-false information provided by Elles. In April 2007 and 
again in July 2008, Elles obtained 
Kohl's signature on such representation letters. 
Both letters documented the aforementioned false explanation by Elles including 
the agreements Elles falsely claimed existed between Carter's and Kohl's about 
the accommodations, and concealed the fact that Elles had granted excess 
accommodations to Kohl's, which Kohl's had agreed 
to defer taking. 
15
 

53. From April 2007 through January 2008, Elles also provided his own false 
representation letters to Carter's accounting personnel. These letters also falsely 
described the amount and timing 
of accommodations due Kohl's and concealed 
from Carter's the excess accommodations Elles had granted. 
F. Impact of the Fraud 
54. On October 27,2009, following discovery ofElles' scheme, Carter's 
announced that it was delaying the issuance of its third quarter financial results in 
order to complete a review 
of its accounting for margin support provided to its 
wholesale customers. On the same day, the Company's stock price dropped 23.8% 
to a closing price 
of $21.66 from the previous day's closing price of $28.44. 
55. Shortly thereafter, on November 10,2009, Carter's announced in a Form 8­
K that management's review had "identified issues with respect to the timing of 
recognizing such margin support payments and the associated historical 
accounting treatment as a result 
of margin support commitments that were not 
disclosed to the Company's finance group." 
56. Carter's also announced that its Audit Committee, with the assistance 
of 
outside counsel, had begun a review ofmargin support payments more brmidly 
16
 

and an investigation into undisclosed margin support commitments and related 
matters. 
57. 
In the same Form 8-K, the Company also announced that as a result of the 
review, its previously issued financial statements for the fiscal years 2004 through 
2008 included in the Company's Forms 10-K, and for the fiscal quarters from 
September 
29,2007 through July 4,2009 included in the Company's Forms 10-Q, 
should no longer be relied upon and would be restated. On November 10, 2009, 
the 
Company's stock price dropped 9.1% to a closing price of$21.86 from the 
previous 
day's closing price of$24.04. 
58. Following an investigation by counsel for Carter's Audit Committee, 
Carter's filed amended forms 10-K and 10-Q 
on January 15,2010, restating its 
previously issued financial statements for the fiscal years ended January 3, 2009, 
December 29, 2007, December 
30,2006, December 31,2005 and January 1,2005, 
and quarterly reports for the periods ending July 4,2009, April 4, 2009, and 
September 
27,2008. On the same day, the Company's stock price dropped 2.9% 
to a closing price 
of $26.06 from the previous day's closing price of $26.85. 
17
 

59. Between the first quarter of Carter's fiscal year 2006 and the third quarter of 
Carter's fiscal year 2008, Elles' misconduct caused the Company to overstate the 
quarterly net income, as reported in Carter's forms 10-Q, from between 5% to 
as 
much as 19.1%. 
G. Elles' Stock Sales 
60. While in possession of, and based upon, material non-public information 
that Carter's reported earnings were overstated as a result 
of his scheme, Elles 
realized sizeable gains from sales ofCarter's stock. Specifically, 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. 
61. Also, between February 2007 and February 2009, Elles realized a profit 
before tax 
of approximately $116,260 from the release of 6,000 shares of 
previously awarded restricted stock. 
62. Each 
ofthe aforementioned stock sales occurred prior to any of Carter's 
disclosures related to the fraud. The Company's stock price fell after each 
18
 

disclosure, ranging from a decline of23.8% after one disclosure to a decline of 
2.9% after a subsequent disclosure. 
ELLES' SCIENTER 
63. Elles understood the impact of his actions on Carter's financial reporting. 
64. For instance, in a March 13,2003 memo from Carter's President to EIles, 
Elles received a clear instruction that accommodations could not be deferred to 
later fiscal years. The memo stated that charging accommodations for one year in 
the following year could not be done because 
"illt is  illegal." 
65. Later, in a string 
ofemails sent on February 14,2007, Carter's CFO made 
clear to Elles the importance of matching accommodations to the sales to which 
they related. Specifically, the CFO wrote 
"must so you understand the importance 
of [a sub-certification Elles was being asked to sign], I cannot clear the 2006 _. 
results tomorrow with the audit committee if you are unable to represent we've 
provided an appropriate charge to earnings for accommodations," adding that "[i]f 
you're striking new deals for 2007 sales, we'll provide for those commitments in 
2007." 
19
 

66. The CFO further wrote: "[a]nything related to 2006, must be reflected in 
our 2006 results." Later, in the same string 
of emails, the CFO reiterated the 
import 
ofthe representation he was asking Elles to make as part ofthe sub-
certification process when he stated to Elles that "[y]ou're representing that we've 
appropriately provided for the amount [for accommodations] that relates to 2006 
sales." 
COUNT I-FRAUD 
Violations of Section 17(a)(1) of the Securities Act 
115 U.S.C. § 77g(a)OH 
67. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 
by reference. 
68. From at least 2004 through March 2009, Elles, in the offer and sale 
ofthe 
securities described herein, by the use 
of means and instruments of transportation 
and communication in interstate commerce and by use ofthe mails, directly and 
indirectly, employed devices, schemes and artifices to defraud purchasers 
ofsuch 
securities, all as more particularly described above. 
69. Elles knowingly, intentionally, and/or recklessly engaged in the 
aforementioned devices, schemes and artifices to defraud. 
20 

