On December 20, the SEC announced that it had entered into a non-prosecution agreement with Carter’s Inc., allowing Carter’s to avoid prosecution in exchange for cooperation with a fraud investigation. This is the first non-prosecution agreement issued by the SEC since its announcement in January 2010 of new measures designed to strengthen SEC enforcement by encouraging more cooperation from individuals and companies in the agency’s investigations and enforcement actions.
In a complaint filed December 20, the SEC alleges that Joseph M. Elles, an Executive VP of Sales at Carter from 2004 to 2009, fraudulently manipulated the dollar amount of discounts that Carter’s granted to its largest wholesale customer, and persuaded the company to defer the discounts to later reporting periods, leading to an understatement of Carter’s expenses and a material overstatement of its net income. During that time, Elles allegedly realized gains from insider trading in shares of Carter’s common stock, resulting in a pre-tax profit of approximately $4.7 million. The fraud was disclosed on October 27, 2009, leading to a 23.8% drop in the company’s share price.
The non-prosecution agreement means that Carter’s will not be charged with violations of the federal securities laws related to Elles’ conduct. In its press release, the SEC made the following observations:
- the alleged unlawful conduct was relatively isolated;
- Carter’s promptly self-reported the conduct to the SEC;
- Carter’s cooperation with the SEC was “exemplary and extensive,” and included a thorough, comprehensive internal investigation; and
- Carter’s took extensive and substantial remedial actions.
The agreement requires Carter’s to cooperate with the Commission during its investigation and subsequent proceedings, including utilizing its “best efforts” to secure the full cooperation of current and former employees, and that Carter’s provide full testimony, non-privileged documents, and other information. Additionally, under the agreement Carter’s cannot deny the underlying conduct except in legal proceedings where the SEC is not a party. The agreement applies only to the SEC and not to other self-regulatory or governmental proceedings, although the SEC may use its discretion in forwarding a letter detailing the cooperation of the company.
With this case, the SEC has provided a roadmap to using non-prosecution agreements in the future. Companies should take note.
Samantha E. Thompson authored this post.