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U.S. Securities and Exchange Commission


Litigation Release No. 18848 / August 24, 2004

Accounting and Auditing Enforcement
Release No. 2087 / August 24, 2004

SECURITIES AND EXCHANGE COMMISSION v. ATHENA DIAZ, United States District Court for the Western District of Washington (Seattle Division), Civil Action No. CV 04-1837 Zilly


The Securities and Exchange Commission today announced fraud charges against Athena Diaz, the former controller of Cutter & Buck Inc., a sportswear company based in Seattle, Washington. The Commission's complaint alleges that Diaz assisted in a scheme by Cutter's management to fraudulently inflate its financial results for the fiscal quarter and year ended April 30, 2000. Diaz assisted in the scheme by allowing the improper revenue recognition of $5.7 million in shipments to distributors functioning as Company warehouses and concealing the improper transactions from the Company's auditors and shareholders.

Simultaneously with the filing of the complaint, Diaz agreed to settle the charges without admitting or denying the Commission's allegations, consenting to orders permanently enjoining her from violations of the antifraud and other provisions of the federal securities laws.

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 final days of its fiscal year ended April 30, 2000. In late April, a vice president of sales negotiated deals with three distributors under which Cutter would ship them a total of $5.7 million in products, where 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 Diaz, age 47, of Seattle, Washington, knew or was reckless in not knowing that these distributors were operating as Cutter warehouses and that revenue recognition had been improper. Rather than take steps to ensure that revenue was not recognized, Diaz sought to conceal the agreements by hiding the distributor invoices from the Company's auditors. Diaz also divided product returns among multiple company sales divisions in order to hide the magnitude of the returns, knowing that this was improper.

Diaz was terminated by the Company 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 Diaz with aiding and abetting securities fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), aiding and abetting Cutter's reporting of false financial information to the Commission (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1) and aiding and abetting 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). The complaint additionally charges Diaz with lying to accountants (Rule 13b2-2 under the Exchange Act) and falsifying the company's books and records (Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder).


Modified: 08/24/2004