70. While engaging in the course of conduct described above, Elles acted with 
scienter, that is, with an intent to deceive, manipulate or defraud or with a severely 
reckless disregard for the truth. 
71. 
By reason ofthe foregoing, Elles, directly and indirectly, has violated and, 
unless enjoined, will continue to violate Section 17(a)(1) 
of the Securities Act [15 
U.S.C. § 77q(a)(1)]. 
COUNT II-FRAUD 
Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act 
115 U.S.C. §§ 77q(a)(2) and 77q(a)(3U 
72. Paragraphs 1 through 66 are hereby realleged and are incorporated herein by 
reference. 
73. From at least 2004 through March 2009, Elles, in the offer and sale 
of the 
securities described herein, by use of means and instruments of transportation and 
communication in interstate commerce and by use 
ofthe mails, directly and 
indirectly: 
a. obtained money and property by means of untrue statements of 
material fact and omissions to state material facts necessary in order to make 
21
 

the statements made, in light ofthe circumstances under which they were 
made, not misleading; and 
b. engaged in transactions, practices and courses 
of business 
which would and did operate as a fraud and deceit upon the purchasers 
of 
such securities, 
all as more particularly described above. 
74. 
By reason of the foregoing, Elles, directly and indirectly, has violated and, 
unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) 
ofthe 
Securities Act [15 U.S.C. 
§§ 77q(a)(2) and 77q(a)(3)]. 
COUNT Ill-FRAUD
 
Violations of Section lOeb) of the Exchange Act
 
115 U.S.C. § 78Ub)] and Rules lOb-5 thereunder (17 C.F.R. §§ 240.l0b-51
 
75. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 
by reference. 
76. From at least 2004 through March 2009, Elles, in connection with the 
purchase and sale 
of securities described herein, by the use of the means and 
instrumentalities 
of interstate commerce and by use of the mails, directly and 
indirectly: 
22 

a. employed devices, schemes, and artifices to defraud; 
b. made untrue statements 
of material facts and omitted to state material 
facts necessary 
in order to make the statements made, in light ofthe 
circumstances under which they were made, not misleading; and· 
c. engaged in acts, practices, and courses of business which would and 
did operate 
as a fraud and deceit upon the purchasers of such securities, 
all as more particularly described above. 
77. Elles knowingly, intentionally, and/or recklessly engaged in the 
aforementioned devices, schemes and artifices to defraud, made untrue statements 
of material facts and omitted to state material facts, and engaged in fraudulent acts, 
practices and courses of business. In engaging in such conduct, Elles acted with 
scienter, that is, with an intent to deceive, manipulate or defraud or with a severely 
reckless disregard for the truth. 
78. By reason 
of the foregoing, Elles, directly and indirectly, has violated and, 
unless enjoined, will continue to violate Section lOeb) of the Exchange Act [15 
U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.l0b-5]. 
23
 

COUNT IV-FRAUD
 
Violations 
of Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and 
Rule 13b2-1 thereunder (l7 C.F.R. § 240.13b2-11 
79. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 
by reference. 
80. From at least 2004 through March 2009, Elles knowingly circumvented 
Carter's system 
ofinternal controls, knowingly falsified the books, records and/or 
accounts of Carter's, and knowingly caused to be falsified Carter's books, records 
and/or accounts. 
81. In engaging in such conduct, Elles acted with scienter, that is, with an intent 
to deceive, manipulate or defraud or with a severely reckless disregard for the truth. 
82. By reason 
ofthe foregoing, Elles, directly and indirectly, has violated and, 
unless enjoined, will continue to violate Section 13(b)(5) 
of the Exchange Act [15 
u.S.C. § 78m(b)(5)] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1]. 
24
 

COUNT V-AIDING AND ABETTING REPORTING PROVISIONS 
Aiding 
and Abetting Carter's Violations of Section 13(a) of the Exchange Act 
[15 U.S.C. 
§ 78m(a)] and Rules 12b-20, 13a-l, 13a-ll and 13a-13 thereunder 
J17 C.F.R. §§ 240.12b-20, 240.13a-l, 240.13a-ll and 240.13a-131 
83. Paragraphs 1 through 66 are hereby realleged and are incorporated herein by 
reference. 
84. From at least 2004 through March 2009, Elles aided and abetted Carter's 
violations 
of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 
12b-20, 13a-1, 13a-ll and 13a-13 thereunder [17 C.F.R. §§ 240.12-20, 240.13a-1, 
240.13a-11, and 240.13a-13]. 
85. The underlying violations occurred when Carter's filed periodic reports that 
contained financial statements that were not prepared in conformity with GAAP 
and contained material misstatements. 
86. Through the conduct described above, Elles aided and abetted and, unless 
enjoined, will continue to aid and abet violations 
of Section 13(a) of the Exchange 
Act and Rules 12b-20, 13a-1, 
13a-ll and 13a-13 thereunder. 
25
 

COUNT VI-AIDING AND ABETTING BOOKS
 
AND RECORDS PROVISIONS
 
Aiding and Abetting Carter's Violations 
of
 
Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(All .
 
