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Former Midtown Executive Indicted on Federal Charges

Former president of children's clothing maker Carter’s, Inc., was indicted Tuesday on federal securities fraud and other charges.

The former president of a Midtown-based children’s clothing company was indicted Tuesday by a federal grand jury for securities fraud, causing the filing of false financial statements, and falsifying the books and records of a public company.

According to a news release from the U.S. Attorney’s Office in Atlanta, the charges are part of a superseding indictment that charges Joseph Pacifico of Atlanta, and another former top executive, Joseph M. Elles of Las Vegas, with 37 federal crimes relating to their alleged roles in accounting irregularities at Carter’s, Inc.,

Carter’s Inc., which is located at 1170 Peachtree Street in the Proscenium Building in Midtown, makes OshKosh B’gosh branded apparel.

The 62-year-old Pacifico, the former second-in-command of the company, served as company president from 2004 until December 2009. He was the highest-ranking executive in the Carter’s sales organization and supervised the company’s wholesale sales accounts, including Kohl’s Department Stores.

United States Attorney Sally Quillian Yates said in a statement that Pacifico “is accused of trying to hide a multi-million dollar fraud, lying to shareholders, and committing additional crimes in the course of the attempted cover-up." 

According to the statement, the superseding indictment alleges that, at least by April 2009, Pacifico was aware that Elles and others had been deliberately causing Carter’s to falsely record in its accounting books, millions of dollars in rebates that Elles had agreed to pay to Kohl’s and other retailers. 

The superseding indictment alleges that, from 2006 and into 2009, at the end of each fiscal year and at the end of several fiscal quarters, Elles agreed to pay rebates to Kohl’s and other retailers referred to as “margin support” or “accommodations.” 

The news release explained that these rebates, which are common in the apparel industry, help compensate the retailer in certain circumstances where the retailer was unable to make its expected profit margins from the sale of Carter’s goods. These rebates are expenses that reduce Carter’s net sales revenue and profits.

The superseding indictment alleges that at least by April 2009 and continuing through November 2009, Pacifico was aware of millions of dollars in undisclosed rebates and attempted to keep them hidden from other members of senior management, Carter’s shareholders, internal and external auditors, and others.  The superseding indictment alleges that Pacifico did so by lying to other members of senior management and other employees, signing false documents, and instructing subordinates not to relay information about the rebates to senior management or dissuading them from doing so.

The superseding indictment alleges that, as a result of the fraud and attempted cover-up, Pacifico caused Carter’s to materially misstate its net income and other items in its publicly filed financial statements from April 2009 through July 2009, and falsified and caused to be falsified certain corporate books and records during that period. The superseding indictment alleges that Elles caused Carter’s to file materially false financial statements for several years and quarters from at least November 2006 through July 2009, and that he also falsified or caused to be falsified multiple corporate books and records during that period.

According to the news release, in late October 2009 and continuing into December 2009, Carter’s announced that it had discovered the accounting regularities and that it intended to re-state several years worth of previously-published financial statements. Carter’s stock price fell over 20-percent on the day it announced that it would delay the release of its financial information for the third quarter of 2009 in order to review its accounting for accommodations. Pacifico was placed on administrative leave in November 2009, then resigned in December 2009.

The securities fraud charges against the men each carry a maximum sentence of 25 years in prison and a fine of up to $250,000. The charges for causing the filing of false financial statements with the SEC and the falsification of corporate books and records, in violation of the Securities Exchange Act of 1934, each carry a maximum sentence of 20 years in prison and a fine of up to $5 million. In determining the actual sentence, the Court will consider the United States Sentencing Guidelines, which are not binding but provide appropriate sentencing ranges for most offenders.

Pacifico’s initial appearance in court on the charges has not yet been scheduled.

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