United States Attorney and SEC File Charges Against Former Executives of Seattle Clothing Company, Cutter & Buck, Arising Out of Financial Accounting Fraud
FOR IMMEDIATE RELEASE
|U.S. SECURITIES AND EXCHANGE COMMISSION|
San Francisco District Office
44 Montgomery Street, Suite 1100
San Francisco, California 94104
|U.S. DEPARTMENT OF JUSTICE|
United States Attorney
Western District of Washington
601 Union Street, Suite 5100
Seattle, WA 98101
The United States Attorney's Office for the Western District of Washington, the United States Securities and Exchange Commission, and the Federal Bureau of Investigation today announced the filing of separate criminal and civil charges arising out of financial reporting fraud at Cutter & Buck Inc. [NASD: CBUK], an upscale clothing company based in Seattle, Washington. Documents filed in Court today allege that former company 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, board of directors, and shareholders.
Cutter's former Chief Financial Officer Stephen Scott Lowber, 52, of Mill Creek, Washington, pled guilty to a felony criminal offense of being an accessory after the fact to wire fraud. In addition, the Commission filed civil securities fraud charges against Lowber as well as Cutter's former Regional Sales Vice President David Andrew Hilton, 46, of Parkville, Missouri. Without admitting or denying the allegations of the Commission's complaint, Lowber and Hilton agreed to the entry of antifraud injunctions and 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.
In a separate proceeding, Cutter & Buck, without admitting or denying the Commission's findings, agreed to an order that it cease and desist from further violations of the corporate reporting, books and records and internal controls provisions of the federal securities laws.
According to the pleadings filed today, Cutter was encountering declining sales as it approached the end of its fiscal year ended April 30, 2000. In the final days of April, Cutter negotiated deals with three distributors under which Cutter would ship them a total of $5.7 million in products. Hilton assured the distributors 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 year 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 filings also charge that Lowber 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 day after the announcement, Cutter's stock price dropped from $4.02 to $3.44, or 14%.
The Criminal Charges
Lowber pled guilty to being an accessory after the fact to wire fraud, as charged in a felony information filed by the United States Attorney's Office on August 7, 2003. The wire fraud involved the transmission of false financial statements to the Securities and Exchange Commission on July 31, 2000. As part of his plea, Lowber admitted that he knew by late 2000 that Cutter's recognition of the $5.7 million of revenue, and the wire transmission to the Commission containing false financial statements, was part of a fraudulent scheme. Between the fall of 2000 and late July 2001, Lowber assisted other officers and employees of the Company in order to hinder and prevent their apprehension for their roles in the fraudulent scheme. The statutory penalties for Lowber's offense include imprisonment for up to 2.5 years, a fine of up to $125,000, and a period of supervision following release from prison of between 2 and 3 years. Sentencing will be held in Seattle before United States District Judge Thomas Zilly on a date to be determined by the Court. As part of his plea, Lowber has agreed to cooperate fully with the government in its investigation of the fraudulent scheme associated with Cutter's improper recognition of revenue.
United States Attorney McKay stated that the government is pleased that Lowber has chosen to take responsibility for his role in the accounting scandal at Cutter & Buck. The disposition of his criminal case should send the message that the Office of the United States Attorney, along with its law enforcement and securities enforcement partners, will quickly and thoroughly investigate allegations of corporate fraud and bring those responsible to justice. The investigation of the fraudulent revenue recognition scheme is ongoing.
The Commission's Actions
The Commission's civil 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).
Simultaneously with the filing of the complaint, Lowber and Hilton agreed, without admitting the allegations, to orders permanently enjoining them from violations of these provisions and to the other relief described above.
Finally, the Commission issued an order instituting and simultaneously settling cease-and-desist proceedings against Cutter, which consented to the issuance of the Commission order without admitting or denying any of its findings. The order found that Cutter violated the corporate reporting, books and records and internal controls provisions of the federal securities laws (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder) and ordered the company to cease and desist from violating these provisions. In determining to accept Cutter's settlement offer, the Commission considered remedial acts promptly undertaken by the Company and cooperation afforded the Commission staff.
"Investors need to know that the financial information they receive is accurate and reflects real sales," said Helane Morrison, head of the Commission's San Francisco District Office. "And when corporate executives learn the financial information they've given shareholders is materially false, they can't just hide the problem and hope nobody finds out."
For further information contact:
Helane L. Morrison
Robert L. Mitchell
Assistant District Administrator
San Francisco District Office
U.S. Securities and Exchange Commission
Executive Assistant U.S. Attorney
Jeffrey B. Coopersmith
Assistant U.S. Attorneys
United States Attorney's Office
Western District of Washington