SEC Charges Former Carter's Executive With Fraud and Insider Trading; 2010-252; Dec. 20, 2010
summary
Joseph M. Elles, former Executive Vice President of Sales at Carter’s Inc., committed financial fraud by manipulating wholesale discounts to inflate net income and engaged in insider trading, profiting $4.74 million from stock sales before the fraud was disclosed, leading to SEC charges seeking disgorgement, penalties, and an officer/director bar.
paragraph
The SEC charged Joseph M. Elles with fraud and insider trading for manipulating discount agreements with a major wholesale customer from 2004 to 2009, causing material misstatements in Carter’s financial reports by concealing the true timing and amount of discounts through falsified documents. Elles realized approximately $4,739,862 in pre-tax profits by exercising stock options and selling Carter’s shares before the fraud was publicly disclosed on October 27, 2009, after which the stock price dropped 23.8%. The SEC alleges violations of Section 17(a) of the Securities Act and Sections 10(b), 13(b)(5), and related rules of the Exchange Act, seeking permanent injunctive relief, disgorgement with interest, financial penalties, and an officer and director bar, while Carter’s avoided charges under a landmark non-prosecution agreement for its cooperation and remediation.
narrative
Joseph M. Elles, former Executive Vice President of Sales at Carter’s Inc., orchestrated a multi-year fraud from 2004 to 2009 by artificially inflating the company’s net income through fraudulent manipulation of discounts granted to a major wholesale customer, concealing the true timing and amount of those discounts via falsified documents submitted to accounting personnel. This misconduct led to material misstatements in Carter’s financial reports across several reporting periods, misleading investors and distorting the company’s earnings performance. Taking advantage of the non-public, artificially inflated financial results, Elles exercised stock options and sold resulting shares between May 2005 and March 2009, realizing approximately $4,739,862 in pre-tax profits before the fraud was disclosed on October 27, 2009, triggering a 23.8% drop in Carter’s stock price. Carter’s avoided SEC charges by promptly self-reporting the misconduct, conducting a thorough internal investigation, fully cooperating with the SEC, and implementing extensive remedial actions, earning the agency’s first non-prosecution agreement under its new cooperation initiative. The SEC’s complaint alleges Elles violated Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and related rules of the Securities Exchange Act of 1934, and aided and abetted violations of reporting obligations. The agency is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles. The investigation, supported by the FBI and the U.S. Attorney’s Office for the Northern District of Georgia, remains ongoing.
Classified financial-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 67% / precision 23%. detection rule →
Statutes
Section 17(a) of the Securities ActSections 10(b) and 13(b)(5) of the Securities Exchange ActSections 10(b) and 13(b)(5) of the Securities Exchange ActSections 10(b) and 13(b)(5) of the Securities Exchange ActSections 13(a) and 13(b)(2)(A) of the Securities Exchange ActSections 13(a) and 13(b)(2)(A) of the Securities Exchange Act
Parties
affected periodscarter's inc.joseph m. ellesrobert khuzamisec atlanta regional officesec division of enforcementSecurities and Exchange CommissionWilliam P. Hicks
Keywords
carter'ssecnon-prosecution agreementinsider tradingellescarter's executivefraud insidernon-prosecutioninvestigationfraudfinancialmisconductagreementsec'senforcement
Exhibits & Attached Documents (2)
Extracted insights
Dollar amounts 1
- $4.74M $4,739,862 $1M–$10M
Entities 9
- person affected periods
- company carter's inc.
- person joseph m. elles
- scheme_term joseph m. elles with fraud and insider trading
- person robert khuzami
- agency sec atlanta regional office
- agency sec division of enforcement
- agency Securities and Exchange Commission
- person William P. Hicks
Triples 12
- SEC charged Joseph M. Elles with fraud and insider trading
- Joseph M. Elles was Executive Vice President of Carter's Inc.
- Joseph M. Elles caused understatement of Carter's expenses and overstatement of net income
- SEC entered non-prosecution agreement with Carter's Inc.
- Joseph M. Elles conducted scheme from 2004 to 2009
- Joseph M. Elles fraudulently manipulated dollar amount of discounts to largest wholesale customer
- Joseph M. Elles realized profit before tax of $4,739,862 from stock options and sales
- Joseph M. Elles exercised options and sold shares between May 2005 and March 2009
- Carter's Inc. common stock dropped 23.8 percent on Oct. 27, 2009
- Robert Khuzami is Director of SEC Division of Enforcement
- William P. Hicks is Associate Director of Enforcement in SEC Atlanta Regional Office
- Carter's Inc. issued restated financial results for affected periods
PDF (from attached: complaint)
Text layers
Extracted body text (5,014c)
SEC Charges Former Carter's Executive With Fraud and Insider Trading FOR IMMEDIATE RELEASE 2010-252 Washington, D.C., Dec. 20, 2010 — The Securities and Exchange Commission today 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. The 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. Additional Materials SEC Complaint Non-Prosecution Agreement "Elles's trickery 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." 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. Elles then 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. After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods. Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC staff as well as in the enforcement action filed against Elles. 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. The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter. The SEC's investigation is continuing. # # # For more information about this enforcement action, contact: William P. Hicks Associate Director of Enforcement, SEC Atlanta Regional Office 404-842-7675 Lorin L. Reisner Deputy Director, SEC Division of Enforcement 202-551-4787 http://www.sec.gov/news/press/2010/2010-252.htm Home | Previous Page Modified: 12/20/2010
OCR text (5,014c · plain-text · 99% conf)
SEC Charges Former Carter's Executive With Fraud and Insider Trading FOR IMMEDIATE RELEASE 2010-252 Washington, D.C., Dec. 20, 2010 — The Securities and Exchange Commission today 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. The 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. Additional Materials SEC Complaint Non-Prosecution Agreement "Elles's trickery 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." 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. Elles then 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. After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods. Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC staff as well as in the enforcement action filed against Elles. 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. The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter. The SEC's investigation is continuing. # # # For more information about this enforcement action, contact: William P. Hicks Associate Director of Enforcement, SEC Atlanta Regional Office 404-842-7675 Lorin L. Reisner Deputy Director, SEC Division of Enforcement 202-551-4787 http://www.sec.gov/news/press/2010/2010-252.htm Home | Previous Page Modified: 12/20/2010