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Chargebacks Clamor: SEC Intensifies Probe Into Saks Fifth Avenue

The SEC has begun a formal investigation into Saks Inc. for alleged improper collections of markdown allowances at its SFA unit.

NEW YORK — The Securities and Exchange Commission has launched a formal investigation into Saks Inc. over what could be a series of concerns, ranging from improper collection of markdown allowances to related accounting and disclosure issues.

The SEC notified Saks Inc. last Thursday that it issued a formal order of a private investigation. Saks Inc. revealed the development on Monday and said it is fully cooperating with the SEC. An SEC spokesman said the commission does not discuss current investigations.

On March 3, Saks Inc. announced it was conducting an internal probe of “alleged improper collections of vendor allowances” in one merchandise division of its Saks Fifth Avenue chain, and that it had informed the SEC about the investigation.

Saks Inc., which is based in Birmingham, Ala., also said then that its investigation, being conducted by an audit committee of the board, would be completed by the end of this month. Now the company expects the investigation to be completed in April.

Saks Inc. is said to be shopping its department store group. The SEC situation would be a distraction and a possible roadblock to any sale.

In addition to operating the 57-unit Saks Fifth Avenue chain, Saks Inc. operates 52 Off 5th stores and the 238-unit Saks department store group, which includes the Parisian, Proffitt’s, McRae’s, Younkers, Herberger’s, Carson Pirie Scott, Bergner’s and Boston Store nameplates. There are also 38 Club Libby Lu specialty stores owned by Saks Inc.

The  retailer also said Monday that, in addition to the alleged improper collections of vendor markdown allowances, the audit committee’s probe relates to “the adequacy of an initial internal investigation in 2002 into this matter, and accounting and disclosure issues that have arisen in the course of the audit committee’s investigation.”

As reported, Saks has agreed to pay back, or otherwise compensate, certain resources a total of $21.5 million due to the improper collection of markdown allowances. The impropriety reportedly occurred in the bridge area of the SFA division. Saks Inc. would not confirm that.

Onward Kashiyama USA is believed to be among the vendors being repaid. The vendor, which supplied Kors merchandise to Saks, has sued the retailer for $9,275,643 for “substantial deductions and credits which were not allowed under the terms of the agreement,” according to legal papers.

This story first appeared in the March 29, 2005 issue of WWD.  Subscribe Today.

Saks Inc. has said that a majority of the improper collections occurred during the company’s 2000, 2001 and 2002 fiscal years and a lesser amount occurred during the 1999 and 2003 fiscal years. None occurred in 2004.

The problem with the chargebacks, as well as accounting errors related to leased departments inside stores, is forcing Saks Inc. to restate earnings from fiscal 1999 to the third quarter of fiscal 2004.

With the intrigue mounting, so is the question of culpability. Saks Inc. has yet to point the finger at any of its personnel, though the company has said its investigation could lead to actions against some.

There was speculation among retail executives outside of Saks that, with the SEC getting more deeply involved, the degree of culpability could be wider than initially believed, possibly involving individuals at divisional and corporate levels. 

“This basically means that the SEC wants to know if something improper was going on,” said one retail executive.

Sources outside Saks have said the situation there could open a can of worms in the industry and put more retailers and their margin and markdown money agreements on notice, and under the watchful eye of the SEC. These practices fall under the umbrella of chargebacks, a widespread practice where retailers charge vendors for a variety of things, generally related to strictly complying with packaging, shipping and delivery-date agreements. However, new government rules of full disclosure require that markdown money has to be taken and charged to the vendor in the year the retailer bought the merchandise.

“This could give certain vendors the impetus to go after retailers on logistic and markdown chargebacks,” the retail executive said. However, he acknowledged that most vendors wouldn’t want to jeopardize a relationship with a retailer by vigorously contesting chargebacks, assuming they did a big volume of business with that retailer.