87. Paragraphs. 1 through 66 are hereby reaIleged and are incorporated herein by 
reference. 
88. From at  least 2004 through March 2009, EIles aided and abetted Carter's 
violations 
of Section 13(b)(2)(A) ofthe Exchange Act [15 U.S.C. § 
78m(b)(2)(A)], which occurred when Carter's, as an issuer 
of securities, failed to 
make and keep accounting books, records and accounts which accurately and 
fairly reflected its transactions and the dispositions 
of its assets. 
89. Through the conduct described above, Elles aided and abetted and, unless 
restrained and enjoined, will continue to aid and abet violations 
of Section 
13(b)(2)(A) 
of the Exchange Act. 
26
 

PRAYER FOR RELIEF
 
WHEREFORE, Plaintiff Commission respectfully prays for: 
I. 
Findings of fact and conclusions oflaw pursuant to Rule 52 of the Federal 
.~. 
Rules of Civil Procedure, finding that Elles committed the violations alleged herein. 
II. 
A permanent injunction enjoining Elles, his agents, servants, employees, and 
attorneys from violating, directly or indirectly, Section 17(a) 
of the Securities Act 
[15 U.S.C. § 77q(a)] and Sections 10(b) and 13(b)(5) 
of the Exchange Act [15 
U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5 and 13b2-1 thereunder [17 
C.F.R. §§ 240.10b-5 and 240.13b2-1], and enjoining Elles, his agents, servants, 
employees, and attorneys, pursuant to Section 20(e) 
ofthe Exchange Act, from 
aiding and abetting violations 
of Sections 13(a) and 13(b)(2)(A) of the Exchange 
Act [15 U.S.C. 
§§ 78m(a) and 78m(b)(2)(A)] and Rules 12b-20, 13a-1, 13a-11 and 
13a-13 thereunder [17 C.F.R. 
§§ 240.12-20, 240.13a-l, 240.13a-11, and 240.13a­
13]. 
27
 

III. 
An order requiring the disgorgement by Elles of all ill-gotten gains or unjust 
enrichment with prejudgment interest, to effect the remedial purposes 
of the federal 
securities laws. 
IV. 
An order pursuantto Section 20(d) ofthe Securities Act [15 U.S.C. § 77t(d)] 
and Section 21(d)(3) 
ofthe Exchange Act [15 U.S.C. § 78u(d)(3)] imposing civil 
penalties against Elles. 
V. 
An order pursuant to Section 20(e) of the Securities Act and Section 
21 (d)(2) ofthe Exchange Act barring Elles from acting as an officer or director of 
any issuer whose securities are registered with the Commission pursuant to 
Section 12 
of the Exchange Act or which is required to file reports with the 
Commission pursuant to Section 15(d) 
of the Exchange Act. 
28
 

