U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20933A / March 6, 2009
Accounting and Auditing Enforcement Release No. 3024 / March 6, 2009
Securities and Exchange Commission v. Martin G. Fraser, Don W. Watson, Edward W. O'Brien, and Gary M. Opper, Case No. 2:09-cv-00442-LOA (D. Ariz.)
SEC CHARGES FORMER CSK AUTO CORPORATION MANAGEMENT WITH ACCOUNTING FRAUD
On March 5, 2009, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court in Phoenix, Arizona against two former senior officers, Martin G. Fraser and Don W. Watson, the former controller, Edward W. O'Brien, and a former supervisor, Gary M. Opper, of Phoenix-based CSK Auto Corporation (CSK). The Commission's complaint alleges that the defendants orchestrated a multi-million dollar accounting scheme to inflate the company's financial results and overstate its net income in 2002 through 2004. At the time of the fraud, CSK was one of the nation's largest auto parts retailers with over 1000 stores located throughout the western United States. In July 2008, CSK became a wholly owned subsidiary of O'Reilly Automotive, Inc.
According to the complaint, CSK had a program by which it obtained allowances from its vendors that decreased CSK's costs of goods sold and, as a result, increased the company's pre-tax income. The complaint alleges that from 2002 through 2004, CSK could not collect tens of millions of dollars in vendor allowances it had previously recognized, and that instead of writing off those uncollectible receivables, Watson, O'Brien, and Opper hid them using a variety of methods, including improperly moving vendor allowance collections between years, making unsubstantiated journal entries, and incorrectly accounting for amounts paid back to vendors. The Commission alleges that the defendants all participated in preparing and filing false financial statements that overstated CSK's pre-tax income in 2002 by approximately 47%, or $11 million; in 2003 by approximately $34 million, reporting pre-tax income instead of an actual pre-tax loss; and in 2004 by approximately 65%, or $21 million. The complaint further alleges that in order to hide their misconduct, the defendants repeatedly lied to the company's independent auditors and provided false documentation in support of CSK's inappropriate accounting.
The complaint alleges that in 2005, CSK filed a restatement of its previously reported financial statements in connection with its accounting for vendor allowances. The Commission's complaint further alleges that the defendants knew, or were reckless in not knowing, that CSK falsely ascribed the restatement solely to "errors in estimation in earlier periods" and "imprecise estimates, bookkeeping errors and recording allowances in the incorrect periods." In addition, the complaint alleges that the restatement failed to write off all the uncollectible vendor allowance receivables. As a result, the defendants tried to collect approximately $15 million in vendor allowances that CSK was not actually owed in order to conceal these uncollectible receivables from CSK's auditors and shareholders.
The Commission's complaint charges Fraser, age 53, of Phoenix, Ariz., Watson, age 53, of Gilbert Ariz., O'Brien, age 46, of Cave Creek, Ariz., Opper, age 56, of Mesa Ariz., with violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13b2-1, Fraser, Watson, and O'Brien with violating Rule 13b2-2 of the Exchange Act; and Watson with violating Rule 13a-14 of the Exchange Act. The Commission is seeking a permanent injunction from future violations, disgorgement, prejudgment interest, and civil penalties against all the defendants, and an order barring Fraser, Watson, and O'Brien from serving as a director or officer of a public company.
The Commission's investigation is ongoing.