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Saks Inc. Takes Action: Retailer Fires Executives Following Internal Probe

Saks Inc. said it has completed the internal investigation of its markdown allowance scandal, and several executives were asked to leave the firm.

NEW YORK — Saks Inc. is cleaning house, but its problems aren’t going away.

The retailer said late Monday afternoon that its internal investigation into alleged improper collections of about $20 million in vendor markdown allowances, as well as related accounting and disclosure issues, is over and several senior executives are either being fired or asked to resign.

Saks also disclosed that it received an inquiry from the U.S. Attorney for the Southern District of New York, raising speculation that broader and more serious issues regarding accounting practices, possibly going beyond the vendor allowance situation, could be under scrutiny by law enforcement.

Last week, a shareholder lawsuit was filed in state court in Birmingham, Ala., against members of the board and certain executive officers alleging “breach of fiduciary duties in failing to correct or prevent problems with the company’s accounting and internal control practices and procedures.” The action seeks unspecified damages and for the executives to return certain compensations. Saks Inc. is based in Birmingham, while the Saks Fifth Avenue Enterprises division is based here.

The Saks executives that are being terminated include:

  • Donald Watros, the chief administrative officer of the SFAE division of Saks Inc., who has been asked to resign and forfeit vested options, and will incur other financial penalties. He previously had been placed on leave.

  • Brian Martin, who was general counsel at the time of an earlier investigation into the markdown issue in 2002 and is now a senior vice president. Martin is the brother of R. Brad Martin, chairman and chief executive officer of Saks Inc.

  • Donald Wright, who has been the chief accounting officer since before 2002, has been asked to resign. A successor will be named.
Other Individuals at SFAE and Saks Inc. “determined to have failed to adequately supervise those directly involved in such overcollections, or otherwise performed inadequately in respect of this issue” are receiving disciplinary action and reprimands. They include R. Brad Martin and Saks Inc.’s chief financial officer, Douglas Coltharp, both of whose bonuses are being either reduced or eliminated because “the board was critical of the quality of communication to the audit committee and the quality of follow-up by several members of senior management with respect to the vendor markdown allowances.”

In addition, Coltharp no longer will have responsibility for accounting or financial reporting, but will continue to supervise treasury, strategic planning, external development and real estate.

Saks Inc. executives could not be reached for comment.

As reported, the Securities and Exchange Commission has been investigating Saks Inc. regarding vendor allowances as well as certain accounting, controls and disclosure practices. Last week, the New York Stock Exchange notified Saks that its stock would begin trading with an “LF” indicator attached to its symbol. The letters designate that the company failed to file periodic reports in a timely manner with the SEC, including its annual report on Form 10-K. It was due last month, but was delayed because of the probes.

Saks is expected to restate earnings for a few years. Due to the filing delays, the company could be in breach of certain covenants with loaners that might affect its liquidity, unless Saks obtains waivers. The company expects that the previously disclosed restatement of its financial statements for fiscal 1999 through the third quarter of fiscal 2004 will be completed, and the 2004 Form 10-K will be filed on or before Sept. 1. The company also expects its quarterly report on Form 10-Q for the quarter ended April 30 will be filed at about the same time.

Saks Inc. disclosed on March 3 that an audit committee of the board was conducting an investigation that reportedly centered on the bridge department at Saks Fifth Avenue. Saks has said it involved about $20 million in overcollections in the 1999-2003 fiscal years from one merchandising area that it never specified. No improper collections during the 2004 fiscal year were identified, but management is working to determine if any other improper collections occurred before 1999.

Saks will reimburse affected vendors and is said to be reimbursing Onward Kashiyama USA for about half of the $20 million. Sources said the $20 million doesn’t seem significant considering it involves a four-year period, suggesting that government agencies might be more interested in broader accounting issues.

C. Warren Neel, chairman of the audit committee, said in a statement, “The audit committee believes that its investigation was thorough and deliberate, leaving no stone unturned, and is convinced that its findings will have a profound positive effect upon the company. We are committed to integrity, honesty and transparency in our accounting and business practices.”

Saks further stated, “The committee also reviewed the conduct of other senior corporate-level officers, none of whom was found to have culpability with respect to the overcollection of vendor allowances, the failed 2002 internal investigation [which involved markdown allowances] or the accounting and disclosure issues identified during the pendency of the current investigation.”

Management has been asked to develop an action plan for enhanced ethics training, improved awareness of the company’s compliance and ethics “hotline” and similar matters.