Non-Prosecution Agreement Suggests SEC May Take New Approach to Corporate Cooperators


The U.S. Securities and Exchange Commission’s decision to enter into a first-time non-prosecution agreement with a public company could portend a new trend toward rewarding cooperating companies with meaningful benefits.

On December 20, 2010, the U.S. Securities and Exchange Commission (SEC) announced its first non-prosecution agreement (NPA), one of the tools available to the SEC’s Division of Enforcement as part of the new Cooperation Program. (See SEC’s New Individual Cooperation Program Could Have Significant Ramifications for Companies for more information.) Under the NPA, the SEC agreed not to bring charges against Carter’s Inc., an Atlanta-based marketer of children’s clothing, related to the alleged unlawful conduct of its former executive vice president (VP) of Sales. The SEC’s decision to enter into the NPA could portend a new trend toward rewarding cooperating companies with meaningful benefits.

According to the SEC’s complaint, the former VP of Sales negotiated discounts with Carter’s largest retailer that far exceeded budgeted amounts, then used falsified documents to delay recognition of the discounts until future reporting periods. Accounting principles require matching expenses to the related revenues, so that both are recognized in the same reporting period. The VP of Sales’ alleged conduct occurred from March 2004 through 2009, during which time he also exercised options and sold company stock. The SEC has charged him with accounting fraud, circumventing internal controls, insider trading, and aiding and abetting the company’s violations of internal controls, and books and records provisions of the securities laws. The alleged accounting fraud affected numerous filings and required Carter’s to perform a multiyear restatement of financial statements.

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