On October 18, 2012, the Securities and Exchange Commission charged Joseph Pacifico, a former President of Carter’s, Inc., the Atlanta-based marketer of children’s clothing, for engaging in financial fraud at Carter’s. The SEC alleges that Pacifico’s misconduct caused Carter’s to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.
The SEC’s complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Carter’s Executive Vice President of Sales, Joseph Elles, who reported to Pacifico, fraudulently manipulated the amount of discounts that Carter’s granted to its largest wholesale customer in order to induce that customer—itself a large national department store—to purchase greater quantities of Carter’s clothing for resale. Elles then concealed his conduct by persuading the customer to defer subtracting the discounts from payments until later periods and creating and signing false documents misrepresenting the timing and amount of those discounts to Carter’s accounting personnel.
After Pacifico discovered Elles’s scheme, the complaint alleges that Pacifico signed a false certification to Carter’s accounting personnel that understated the amount discounts that Carter’s owed to the customer. The complained also alleges that Pacifico signed false internal forms that also misstated that discounts to be paid to the customer related to sales in 2009 when, in fact, the discounts related to prior financial periods. After conducting its own internal investigation, Carter’s was required to issue restated financial results for the affected periods.
The SEC’s complaint alleges that Pacifico violated Section 17(a)(2) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5(b) and 13b2-1 thereunder, and aided and abetted Carter’s violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5(b),12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is seeking permanent injunctive relief, financial penalties, and an officer and director bar against Pacifico.
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