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SEC CHARGES FORMER CSK AUTO CORPORATION MANAGEMENT WITH ACCOUNTING FRAUD

March 10, 2009 By Paul (Founder, WorkAtHomeTruth) Leave a Comment

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20933 / March 6, 2009

Securities and Exchange Commission v. Martin G. Fraser, Don W. Watson, Edward W. O’Brien, and Gary M. Opper, Case No. 2:09-cv-00442-LOA (D. Ariz.)

SEC CHARGES FORMER CSK AUTO CORPORATION MANAGEMENT WITH ACCOUNTING FRAUD

On March 5, 2009, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court in Phoenix, Arizona against two former senior officers, Martin G. Fraser and Don W. Watson, the former controller, Edward W. O’Brien, and a former supervisor, Gary M. Opper, of Phoenix-based CSK Auto Corporation (CSK). The Commission’s complaint alleges that the defendants orchestrated a multi-million dollar accounting scheme to inflate the company’s financial results and overstate its net income in 2002 through 2004. At the time of the fraud, CSK was one of the nation’s largest auto parts retailers with over 1000 stores located throughout the western United States. In July 2008, CSK became a wholly owned subsidiary of O’Reilly Automotive, Inc.

According to the complaint, CSK had a program by which it obtained allowances from its vendors that decreased CSK’s costs of goods sold and, as a result, increased the company’s pre-tax income. The complaint alleges that from 2002 through 2004, CSK could not collect tens of millions of dollars in vendor allowances it had previously recognized, and that instead of writing off those uncollectible receivables, Watson, O’Brien, and Opper hid them using a variety of methods, including improperly moving vendor allowance collections between years, making unsubstantiated journal entries, and incorrectly accounting for amounts paid back to vendors. The Commission alleges that the defendants all participated in preparing and filing false financial statements that overstated CSK’s pre-tax income in 2002 by approximately 47%, or $11 million; in 2003 by approximately $34 million, reporting pre-tax income instead of an actual pre-tax loss; and in 2004 by approximately 65%, or $21 million. The complaint further alleges that in order to hide their misconduct, the defendants repeatedly lied to the company’s independent auditors and provided false documentation in support of CSK’s inappropriate accounting.

The complaint alleges that in 2005, CSK filed a restatement of its previously reported financial statements in connection with its accounting for vendor allowances. The Commission’s complaint further alleges that the defendants knew, or were reckless in not knowing, that CSK falsely ascribed the restatement solely to “errors in estimation in earlier periods” and “imprecise estimates, bookkeeping errors and recording allowances in the incorrect periods.” In addition, the complaint alleges that the restatement failed to write off all the uncollectible vendor allowance receivables. As a result, the defendants tried to collect approximately $15 million in vendor allowances that CSK was not actually owed in order to conceal these uncollectible receivables from CSK’s auditors and shareholders.

The Commission’s complaint charges Fraser, age 53, of Phoenix, Ariz., Watson, age 53, of Gilbert Ariz., O’Brien, age 46, of Cave Creek, Ariz., Opper, age 56, of Mesa Ariz., with violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13b2-1, Fraser, Watson, and O’Brien with violating Rule 13b2-2 of the Exchange Act; and Watson with violating Rule 13a-14 of the Exchange Act. The Commission is seeking a permanent injunction from future violations, disgorgement, prejudgment interest, and civil penalties against all the defendants, and an order barring Fraser, Watson, and O’Brien from serving as a director or officer of a public company.

The Commission’s investigation is ongoing.

http://www.sec.gov/litigation/litreleases/2009/lr20933.htm

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JAMES N. STANARD, FORMER CEO OF RENAISSANCERE HOLDINGS LTD., HELD LIABLE FOR ACCOUNTING FRAUD

February 1, 2009 By Paul (Founder, WorkAtHomeTruth) Leave a Comment

1/30/2009 S.E.C. Litigation Release:

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20875 / January 30, 2009

SECURITIES AND EXCHANGE COMMISSION V. JAMES N. STANARD, ET AL., Case No. 06 Civ. 7736 (GEL) S.D.N.Y.

JAMES N. STANARD, FORMER CEO OF RENAISSANCERE HOLDINGS LTD., HELD LIABLE FOR ACCOUNTING FRAUD

The Securities and Exchange Commission announced that on January 27, 2009, after a six-day bench trial, the Hon. Gerard E. Lynch of the U.S. District Court for the Southern District of New York issued an opinion and order that, among other things, held defendant James N. Stanard liable for securities fraud in the Commission’s civil enforcement action against him. Stanard is the former chief executive officer of reinsurer RenaissanceRe Holdings Ltd. (“RenRe”). The court also held Stanard liable for making false or misleading statements to auditors, providing false officer certifications, and violating and aiding and abetting violations of reporting, books-and-records, and internal controls provisions of the securities laws.

The Commission charged Stanard and the other defendants with fraud in connection with a sham transaction whose purpose and effect was to fraudulently defer more than $26 million of RenRe’s earnings from 2001 to later periods. With Stanard’s knowledge, RenRe fraudulently accounted for the sham transaction as “reinsurance,” when in fact, as Stanard knew, the transaction transferred no risk and could not properly be accounted for as reinsurance. As a result of RenRe’s fraudulent accounting treatment, RenRe materially understated income in 2001 and materially overstated income in 2002.

In the court’s January 27, 2009 opinion and order, Judge Lynch ruled in favor of the Commission on all of its claims, finding that Stanard “wanted to engage in a transaction that would have a particular balance sheet effect, without economic reality;” that “he knew the transaction was being structured in a way … that would obscure its significance from the auditors;” that he “knew the facts, and he knew the [applicable accounting] rule, and he knew that the facts did not square with the rule;” and that “[a]ccordingly, he acted with knowledge that RenRe’s earnings would be falsely stated.” The court further found that “Stanard damaged his credibility by claiming repeatedly at trial that this was intended as a reinsurance transaction, when in fact it was intended only to have an accounting effect, and not to constitute true insurance against risk.”

The court found that Stanard violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 and that Stanard aided and abetted violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The court permanently enjoined Stanard from violating or aiding and abetting violations of all these provisions of the securities laws and imposed a civil penalty of $100,000 but denied the Commission’s request for an officer and director bar. The court directed the Commission to submit an appropriate final judgment on or before February 17, 2009.

The Commission previously settled its claims against defendants Michael W. Cash and Martin J. Merritt and, in a related action, against RenRe.

For further information, see Litigation Release Nos. 19847 (Sept. 27, 2006), 19989 (Feb. 6, 2007), and 20360 (Nov. 8, 2007), and Administrative Proceeding No. 34-54661 (Oct. 27, 2006).

http://www.sec.gov/litigation/litreleases/2009/lr20875.htm

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