VI. 
Such other and further relief as this Court may deem just, equitable, and 
appropriate in connection with the enforcement 
of the federal securities laws and for 
the protection 
of investors. 
Dated: December 20,2010 
Respectfully submitted, 
~~~ 
M. Graham Loomis 
Regional Trial Counsel 
Georgia Bar No. 457868 
Email: [email protected] 
Kristin B. Wilhelm 
Senior Trial Counsel 
Georgia 
Bar No. 759054 
Email: [email protected] 
COUNSEL FOR PLAINTIFF 
Securities and Exchange 
Commission 
3475 Lenox Road, N.E. 
Suite 500 
Atlanta, Georgia 30326-1232 
Tel: (404) 842-7600 
Fax: (404) 842-7666 
29
 

FILED IN CLERK'S OFFICE 
U.S.D.C. Atlanta 

DEC 202010 

IN THE UNITED STATES DISTRICT COURT JAME 
FOR THE NORTHERN DISTRICT OF GEORGIA ~ 

ATLANTA DIVISION 

SECURITIES AND EXCHANGE 
COMMISSION, 

v. 
Plaintiff, Civil Action No. 

1: 10- Cv - 4118 
JOSEPH M. ELLES, 

Defendant. 

COMPLAINT FOR INJUNCTIVE RELIEF 

Plaintiff, Securities and Exchange Commission (the "Commission"), files its 

complaint and alleges that: 

OVERVIEW 

1. This matter involves financial fraud perpetrated by Defendant Joseph M. 

Elles ("Elles") while serving as Executive Vice President of Sales at Carter's, Inc. 

("Carter's"), an Atlanta-based clothing marketer. 

2. From at least 2004 through March 2009, Elles fraudulently manipulated the 

amount of discounts Carter's granted Kohl's Corporation ("Kohl's"), its largest 



wholesale customer, in order to induce Kohl's to purchase greater quantities of 

Carter's products. 

.-.111!"­

3. These discounts-typically known in the clothing industry as 

"accommodations"-were intended to help Kohl's defray costs related to 

inventory clearance and sales promotions, and to allow Kohl's to achieve a desired 

profit margin on its sales of goods purchased from Carter's. 

4. Elles-unbeknownst to Carter's accounting personnel-granted Kohl's 

quarterly accommodations in excess of the amount he was budgeted to give, in 

exchange for Kohl's purchasing increased amounts of Carter's goods. To conceal 

these additional accommodations from Carter's accounting personnel, Elles 

obtained from Kohl's an agreement to defer taking those accommodations, i.e., 

deducting them from invoice payments, until later quarters. 

5. To further conceal his actions, Elles directed his assistant to create false 

accommodation tracking sheets for Carter's accounting department that 

misrepresented the timing of when the accommodations were granted. 

6. Elles signed quarterly and annual internal memos to Carter's Chief 

Financial Officer ("CFO") falsely underreporting the magnitude of outstanding 

2
 



accommodations granted to Kohl's. Elles engaged in these actions even though, at 

least as early as 2003, he had been clearly instructed that deferring 

accommodations in this manner was improper, caused misstatements in Carter's 

financial reports, and was "illegal." 

7. Accounting rules required the accommodations to be recorded as an expense 

of the period in which the related sale was recognized. By arranging for Kohl's to 

delay taking those accommodations and providing false information to Carter's 

accounting personnel, Elles misrepresented to Carter's accounting personnel that 

the accommodations were an expense of the later period in which the 

accommodation was deducted by Kohl's from payments to Carter's, rather than an 

expense of the period when the sale was actually recognized by Carter's. 

8. Thus, during Elles' scheme, Carter's accommodation expense in certain 

quarters was understated and its income for the corresponding quarter was 

.... 
overstated. 

9. During the course of his misconduct, between May 2005 and March 2009, 

Elles exercised options and sold 200,814 shares of Carter's stock, for a profit 

before tax of approximately $4,739,862. 

3 



VIOLATIONS
 

10. Elles has engaged and, unless restrained and enjoined by this Court, will 

continue to engage in acts and practices that constitute and will constitute 

violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 

U.S.C. § 77 q(a)] and Sections 10(b) and 13(b)(5) of the Securities Exchange Act 

of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5 

and 13b2-1 thereunder [17 C.F.R. §§ 240.10b-5 and 240.13b2-1]. 

11. Additionally, Elles has engaged, and unless restrained and enjoined by the 

Court, will continue to engage in acts and practices that aid and abet violations of 

Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. §§ 78m(a) and 

78m(b)(2)(A)] and Rules 12b-20, 13a-l, 13a-ll and 13a-13 thereunder [17 C.F.R. 

§§ 240.12-20, 240.13a-l, 240.13a-ll, and 240.13a-13]. 

JURISDICTION AND VENUE 

12. The Commission brings this action pursuant to Sections 20 and 22 of the 

Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21(d) and 21(e) of the 

Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)] to enjoin Elles from engaging in 

the transactions, acts, practices, and courses of business alleged in this complaint, 

4
 



and transactions, acts, practices, and courses ofbusiness of similar purport and 

object, for civil penalties and for other equitable relief. 

13. This Court has jurisdiction over this action pursuant to Section 22 of the 

Securities Act [15 U.S.C. § 77v] and Sections 21(d), 21(e), and 27 of the 

Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. 

14. Elles, directly and indirectly, made use of the mails, the means and 

instruments of transportation and communication in interstate commerce and the 

means and instrumentalities of interstate commerce in connection with the 

transactions, acts, practices, and courses of business alleged in this complaint. 

15. Certain of the transactions, acts, practices, and courses of business 

constituting violations of the Securities Act and the Exchange Act occurred in the 

Northern District of Georgia. In addition, Carter's is based in the Northern 

District of Georgia. 

16. Elles, unless restrained and enjoined by this Court, will continue to engage 

in the transactions, acts, practices, and courses of business alleged in this 

complaint, and in transactions, acts, practices, and courses of business of similar 

purport and object. 

5 



THE DEFENDANT
 

17. Joseph M. Elles, 55 and a resident of Las Vegas, Nevada, was hired by 

