The former vice president of sales at Atlanta children's clothing company Carter's pleaded not guilty Monday to 32 criminal charges related to a fraud he allegedly committed while working there.
The felony charges against Joseph M. Elles include securities fraud, causing false filings to the U.S. Securities and Exchange Commission and fraud by wire, radio or television, among others. Elles had his first appearance Monday in the United States District Court in Georgia's northern district; he was released on $100,000 bond.
Elles had previously been charged with four counts of fraud in a civil case following an SEC investigation.
According to the criminal indictment, over at least four years Elles enticed Kohl's to buy more Carter's products by giving its biggest wholesale customer larger discounts than Carter's had budgeted for. He allegedly altered the quarter when those larger discounts were reported in Carter's earnings, making them appear to be related to sales in future quarters. That caused the company to falsely overstate its profits in many quarters.
Beginning in 2005, the alleged fraud caused Carter's to overstate its income by 3 percent. In 2006, it was 5 percent and in 2007, Carter's overstated its income by 20 percent. Then in 2008, Carter's income was understated by 3 percent.
Carter's failed to report $16 million in expenses that had been hidden as a result of the fraud, the indictment said.
U.S. Attorney Sally Yates said investors were "duped" by Elles' actions, and called it a significant case.
"In the midst of a financial crisis, cases like this take on more import," she said.
Investors took a double hit, she said, by buying inflated stock, then suffering when it fell more than 20 percent as word of the alleged fraud came out in 2009.
It led to a shareholder lawsuit that was sent to mediation in August, as the parties attempt to reach a settlement. An internal investigation led former president Joseph Pacifico to leave the company in December 2009.
In a statement, Carter's vice president of investor relations Sean McHugh said the company is cooperating with the U.S. Department of Justice, and does not expect that any action will be taken against Carter's. The SEC had entered into a non-prosecution agreement with Carter's, but McHugh said the agreement did not extend to the justice department.
An attorney for Elles, Joseph Burby, said in a statement that he was disappointed that criminal charges were filed as the SEC's civil case was beginning, instead of after more information was available about the conduct of other Carter's and Kohl's employees.
He said that Elles "acted at all times at the direction, and with the knowledge, of Carter’s senior management."
Elles intends to "vigorously defend himself against these charges," Burby said.
A trial date has not yet been set.
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