CSK Auto Corporation Agrees to Pay $20.9 Million to Resolve Violations of Securities Laws Related to Scheme to Manipulate Corporate Earnings
WASHINGTON – CSK Auto Corporation, a specialty retailer of automotive parts and accessories and formerly a publicly-traded company, has agreed to pay a $20.9 million penalty to resolve securities law violations stemming from a corporate earnings manipulation and double-billing scheme, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division.
As part of an agreement with the Department of Justice, CSK has accepted responsibility for the illegal conduct of its former employees. According to the non-prosecution agreement, from 2001 through 2006, certain former CSK employees, including senior executives, conspired to willfully manipulate CSK’s earnings. To date, the criminal investigation has resulted in charges against three former CSK executives, all of whom have pleaded guilty. Don W. Watson, CSK’s former chief financial officer, pleaded guilty to conspiracy to commit securities and mail fraud in connection with the scheme. Edward W. O’Brien III, the former controller of CSK, and Gary M. Opper, the former director of credits and receivables at CSK, each pleaded guilty to obstruction of justice for making material false statements during an internal investigation of CSK’s accounting practices.
As part of an agreement with the Department of Justice, CSK has accepted responsibility for the illegal conduct of its former employees. According to the non-prosecution agreement, from 2001 through 2006, certain former CSK employees, including senior executives, conspired to willfully manipulate CSK’s earnings.
According to the agreement, CSK purchased hundreds of millions of dollars in automotive parts and accessories every year from vendors. CSK received vendor allowances, or discounts, on its purchases in return for marketing vendors’ products for sale in CSK’s stores. These allowances reduced CSK’s expenses and thereby increased its pre-tax income. CSK recognized vendor allowances based on anticipated purchases from vendors. According to the agreement, certain employees manipulated CSK’s largest and most lucrative vendor allowance program by concealing amounts it had recognized based on anticipated purchases that ultimately did not take place, thus making the allowances uncollectible. The employees concealed these uncollectible amounts by applying collections for allowances from subsequent years to cover shortfalls in collections from prior years and by moving uncollectible balances to subsequent years. In so doing, the employees gave the false appearance that CSK had collected or was going to collect vendor allowances that it had already recognized as earnings. As a result of these manipulations, the employees caused CSK to conceal approximately $52 million in uncollectable receivables for fiscal years 2002 through 2004. By failing to write off uncollectible balances in these fiscal years, CSK overstated its pre-tax income in its public filings.
According to the agreement, in July 2005, CSK employees attempted to conceal their scheme by billing CSK’s vendors for approximately $30 million in vendor allowances, approximately $15 million of which they knew the vendors did not owe CSK. Additionally, throughout the duration of the scheme, they provided false information to CSK’s independent auditor to further conceal the accounting improprieties.
O’Reilly Automotive Inc., which acquired CSK after the accounting improprieties were uncovered and disclosed to the government, is also a party to the non-prosecution agreement because of its acquisition of CSK. The agreement and monetary penalty recognizes CSK’s timely, voluntary and complete disclosure of the illegal conduct; CSK’s and O’Reilly’s thorough cooperation with the government’s investigation; O’Reilly’s extensive remedial efforts pertaining to CSK’s internal training, compliance and reporting; and O’Reilly’s acquisition of CSK after the illegal conduct was discovered and disclosed to the government. As a result of these mitigating factors, the department agreed not to prosecute CSK or O’Reilly for the manipulation of CSK’s earnings, provided that CSK and O’Reilly satisfy their ongoing obligations under the agreement for a period of two years.
The sentencings for the CSK executives are scheduled to take place in Phoenix in September and November before U.S. District Judge Susan Bolton.
The U.S. Securities and Exchange Commission (SEC) conducted its own investigation, which resulted in a filed action against CSK and pending actions against Watson, O’Brien and Opper. The SEC also referred the conduct to the department.
The case is being prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Andrew H. Warren of the Criminal Division’s Fraud Section. The case is being investigated by the FBI, the IRS-Criminal Investigation and the U.S. Postal Inspection Service. The department thanks those agencies as well as the SEC for their substantial assistance in this matter.