U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21784 / December 20, 2010
Accounting and Auditing Enforcement Release No. 3219 / December 20, 2010
SEC v. Joseph M. Elles, Civil Action No. 1:10-CV-4118 (U.S. District Court for the Northern District of Georgia)
The Securities and Exchange Commission today charged Joseph M. Elles, a former Executive Vice President of Carter’s, Inc., the Atlanta-based marketer of children’s clothing, for engaging in financial fraud and insider trading at Carter’s between at least 2004 and March 2009. The SEC alleges that Elles’s misconduct caused an understatement of Carter’s expenses and a material overstatement of its net income in several financial reporting periods. While engaged in this misconduct, Elles also exercised options for the purchase of Carter’s common stock and sold the resulting shares.
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. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC’s new cooperation initiative earlier this year.
The SEC’s complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles, then Carter’s Executive Vice President of Sales, fraudulently manipulated the amount of discounts that Carter’s granted to its largest wholesale customer in order to induce that customer—itself a large national department store—to purchase greater quantities of Carter’s clothing for resale. Elles then concealed his conduct by persuading the customer to defer subtracting the discounts from payments until later periods and creating and signing false documents misrepresenting the timing and amount of those discounts to Carter’s accounting personnel.
After discovering Elles’s actions and conducting its own internal investigation, Carter’s was required to issue restated financial results for the affected periods.
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 October 27, 2009, immediately after which the Company’s common stock share price dropped 23.8%.
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 acknowledges 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.
See Also: SEC Complaint