By  on March 21, 2012

A federal grand jury on Tuesday indicted Joseph Pacifico, the former president of children’s apparel firm Carter’s Inc., for securities fraud and other accounting irregularities and, when combined with a previous indictment against another former Carter’s executive, brings the number of counts to 37.

Tuesday’s indictment follows one issued by the grand jury on Sept. 21, 2011, against Joseph Elles, the former head of wholesale sales at Carter’s. In addition to securities fraud, the two are essentially charged with causing the filing of false financial statements and falsifying corporate books and records.

Neither Pacifico, 62, of Atlanta, nor Elles, 57, of Las Vegas, could be reached for comment.

The indictments against each individual are criminal allegations and still need to be proven by the government.

The securities fraud charges against the two defendants each carry a maximum sentence of 25 years in prison and a fine of up to $250,000. The charges against each individual for causing the filing of false financial statements and falsification of corporate books and records, a violation of federal securities law, each carry a maximum sentence of 20 years in prison and a fine of $5 million. In addition, the wire and mail fraud charges solely against Elles each have a maximum sentence of 20 years of imprisonment and a fine of $250,000.

The investigation is being done by special agents of the Federal Bureau of Investigation, and is part of the interagency Financial Fraud Enforcement Task Force established by President Obama.

The allegations are the latest involving either the issue of accounting or chargeback irregularities that periodically rock the apparel industry.

In October 1996, a federal grand jury indicted Paul Polishan, former chief financial officer of The Leslie Fay Cos., for masterminding a $131 million scheme to defraud the firm via accounting irregularities involving false entries. He was convicted in July 2000.

In 1999, former Donnkenny chairman Richard Rubin pled guilty to criminal fraud charges for creating false invoices and booking false phone sales. Also charged were former chief financial officer Edward Creevy and former controller Ronald Hollingsworth — they, too, eventually pled guilty.

In 2005, the Securities and Exchange Commission investigated Saks Fifth Avenue based on allegations by vendors of unlawful chargebacks involving over-collection of vendor allowances. Saks’ board said an internal audit committee found evidence of wrongdoing and three top executives were fired. Saks settled the civil matter with the SEC in 2007.

In Tuesday’s indictment, Sally Quillian Yates, U.S. Attorney for the Northern District of Georgia, said that Pacifico is “accused of trying to hide a multimillion-dollar fraud, lying to shareholders and committing additional crimes in the course of the attempted cover-up.”

According to information from Yates, Pacifico allegedly was aware that Elles and others, at least by April 2009, had been “deliberately causing Carter’s to falsely record in its accounting books millions of dollars in rebates that Elles had agreed to pay to Kohl’s and other retailers.” The so-called rebates to the retailers are referred to as “margin support” or “accommodations.”

The U.S. Attorney said the rebates are “common” in the apparel industry to help a retailer that didn’t make its expected profit margins from the sale of Carter’s products. The rebates are expenses that reduce Carter’s net sales revenues and profits.

The Elles indictment alleged that he “manipulated” the company’s accounting of the rebates to Kohl’s by misrepresenting that they related to sales made in current fiscal years or quarters, when the sales were actually made in prior years or quarters.

The Elles indictment also alleged that from April through November 2009, Pacifico was aware of the millions of dollars of undisclosed rebates and attempted to keep them hidden from members of Carter’s senior management, shareholders and internal and external auditors, among others. Those attempts included signing false documents and instructing subordinates not to relay information about the rebates to senior management.

As a result of the financial irregularities, Pacifico allegedly caused Carter’s to materially misstate its net income and other items in publicly filed financial statements from April through July 2009. Elles was alleged to have caused Carter’s to file false statements from “at least November 2006 through July 2009.” Both are alleged to have caused the falsification of multiple corporate books and records for the periods stated.

On the day that Carter’s disclosed the accounting irregularities in October 2009 and said it would have to restate several years’ worth of financial information, its stock price dropped 20 percent, according to Yates.

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