By  on September 6, 2007

NEW YORK — Saks Inc. settled charges by the Securities and Exchange Commission on Wednesday over alleged financial reporting violations.

The settlement does not include any financial penalty, and there is no admission or denial of any SEC charges. Saks did agree to a permanent injunction against future violations, according to Saks and the SEC.

Simultaneously with Saks' consent to a final judgment against the company, the SEC had filed a lawsuit against Saks in U.S. District Court in Manhattan.

The settlement follows a disclosure by the retailer in March 2005 that an internal investigation found "improper collections of vendor markdown allowances" at its Saks Fifth Avenue division.

Part of the fallout from the disclosure, in addition to the SEC probe, was an investigation by the U.S. Attorney's Office in Manhattan. An attorney not connected with the government, but familiar with the background of the probe, said Wednesday that he believes that the U.S. Attorney's investigation is continuing. A spokeswoman for the U.S. Attorney's Office declined comment. A spokeswoman for Saks could not be reached for comment.

Saks has said repeatedly that the company has "cooperated" with both governmental investigations.

Saks' disclosure also spawned a lawsuit by International Design Concepts Inc. against Saks and SFA over allegedly improper vendor allowances in May 2005. IDC is the assignee of assets of Apparel Group International, the licensee of Oscar de la Renta for the "Oscar de la Renta" trademarks that AGI used in connection with the women's sportswear bridge collection at SFA. AGI is no longer in operation, according to court papers filed in the 2005 lawsuit, which alleged that it was "forced out of business by the actions of the Saks defendants."

Donald Kreindler of Phillips Nizer LLP, attorney for IDC, said he was "not at all surprised" by the SEC lawsuit against Saks. Meanwhile, the IDC lawsuit "may come up for trial as early as November," Kreindler said.

A separate lawsuit against Saks by Onward Kashiyama, involving markdowns and also filed in 2005, has been settled.

When an internal audit was completed in August 2005, Saks said its SFA division, known as Saks Fifth Avenue Enterprises, owed vendors $26 million for markdown allowances during the 1999-2003 fiscal years, and another $8.2 million during the 1996-1998 fiscal years. In addition, vendors were to be paid interest at the rate of 7.25 percent annually, totaling about $14 million for the improperly collected markdown allowances. In total Saks paid $48.2 million back to vendors.The SEC's lawsuit against Saks charged the company with violating the "financial reporting, books-and-records and internal control provision of the Securities and Exchange Act of 1934." The complaint said improper accounting by Saks resulted in aggressive financial targets the company set for its SFA division, and some SFA buyers believed they were expected to achieve their targets by deceptive means, if necessary. The legal documents also said that Saks' lack of internal controls and the deceptive practices by certain employees resulted in the company's "overstatement of income" for fiscal years 2000 through 2002 and for two quarters in fiscal 2001 and 1999.

According to the complaint, one deceptive practice involved the understatement of sales performance of vendors' merchandise, from which SFA collected millions of dollars in "vendor allowance" payments. Court papers said that the other practice involved the improper deferral of permanent markdowns from one period to another at SFA, which resulted in the overstatement of inventory and net income in certain reporting periods.

Saks agreed to the injunction barring the company and its officers and employees from further violations of federal securities laws in connection with the retailer's record keeping and internal controls.

"I am pleased that this settlement with the SEC puts these matters behind us as we continue to execute our strategies for the long-term success of our business," said Stephen I. Sadove, chairman and chief executive officer of Saks, in a statement.

Deborah Weinswig, retail analyst at Citigroup Global Markets, wrote in a research note Wednesday, "We view Saks' settlement of its ongoing SEC investigation as a positive, as it allows the current management team to focus on the execution of the company's fundamental turnaround going forward."

She said the allegations in the SEC complaint "were not reflective of the actions of the current Saks management team and that corrective actions with employees were taken in 2005.

The scandal resulted in the ouster of three senior executives on May 9, 2005: Donald Watros, chief administrative officer of Saks Fifth Avenue Enterprises; Brian Martin, a senior vice president of Saks Inc., and Donald Wright, chief accounting officer of Saks Inc. Martin is the brother of then Saks Inc. chairman and ceo R. Brad Martin.The fallout hit the merchandising team on May 13, 2005, when eight buyers in the bridge department, possibly up to the general merchandise level, were escorted out of the Saks Fifth Avenue flagship.

The company currently operates Saks Fifth Avenue, which is comprised of 54 Saks Fifth Avenue stores, 49 Saks Off 5th stores and saks.com. The company also operates Club Libby Lu specialty stores.

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