Carter's in 1996 as Vice President ofRegional Accounts and, thereafter, promoted 

in 1997 to Executive Vice President of Sales-a po~ition he held until his 

termination from Carter's in March 2009. As Executive Vice President of Sales, 

Elles supervised all of the individual Vice Presidents who managed Carter's retail 

and mass channel customer accounts, and reported directly to Carter's President. 

Elles was terminated from the Company as of March 2009. 

RELATED ENTITIES 

18. Carter's, Inc. (NYSE: CRI) is an Atlanta-based public issuer and the self­

proclaimed "largest branded marketer in the U.S. of apparel exclusively for babies 

and young children." The Company sells clothing under the Carter's and Osh 

Kosh brand names, as well as private label apparel, through its own stores and 

oth-er retailers. In fiscal 2009, the Company generated net income of$116 million 

on sales of$1.59 billion. Since October 2003, Carter's common stock has been 

registered with the Commission under Section 12(b) of the Exchange Act and 

listed on the NYSE. 

6 



19. Kohl's Corporation (NYSE: KSS) is a public issuer and retailer based in 

Wisconsin. Kohl's operates over a thousand department stores in 49 states. At the 
#- - . 

time ofElles' misconduct, Kohl's was Carter's largest wholesale customer in 

terms ofvolume ofpurchases. 

THE FRAUDULENT SCHEME 

A. Background 

20. As a standard business practice, Carter's gave certain customers discounts 

off invoices to help those customers defray costs related to inventory clearance 

and sales promotions and to allow customers to achieve a desired profit margin on 

their subsequent resales of Carter's products. 

21. The granting of such accommodations was a common arrangement in the 

clothing industry, and worked as follows. Once an accommodation was agreed 

upon-typically at or near the end of a period-the customer then deducted the 

accommodation amount from its subsequent payments to Carter's. 

22. From an accounting standpoint, an accommodation essentially functions as 

an expense that reduces the revenue otherwise realized by Carter's from the sale to 

which the accommodation relates. 

7 



23. From at least 2004 until March 2009, Elles negotiated Kohl's purchases 

from Carter's and the corresponding amount of quarterly accommodations that 

Carter's would give to Kohl's. Elles was the only Carter's employee involved in 

the negotiations. 

24. Elles made sure that all communications with Kohl's ran directly through 

him or his assistant and were made solely at his instruction and with his approval. 

25. Elles made it clear to his assistant that information about the Kohl's account 

was not to be shared with other Carter's employees without his approval. 

B. Carter's Accounting for Accommodations 

26. Under the matching principle of accounting, an expense should be 

recognized when incurred and in the same period as the revenue associated with 

that expense is recognized. 

27. Unlike sales, which can typically be verified by purchase orders and 

shipping confirmations, accommodations Carter's afforded its customers were 

oftentimes negotiated amounts that were not finalized until just before or even 

after the last day of a fiscal period. This timing is a result of the fact that the 

8
 



appropriate amount of accommodations frequently could not be known until the 

customer sold Carter's products to the end consumer. 

28. At Carter's, the total accommodations to be given to Kohl's for any given 

period was never finalized until after the last day of each of Carter's fiscal periods, 

but before Carter's closed its accounting books for that period. 

29. Carter's accounting department monitored and booked accommodations 

primarily by using information and documents obtained from Carter's sales 

department. 

30. Specifically, when an accommodation was negotiated and granted to Kohl's, 

Elles' assistant filled out an Internal Authorization Form (or "lAP") which set 

forth the details of each accommodation, including the customer, the amount, the 

date the form was processed, and the apparel category, budget year and selling 

season to which it related. 

31. This form was then forwarded to Carter's Manager of Strategic Planning 

("Manager"), who was responsible for managing the company-wide budget for 

accommodations and tracking any changes therein. After being prepared by his 

9
 



assistant, Elles signed each IAF for Kohl's and arranged for it to be sent to 

Carter's accounting department. 

32. When a customer actually took an accommodation by deducting it from 

payment to Carter's, Carter's accounting personnel would check to see if they had 

a matching IAF on file. If so, they then cleared the residual charge from the 

customer's account receivable. 

33. If there were no matching IAFs on file, accounting personnel would contact 

the Manager or Elles' assistant to ask whether the accommodation was authorized 

and, if so, the accounting department would request the corresponding IAF. 

Whenever these individuals received such an inquiry, they would go directly to 

Elles and relay Elles' response back to accounting. 

c. Elles' Hidden Accommodations 

34. Unbeknownst to Carter's accounting personnel and senior management, 

since at least 2004 through his departure from Carter's in March 2009, Elles had 

been secretly granting excess accommodations to Kohl's and affirmatively 

concealing those excess accommodations from Carter's accounting personnel. 

10
 



35. Elles extended accommodations to Kohl's above and beyond what he was 

budgeted to give, and arranged for Kohl's to delay taking those accommodations 

for a sufficient amount of time such that each accommodation could be 

mischaracterized to Carter's accounting department as an expense of the later 

period in which it was taken, rather than an expense of the earlier period in which 

the sale was made. 

36. Over the course of the fraud, the accommodations to Kohl's that Elles 

secretly deferred to subsequent years grew as follows: 

Approximate Amount of Kohl's 
Carter's accommodations secretly deferred from 

fiscal year prior year into this year 

2004 $3,073,000
 
2005 $3,784,000
 
2006 $4,404,000
 
2007 $12,968,000
 
