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U.S. Securities and Exchange Commission

Before the

Release No. 47339 / February 10, 2003

Release No. 1712 / February 10, 2003

File No. 11038

In the Matter of

Donald F. Marcus,





The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Donald F. Marcus ("Marcus" or "Respondent").


In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondent admits the Commission's jurisdiction over him and the subject matter of the proceedings, Respondent consents to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order").


On the basis of this Order and Respondent's Offer, the Commission finds1 that:


Respondent Marcus is the president and owner of Morris Marcus & Son, Inc. ("Morris Marcus"), a wholesale distributor of outdoor apparel. Marcus, 57 years old, is a resident of Horseshoe Bay, Texas.

Other Relevant Entities

Morris Marcus, a private company, is a wholesale distributor of outdoor apparel. Morris Marcus's principal place of business is in Horseshoe Bay, Texas.

The North Face, Inc. ("The North Face") was a Delaware corporation with its headquarters in San Leandro, California and Carbondale, Colorado. The North Face is now a wholly-owned subsidiary of VF Corporation, but during the relevant time period it was a publicly-traded company. The North Face products include outerwear, skiwear, and outdoor equipment designed for activities such as mountaineering, backpacking, skiing, hiking, training, and adventure travel.


The North Face had a network of what it called variously "wholesale distributors" or "premium dealers" or "Territory 68"; these were primarily small operations that diverted The North Face product into "gray market" export channels. Morris Marcus was a Territory 68 customer. It was a one-person operation owned by Donald Marcus, who ran the business from a home office. He had no other facilities and the only employee was a part-time bookkeeper. Prior to the third quarter of 1998, Marcus had not placed an order with The North Face for more than $1 million; his total orders for 1996 were $1 million and for 1997 were just $90,000.

In the third quarter of 1998, certain employees of The North Face, including an officer of the company, arranged a $9.3 million consignment sale to Morris Marcus. The true terms of the sale were not disclosed and the sale was improperly recorded by the company as a normal sale-with immediate, improper recognition of revenue and full profit margin. 2

During the audit of The North Face's 1998 financial statement in early 1999, its independent auditor raised certain questions and requested that The North Face conduct an internal investigation into various issues. The sale to Morris Marcus was included in the internal investigation. The auditors were to be informed of the results of the investigation. The North Face's audit committee conducted an investigation and was assisted by an accounting firm different from the independent auditor as well as company employees and outside counsel. As part of the internal investigation it was conducting, the audit committee investigators arranged a conference call with Marcus in March 1999. The purpose of the call was to learn more about the third quarter 1998 transaction to determine if it was a bona fide normal sale. The participants in the conference call included company employees and accountants from the accounting firm assisting the audit committee.

Certain company employees, including an officer of the company, provided a script of misrepresentations for Marcus to tell the accountants-principally that the sale was a normal sale, but that he had lost a significant customer to whom he had expected to re-sell the product. The misrepresentations also included saying that (i) Marcus's customers were located in Latin America, (ii) Marcus had the ability and the intent to pay the balance of the receivable on time (without payment depending on sales to third-parties), (iii) he did not intend to return the product, (iv) he had no right to return the product, and (v) the company had not agreed in advance to pay the storage costs. During the conference call, Marcus followed the scripted misrepresentations.

The audit committee investigators, unaware that there was no purchase order for the Morris Marcus sale, had requested to see it during the internal investigation. Marcus and certain company employees, including an officer of the company, were aware that no purchase order existed. The company employees created a purchase order for the Morris Marcus sale, back-dated it to September 1998, and asked Marcus to sign it. Marcus signed the document. The fake purchase order was given to the CEO, other company employees, accountants from the accounting firm assisting the audit committee, and the auditors. There was no indication on the document that it had just been created and backdated, nor did the company employees or Marcus disclose that there had never been a contemporaneous purchase order.

Marcus returned the inventory in May 1999. Before doing so, however, Marcus signed a confirmation letter from The North Face's independent auditors falsely stating that he owned the product as of December 1998. A company employee, acting on the instructions of an officer of the company, asked Marcus to sign the false confirmation letter.

As a result of the conduct described above, Marcus caused violations of Rule 13b2-2 promulgated under the Exchange Act, which prohibits officers and directors of an issuer from (i) making or causing to be made materially false or misleading statements, or (ii) omitting to state, or causing another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to an accountant in connection with any audit or examination of the financial statements of the issuer or the preparation or filing of any document or report required to be filed with the Commission.


In view of the foregoing, it is appropriate to impose the sanctions agreed to in the Offer submitted by Respondent. Accordingly,

IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent cease and desist from committing or causing any violations and any future violations of Rule 13b2-2 promulgated under the Exchange Act.

By the Commission.

Jonathan G. Katz


1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding

2 Statement of Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return Exists," does not allow the seller to recognize revenue [or, therefore, profit] when the customer can return the product and payment to the seller is contingent upon resale by the customer. Thus, recognition of revenue and profit for a contingent sale is improper since payment to the seller being contingent upon resale by the customer is the essence of a consignment sale.



Modified: 02/11/2003