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The executive at the center of the fraud at Carter's,
Inc., Joseph Elles, was named as a defendant in a 32 count indictment. The
charges include securities fraud and wire fraud. U.S. v. Elles, 11 CR
445 (N.D. Ga.). The company entered into the SEC's first non-prosecution
agreement in December 2010.
Mr. Elles was a sales executive at Atlanta based clothing
store, Carter's, Inc. According to the court documents, from the first quarter
of 2006 through the third quarter of 2008 Mr. Elles engaged in a scheme which
resulted in the falsification of the financial results of the company.
Specifically, Mr. Elles granted larger discounts than appropriate to firm customers
to induce them to make purchases. He then concealed the excessive discounts. As
a result the revenue of the company was overstated in a range of 5% to about
19% during the period. Prior to his resignation in 2009 Mr. Elles is also
alleged to have executed millions of dollars in stock options.
The fraud was not discovered until after his departure
from the company. On discovery the company promptly self-reported, made a full
and complete investigation and cooperated with the SEC. As a result the matter
was resolved with Carter's entering into the SEC's first non-prosecution
agreement. It was based on the cooperation of the company as well as the
isolated nature of the fraud. Since the execution of that agreement the
Commission entered into its first deferred prosecution agreement. These are the
only two such agreements entered into by the Commission to date.
The SEC also previously brought an enforcement action
against Mr. Elles. SEC v. Elles, Civil Action No. 1:10-CV-4118 (N.D. Ga.
Filed Dec. 20, 2010). That case is pending.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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