U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19004 / December 17, 2004
Accounting and Auditing Enforcement
Release No. 2154 / December 17, 2004
SECURITIES AND EXCHANGE COMMISSION v. MARTIN JULIEN MARKS, United States District Court for the Western District of Washington (Seattle Division), Civil Action No. 04-CV-2481 Z
SEC FILES FRAUD CHARGES AGAINST FORMER CONTROLLER OF SEATTLE CLOTHING COMPANY CUTTER & BUCK
The Securities and Exchange Commission today announced the filing of fraud charges against Martin Julien Marks, the former President and Chief Operating Officer of Cutter & Buck Inc., a sportswear company based in Seattle, Washington. The charges stem from Marks's role in a scheme to improperly boost the company's revenue by shipping products to warehouses, and his subsequent efforts to conceal the wrongdoing from the company's auditors and shareholders.
Simultaneously with the filing of the complaint, Marks agreed to settle the charges without admitting or denying the Commission's allegations, consenting to orders permanently enjoining him from violations of the antifraud and other provisions of the federal securities laws and requiring him to pay $45,777 in disgorgement and prejudgment interest. Marks also consented to the entry of an order barring him from serving as an officer or director of a public company, and an order prohibiting him from practicing before the Commission as an accountant.
According to the Commission's complaint, filed in the Western District of Washington, Marks pushed Cutter's sales department to avert a revenue shortfall confronting the company in the closing days of the fiscal year ended April 30, 2000. Cutter negotiated deals with three purported distributors under which Cutter would ship them a total of $5.7 million in products. Cutter recognized revenue for the supposed sales, which constituted over 10% of the quarter's revenue. In reality, the distributors had no obligation or ability to pay for any of the goods unless and until Cutter's sales force found actual customers to purchase the products. The distributors essentially acted as warehouses, rendering revenue recognition for the shipments improper under generally accepted accounting principles (known as "GAAP"). Marks signed Cutter's annual Commission filings falsely announcing revenue of $54.6 million for the fourth quarter and $152.5 million for the fiscal year; because these amounts included $5.7 million in bogus revenue on the distributor sales, they overstated Cutter's true quarterly and annual revenue by 12% and 4%, respectively.
By early 2001, when Cutter sales personnel failed to deliver customers for the products, the distributors returned the products to the company. The Commission's complaint alleges that Marks asked Cutter's then-CFO to divide the product returns among multiple sales divisions on the company's financial records in order to conceal the magnitude of the returns from the Company's board of directors and independent auditors.
The Commission's complaint charges Marks with securities fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder) and causing Cutter to report false financial information to the Commission (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1). The complaint also charges Marks with lying to accountants (Rule 13b2-2 under the Exchange Act), falsifying the company's books and records (Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder), and causing Cutter's failure to maintain accurate books and records and internal controls (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act).
SEC Complaint in this matter