SEC Cleans Clothes of Carter’s

Jack Humphrey, Regulatory journalist
December 20, 2010 /

Since Securities and Exchange Commission (SEC) approved in January 2010 a new initiative that demands cooperation from companies, the commission has never issued a non-prosecution agreement with any firm that violated securities laws, except the one that it has entered December 20 with Carter’s despite misconduct committed by its former vice-president Joseph M. Elles.

Although SEC has filed a lawsuit against Elles for secretly giving away excessive discounts that caused understatements with the company’s expenditure report and income overstatements, a non-prosecution agreement has been entered with the company involved due to the prompt and thorough internal investigation and self-reporting of the misconduct submitted by Carter’s, a manufacturer of kids’ apparel.

The non-prosecution agreement obliges Carter’s to continue with its honest and full cooperation with the SEC in its further investigation of Elles.

SEC argued that Atlanta-based Carter’s could not be charged with violations of the federal securities laws since the case was an “isolated nature of the unlawful conduct,” aided by its immediate reporting and remedial of the wrongdoing and full cooperation with the investigation conducted by SEC.

Robert Khuzami, SEC Divison of Enforcement director, said what Elles has done did some damages to Carter’s investors but added that “incentivizing appropriate corporate response to misconduct” with the non-prosecution agreement promotes the interest of Carter’s, and of other companies who would do the same, including its “shareholders and the SEC alike.”

SEC alleged in its lawsuit that Elles deceived a large national department store to purchase larger quantities of its apparel by presenting a prefabricated amount of discounts with false documents, which he successfully hid by “persuading the customer to defer subtracting the discounts from payments until later financial reporting periods,” according to SEC. The fraud has been taking place from 2005 to 2009, the SEC added.

During this period, Elles was able to amass ill-gotten profit amounting to $4,739,862 before tax. Carter’s restated its financial statements for the period congruent to the occurrence of the fraud.

Elles will be disgorged of the amount equivalent to his ill-gotten gains, with prejudgment interest and fines.


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