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U.S. Securities and Exchange Commission


Litigation Release No. 20266 / September 5, 2007

Accounting and Auditing Enforcement Release No. 2674 / September 5, 2007

SEC v. Saks Incorporated, 07 Civ. 7821 (S.D.N.Y.) (CM)

Saks Inc. Settles Financial Reporting and Related Charges by SEC

On September 5, 2007, the Securities and Exchange Commission filed a civil injunctive action charging Saks Incorporated, owner of luxury department store Saks Fifth Avenue among other retail chains, with violating the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. Saks has agreed to settle the case, without admitting or denying the Commission's allegations, and has agreed to an injunction barring future violations of these provisions.

The Commission's complaint, filed in federal court in Manhattan, alleges that from the mid-1990s until 2003, certain employees of the company's Saks Fifth Avenue Enterprises division ("SFAE") engaged in two deceptive practices in order to achieve their financial targets for the month, quarter or retail season and that these practices resulted in the company's overstatement of income by material amounts in its financial statements for its 2000, 2001, and 2002 fiscal years and for two quarters in fiscal 2001 and 1999. According to the complaint, the improper accounting by Saks resulted from aggressive financial targets the company set for SFAE, the belief by some SFAE buyers that they were expected to achieve their targets by deceptive means, if necessary, and Saks' lack of adequate internal controls.

More specifically, the complaint alleges:

  • One of the practices involved the intentional understatement, by the SFAE buyers to vendors, of the sales performance of the vendors' merchandise. Based on that misinformation, SFAE collected from the vendors millions of dollars in "vendor allowance" payments to which the Company was not entitled. Over a dozen SFAE employees participated in the vendor allowance over-collection practice, which continued for at least eight years, from 1996 until 2003.
  • As a result of the vendor allowance over-collection, Saks overstated its net income for the fiscal year ended February 3, 2001 by 7.0%; overstated its net income for the fiscal year ended February 2, 2002 by 32.3%; overstated its net income for fiscal year ended February 1, 2003 by 42.6%. Saks also overstated its net income by 3.6% for the fiscal year ended January 31, 2004.
  • The second deceptive practice involved the improper deferral (or "rolling") of permanent markdowns from one period to another at SFAE. Permanent markdowns were the means by which Saks recognized that inventory on the sales floor could not sell at the existing retail price, i.e., was impaired. The effect of a permanent markdown on Saks' financial statements was to reduce the value of all inventory subject to the markdown on Saks' balance sheet and also to increase its expense for cost of goods sold, thus reducing the net income reflected on the Company's income statement. Thus the improper rolling of markdowns resulted in Saks' overstatement of its inventory and net income in some reporting periods from which permanent markdowns were deferred.
  • As a result of the markdown rolling, Saks overstated its net income in the second quarter of fiscal year 1999 by 86.5%; and understated its loss in the second quarter of fiscal year 2001 by 10.4%.
  • The complaint also alleges that certain vendor allowance over-collection at SFAE came to the attention of senior Saks management in August and September 2002 but that the internal investigation the company conducted at that time failed to detect the full scope of the problem or adequately address it.

The complaint alleges that by engaging in this conduct, Saks violated the financial reporting, books-and-records, and internal controls provisions of the Exchange Act. Specifically, the complaint alleges that Saks violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Without admitting or denying the Commission's allegations, Saks has agreed to settle the charges by consenting to a permanent injunction against further violations of the above reporting, books-and-records, and internal controls provisions.

Saks is a Tennessee corporation headquartered in Manhattan.

SEC Complaint in this matter



Modified: 09/05/2007