2008 $18,927,000
 

-2009 $18,400,000 

37. Whenever Elles and Kohl's negotiated an accommodation, they also agreed 

on how long Kohl's would wait to take the accommodation. The length of the 

deferral was then documented in an email confirming the accommodations to be 

taken and the period's sales to which the accommodations actually related. 

11 



D. Falsified IAFs 

38. Elles hid his scheme by generating, on a delayed basis, falsified lAPs. 

These falsified lAPs led Carter's accounting department to improperly recognize 

each accommodation in a later period. 

39. For each deferred accommodation, Elles typically told his assistant to wait 

to generate the corresponding lAP until about a week before Kohl's was scheduled 

to take the accommodation in the later quarter. 

40. Elles further told his assistant to complete the lAP by falsely filling in the 

line items denoted, "BUDGET YEAR" and "SEASON/YEAR," with the dates, 

respectively, that corresponded to the agreed upon deferral date, rather than the 

date of the sales to which the accommodation related. These two fields in the lAP 

were used by the accounting department to match the accommodation to the 

appropriate period's sales. 

41. By completing the IAFs using false dates, i.e., dates consistent with the 

agreed upon deferral date rather than the period of the sales to which each 

accommodation actually related, Elles tricked Carter's accounting department into 

recognizing each accommodation in a later period. In effect, this allowed Elles to 

12
 



"borrow" accommodations budgeted for future periods and grant them to Kohl's in 

earlier periods. 

E. Elles Lies to Carter's Personnel 

42. In addition to falsifying lAPs, Elles told outright lies to Carter's senior 

officers and accounting personnel when questioned about certain discounts. 

43. In late March 2007, near the end of the first quarter of Carter's fiscal year, 

Kohl's deducted $5.75 million against a payment to Carter's. Elles knew that this 

deduction represented an accommodation that was entirely related to goods 

shipped and sold in fiscal 2006, but that Kohl's had agreed to defer taking this 

accommodation until fiscal 2007. 

44. Nevertheless, when questioned about this deduction, Elles told the Manager 

that the $5.75 million accommodation had been deducted in error and that "Kohl's 

[was] going to repay [the amount]." 

45. The next day, Elles changed his story. Specifically, he told the Manager 

that the amounts had not been taken in error, and instead Kohl's had merely 

included incorrect date information with the payment. 

13
 



46. Elles then had his contact at Kohl's send Elles an email reiterating that 

explanation, which Elles then forwarded to the Manager knowing that he would in 

tum provide the email to Carter's accounting department. 

47. Elles took two additional steps to further bolster his falsehood. First, he 

directed his assistant to create fraudulent IAFs to confirm the explanation he had 

given. Specifically, he had his assistant create and give to accounting a series of 

falsified IAFs that set forth accommodation amounts totaling $5,750,000. 

48. Second, Elles repeatedly represented in contemporaneous meetings with 

senior Carter's personnel that he had authorized Kohl's taking of the $5.75 million 

accommodation because Kohl's had "asked [him] for a favor" and that Kohl's had 

wanted to take the accommodation amount early in 2007 for its own reasons. 

49. On each of these occasions, Elles falsely told his colleagues that he and 

Kohl's had agreed in advance on an annual sales plan for Kohl's and the level of 

accommodations that Carter's would grant in support of those sales, and Kohl's 

simply wanted to take the deductions earlier in the year. 

14
 



50. Moreover, when specifically asked by Carter's senior management whether 

any portion of the $5.75 million spike in accommodations related to fiscal 2006, 

Elles said "no." 

51. As a result of the concerns generated by Kohl's $5.75 million 

accommodation deduction in March 2007 and Elles' explanation for why it was 

taken, Carter's required that Elles obtain from Kohl's a representation letter 

confirming the agreement that Elles claimed existed between Carter's and Kohl's 

on the total amount of accommodations Carter's would allow Kohl's to deduct for 

the entire year. 

52. The representation letters were written by accounting personnel using­

unbeknownst to them-false information provided by Elles. In April 2007 and 

again in July 2008, Elles obtained Kohl's signature on such representation letters. 

Both letters documented the aforementioned false explanation by Elles including 

the agreements Elles falsely claimed existed between Carter's and Kohl's about 

the accommodations, and concealed the fact that Elles had granted excess 

accommodations to Kohl's, which Kohl's had agreed to defer taking. 

15
 



53. From April 2007 through January 2008, Elles also provided his own false 

representation letters to Carter's accounting personnel. These letters also falsely 

described the amount and timing of accommodations due Kohl's and concealed 

from Carter's the excess accommodations Elles had granted. 

F. Impact of the Fraud 

54. On October 27,2009, following discovery ofElles' scheme, Carter's 

announced that it was delaying the issuance of its third quarter financial results in 

order to complete a review of its accounting for margin support provided to its 

wholesale customers. On the same day, the Company's stock price dropped 23.8% 

to a closing price of $21.66 from the previous day's closing price of $28.44. 

55. Shortly thereafter, on November 10,2009, Carter's announced in a Form 8­

K that management's review had "identified issues with respect to the timing of 

recognizing such margin support payments and the associated historical 

accounting treatment as a result of margin support commitments that were not 

disclosed to the Company's finance group." 

56. Carter's also announced that its Audit Committee, with the assistance of 

outside counsel, had begun a review ofmargin support payments more brmidly 

16
 



and an investigation into undisclosed margin support commitments and related 

matters. 

