U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22520 / October 26, 2012
Accounting and Auditing Enforcement Release No. 3421 / October 26, 2012
Securities and Exchange Commission v. Michael Johnson, Civil Action No. 1:12-CV-03709 (U.S. District Court for the Northern District of Georgia)
On October 24, 2012, the Securities and Exchange Commission charged Michael Johnson, a divisional merchandise manager at Kohl's, which is a national department store. The complaint alleged that Johnson assisted the financial fraud at Carter's, Inc, an Atlanta-based manufacturer of children's clothing. Specifically, the SEC alleges that Johnson assisted Joseph Elles, a former Executive Vice President of Sales at Carter's, in concealing his financial fraud from senior Carter's management. That scheme caused Carter's to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.
The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles fraudulently manipulated the amount of discounts that Carter's granted to Kohl's, Carter's largest wholesale customer in order to induce Kohl's to purchase greater quantities of Carter's clothing for resale. In an effort to conceal the scheme, Elles persuaded Kohl's to defer subtracting the discounts from payments until later periods. Elles also persuaded Johnson, who handled the Carter's account at Kohl's to sign a false confirmation that misrepresented to Carter's accounting personnel the timing and amount of those discounts. By concealing the amount of discounts that had been promised to Kohl's, Elles and Johnson caused Carter's to materially understate it expenses in certain quarters and materially overstate its earnings in those quarters.
After conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.
The SEC's complaint alleges that Johnson violated Rule 13b-2 of the Securities Exchange Act of 1934 ("Exchange Act"), which prohibits any person from directly or indirectly falsifying or causing to be falsified an issuer's accounting records. The complaint also alleges that Johnson aided and abetted Elles' violations of Section 13b(5) of the Exchange Act, which among other things, prohibits any person from knowingly falsifying the books, records and/or accounts of an issuer, and Rule 13b2-1 thereunder. The SEC is seeking permanent injunctive relief and financial penalties against Johnson.
This is the third case that the SEC has filed in this continuing investigation. The Commission previously charged Joseph Elles (see SEC v. Joseph Elles, Litigation Release No. 21784 / December 20, 2010) and Joseph Pacifico (see Litigation Release No. 22517 / October 19, 2012). When the Commission announced the first case, the Commission also announced that it had entered into a non-prosecution agreement with Carter's, based in part on Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. See Release No. 2010-252 / December 20, 2010. Pursuant to that agreement, Carter's has continued to cooperate during the Commission's continuing investigation.
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.