David Andrew Hilton and Stephen Scott Lowber

Litigation Release No. 18276 / August 7, 2003

Accounting and Auditing Enforcement
Release No. 1833 / August 7, 2003

SECURITIES AND EXCHANGE COMMISSION v. DAVID ANDREW HILTON and STEPHEN SCOTT LOWBER, United States District Court for the Western District of Washington (Seattle Division), Civil Action No. C 03-2511-Z

SEC FILES FRAUD CHARGES AGAINST FORMER EXECUTIVES OF SEATTLE CLOTHING COMPANY CUTTER & BUCK

The Securities and Exchange Commission today announced the filing of a complaint alleging financial accounting fraud against Stephen Scott Lowber and David Andrew Hilton, the former Chief Financial Officer and former Regional Sales Vice President, respectively, of Cutter & Buck Inc., an upscale clothing company based in Seattle, Washington. The Commission's complaint alleges that the executives caused Cutter to fraudulently inflate its financial results for the fiscal quarter and year ended April 30, 2000, by improperly recognizing as revenue $5.7 million in shipments to distributors functioning as Company warehouses, and later concealed the improper transactions from the Company's auditors and shareholders. In a related matter, the Commission instituted cease-and-desist proceedings against Cutter for alleged violations of the corporate reporting, books and records and internal controls provisions of the federal securities laws.

Simultaneously with the filing of the complaint, Lowber and Hilton agreed to settle the charges without admitting or denying the Commission's allegations, consenting to orders permanently barring them from violations of the antifraud and other provisions of the federal securities laws and requiring them to pay civil penalties of $50,000 and $25,000, respectively. Lowber 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. Cutter has likewise agreed to the entry of a cease-and-desist order without admitting or denying the Commission's findings.

The Commission's complaint, filed in the United States District Court for the Western District of Washington, alleges that Cutter was encountering declining sales as it approached the end of its fiscal year ended April 30, 2000. In the final days of April, Hilton, now 46 and residing in Parkville, Missouri, negotiated deals with three distributors under which Cutter would ship them a total of $5.7 million in products. Hilton struck side deals with the distributors, assuring them that they had no obligation to pay for any of the goods until customers located by Cutter paid the distributors. Because of Cutter's ongoing obligation to complete the sales, revenue recognition was improper under generally accepted accounting principles (known as "GAAP"). In press releases and in filings with the Commission that were distributed to the public, Cutter announced revenue of $54.6 million for the fourth quarter of Fiscal 2000 and $152.5 million for the entire fiscal year. However, because these figures included $5.7 million in improperly recognized revenue on the distributor sales, they overstated Cutter's true quarterly and annual revenue by 12% and 4%, respectively.

The complaint also charges that Lowber, 52, of Mill Creek, Washington, learned by late 2000 that these distributors were operating as Cutter warehouses and that revenue recognition had been improper. Rather than restate and correct the company's financial statements, as required under GAAP, Lowber took steps to conceal the transactions from Cutter's independent auditors and board of directors. Lowber arranged for the distributors to return $3.8 million in unsold inventory in early 2001. According to the complaint, Lowber directed Cutter personnel to override the company's accounting software program and divide the returns among multiple company sales divisions in order to hide the magnitude of the returns.

Hilton left the company in 2001, and Lowber resigned in August 2002. On August 12, 2002, Cutter, which had undergone a change in management, announced that it would restate its financial statements for fiscal years 2000 and 2001 as a result of the improper distributor transactions. The announcement caused Cutter's stock price to drop from $4.02 to $3.44, or 14%, the following day.

The complaint charges Hilton and Lowber 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 additionally charges Lowber 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).