57. In the same Form 8-K, the Company also announced that as a result of the 

review, its previously issued financial statements for the fiscal years 2004 through 

2008 included in the Company's Forms 10-K, and for the fiscal quarters from 

September 29,2007 through July 4,2009 included in the Company's Forms 10-Q, 

should no longer be relied upon and would be restated. On November 10, 2009, 

the Company's stock price dropped 9.1 % to a closing price of $21.86 from the 

previous day's closing price of$24.04. 

58. Following an investigation by counsel for Carter's Audit Committee, 

Carter's filed amended forms 10-K and 10-Q on January 15,2010, restating its 

previously issued financial statements for the fiscal years ended January 3, 2009, 

December 29, 2007, December 30,2006, December 31,2005 and January 1,2005, 

and quarterly reports for the periods ending July 4,2009, April 4, 2009, and 

September 27,2008. On the same day, the Company's stock price dropped 2.9% 

to a closing price of $26.06 from the previous day's closing price of $26.85. 

17
 



59. Between the first quarter of Carter's fiscal year 2006 and the third quarter of 

Carter's fiscal year 2008, Elles' misconduct caused the Company to overstate the 

quarterly net income, as reported in Carter's forms 10-Q, from between 5% to as 

much as 19.1%. 

G. Elles' Stock Sales 

60. While in possession of, and based upon, material non-public information 

that Carter's reported earnings were overstated as a result of his scheme, Elles 

realized sizeable gains from sales ofCarter's stock. Specifically, 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. 

61. Also, between February 2007 and February 2009, Elles realized a profit 

before tax of approximately $116,260 from the release of 6,000 shares of 

previously awarded restricted stock. 

62. Each of the aforementioned stock sales occurred prior to any of Carter's 

disclosures related to the fraud. The Company's stock price fell after each 

18
 



disclosure, ranging from a decline of23.8% after one disclosure to a decline of 

2.9% after a subsequent disclosure. 

ELLES' SCIENTER 

63. Elles understood the impact of his actions on Carter's financial reporting. 

64. For instance, in a March 13,2003 memo from Carter's President to EIles, 

Elles received a clear instruction that accommodations could not be deferred to 

later fiscal years. The memo stated that charging accommodations for one year in 

the following year could not be done because "illt is illegal." 

65. Later, in a string of emails sent on February 14,2007, Carter's CFO made 

clear to Elles the importance of matching accommodations to the sales to which 

they related. Specifically, the CFO wrote "must so you understand the importance 

of [a sub-certification Elles was being asked to sign], I cannot clear the 2006 _. 

results tomorrow with the audit committee if you are unable to represent we've 

provided an appropriate charge to earnings for accommodations," adding that "[i]f 

you're striking new deals for 2007 sales, we'll provide for those commitments in 

2007." 

19
 



66. The CFO further wrote: "[a]nything related to 2006, must be reflected in 

our 2006 results." Later, in the same string of emails, the CFO reiterated the 

import of the representation he was asking Elles to make as part of the sub-

certification process when he stated to Elles that "[y]ou're representing that we've 

appropriately provided for the amount [for accommodations] that relates to 2006 

sales." 

COUNT I-FRAUD 

Violations of Section 17(a)(1) of the Securities Act 
115 U.S.C. § 77g(a)OH 

67. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 

by reference. 

68. From at least 2004 through March 2009, Elles, in the offer and sale of the 

securities described herein, by the use of means and instruments of transportation 

and communication in interstate commerce and by use of the mails, directly and 

indirectly, employed devices, schemes and artifices to defraud purchasers of such 

securities, all as more particularly described above. 

69. Elles knowingly, intentionally, and/or recklessly engaged in the 

aforementioned devices, schemes and artifices to defraud. 

2070. While engaging in the course of conduct described above, Elles acted with 

scienter, that is, with an intent to deceive, manipulate or defraud or with a severely 

reckless disregard for the truth. 

71. By reason of the foregoing, Elles, directly and indirectly, has violated and, 

unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act [15 

U.S.C. § 77q(a)(1)]. 

COUNT II-FRAUD 

Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act 
115 U.S.C. §§ 77q(a)(2) and 77q(a)(3U 

72. Paragraphs 1 through 66 are hereby realleged and are incorporated herein by 

reference. 

73. From at least 2004 through March 2009, Elles, in the offer and sale of the 

securities described herein, by use of means and instruments of transportation and 

communication in interstate commerce and by use of the mails, directly and 

indirectly: 

a. obtained money and property by means of untrue statements of 

material fact and omissions to state material facts necessary in order to make 

21
 



the statements made, in light of the circumstances under which they were 

made, not misleading; and 

b. engaged in transactions, practices and courses of business 

which would and did operate as a fraud and deceit upon the purchasers of 

such securities, 

all as more particularly described above. 

74. By reason of the foregoing, Elles, directly and indirectly, has violated and, 

unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) of the 

Securities Act [15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)]. 

COUNT Ill-FRAUD
 

Violations of Section lOeb) of the Exchange Act
 
115 U.S.C. § 78Ub)] and Rules lOb-5 thereunder (17 C.F.R. §§ 240.l0b-51
 

75. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 

by reference. 

76. From at least 2004 through March 2009, Elles, in connection with the 

purchase and sale of securities described herein, by the use of the means and 

instrumentalities of interstate commerce and by use of the mails, directly and 

indirectly: 

22 



a. employed devices, schemes, and artifices to defraud; 

b. made untrue statements of material facts and omitted to state material 

facts necessary in order to make the statements made, in light of the 

circumstances under which they were made, not misleading; and· 

c. engaged in acts, practices, and courses of business which would and 

did operate as a fraud and deceit upon the purchasers of such securities, 

all as more particularly described above. 

77. Elles knowingly, intentionally, and/or recklessly engaged in the 

aforementioned devices, schemes and artifices to defraud, made untrue statements 

of material facts and omitted to state material facts, and engaged in fraudulent acts, 

practices and courses of business. In engaging in such conduct, Elles acted with 

scienter, that is, with an intent to deceive, manipulate or defraud or with a severely 

reckless disregard for the truth. 

78. By reason of the foregoing, Elles, directly and indirectly, has violated and, 

unless enjoined, will continue to violate Section lOeb) of the Exchange Act [15 

U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.l0b-5]. 

23
 



COUNT IV-FRAUD
 

Violations of Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and 
Rule 13b2-1 thereunder (l7 C.F.R. § 240.13b2-11 

79. Paragraphs 1 through 66 are hereby re-alleged and are incorporated herein 

by reference. 

80. From at least 2004 through March 2009, Elles knowingly circumvented 

Carter's system of internal controls, knowingly falsified the books, records and/or 

accounts of Carter's, and knowingly caused to be falsified Carter's books, records 

and/or accounts. 

81. In engaging in such conduct, Elles acted with scienter, that is, with an intent 

to deceive, manipulate or defraud or with a severely reckless disregard for the truth. 

82. By reason of the foregoing, Elles, directly and indirectly, has violated and, 

unless enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 

u.S.C. § 78m(b)(5)] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1]. 

24
 



COUNT V-AIDING AND ABETTING REPORTING PROVISIONS 

Aiding and Abetting Carter's Violations of Section 13(a) of the Exchange Act 
[15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-l, 13a-ll and 13a-13 thereunder 

J17 C.F.R. §§ 240.12b-20, 240.13a-l, 240.13a-ll and 240.13a-131 

83. Paragraphs 1 through 66 are hereby realleged and are incorporated herein by 

reference. 

84. From at least 2004 through March 2009, Elles aided and abetted Carter's 

violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 

12b-20, 13a-1, 13a-ll and 13a-13 thereunder [17 C.F.R. §§ 240.12-20, 240.13a-1, 

240.13a-11, and 240.13a-13]. 

85. The underlying violations occurred when Carter's filed periodic reports that 

contained financial statements that were not prepared in conformity with GAAP 

and contained material misstatements. 

86. Through the conduct described above, Elles aided and abetted and, unless 

enjoined, will continue to aid and abet violations of Section 13(a) of the Exchange 

Act and Rules 12b-20, 13a-1, 13a-ll and 13a-13 thereunder. 

25
 



COUNT VI-AIDING AND ABETTING BOOKS
 
AND RECORDS PROVISIONS
 

Aiding and Abetting Carter's Violations of
 
Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(All .
 

87. Paragraphs. 1 through 66 are hereby reaIleged and are incorporated herein by 

reference. 

88. From at least 2004 through March 2009, EIles aided and abetted Carter's 

violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 

78m(b)(2)(A)], which occurred when Carter's, as an issuer of securities, failed to 

make and keep accounting books, records and accounts which accurately and 

fairly reflected its transactions and the dispositions of its assets. 

89. Through the conduct described above, Elles aided and abetted and, unless 

restrained and enjoined, will continue to aid and abet violations of Section 

13(b)(2)(A) of the Exchange Act. 

26
 



PRAYER FOR RELIEF
 

WHEREFORE, Plaintiff Commission respectfully prays for: 

I. 

Findings of fact and conclusions oflaw pursuant to Rule 52 of the Federal 
.~. 

Rules of Civil Procedure, finding that Elles committed the violations alleged herein. 

II. 

A permanent injunction enjoining Elles, his agents, servants, employees, and 

attorneys from violating, directly or indirectly, Section 17(a) of the Securities Act 

[15 U.S.C. § 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 

U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5 and 13b2-1 thereunder [17 

C.F.R. §§ 240.10b-5 and 240.13b2-1], and enjoining Elles, his agents, servants, 

employees, and attorneys, pursuant to Section 20(e) ofthe Exchange Act, from 

aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange 

Act [15 U.S.C. §§ 78m(a) and 78m(b)(2)(A)] and Rules 12b-20, 13a-1, 13a-11 and 

13a-13 thereunder [17 C.F.R. §§ 240.12-20, 240.13a-l, 240.13a-11, and 240.13a­

13]. 

27
 



III. 

An order requiring the disgorgement by Elles of all ill-gotten gains or unjust 

enrichment with prejudgment interest, to effect the remedial purposes of the federal 

securities laws. 

IV. 

An order pursuantto Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] 

and Section 21(d)(3) ofthe Exchange Act [15 U.S.C. § 78u(d)(3)] imposing civil 

penalties against Elles. 

V. 

An order pursuant to Section 20(e) of the Securities Act and Section 

21 (d)(2) of the Exchange Act barring Elles from acting as an officer or director of 

any issuer whose securities are registered with the Commission pursuant to 

Section 12 of the Exchange Act or which is required to file reports with the 

Commission pursuant to Section 15(d) of the Exchange Act. 

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VI. 

Such other and further relief as this Court may deem just, equitable, and 

appropriate in connection with the enforcement of the federal securities laws and for 

the protection of investors. 

Dated: December 20,2010 

Respectfully submitted, 

~~~ 
M. Graham Loomis 
Regional Trial Counsel 
Georgia Bar No. 457868 
Email: [email protected] 

Kristin B. Wilhelm 
Senior Trial Counsel 
Georgia Bar No. 759054 
Email: [email protected] 

COUNSEL FOR PLAINTIFF 
Securities and Exchange 
Commission 
3475 Lenox Road, N.E. 
Suite 500 
Atlanta, Georgia 30326-1232 
Tel: (404) 842-7600 
Fax: (404) 842-7666 

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