Senior Executives of Auto Parts Retailer Charged with Scheme to Manipulate Corporate Earnings

Two former senior executives of CSK Auto Corp. (CSK) have been charged in a 31-count indictment for a scheme to manipulate the companys reported earnings. The indictment, returned by a federal grand jury in Phoenix, charges Martin G. Fraser, 53, of Glendale, Ariz., and Don W. Watson, 53, of Gilbert, Ariz., with conspiracy, securities fraud, mail fraud, false filings with the U.S. Securities and Exchange Commission (SEC), false books and records, and false statements to its auditor. Watson is charged separately with falsely certifying financial reports. Fraser, the former president and chief operating officer, and Watson, the former chief financial officer, allegedly engaged in a scheme from 2001 to 2006 to misstate CSKs income by, primarily, concealing that the company had tens of millions of dollars of uncollectible receivables that it should have written off. Uncollectible receivables are funds that a company reports as income because it expects to collect the funds, but later determines the funds not to be collectable. According to the indictment, during the scheme, CSK operated under the brand names Checker Auto Parts, Schucks Auto Supply, and Kragen Auto Parts. At the time the alleged earnings manipulation occurred, CSK was the largest specialty retailer of auto parts and accessories in the western United States and one of the largest such retailers in the entire United States. According to the indictment, CSK purchased hundreds of millions of dollars worth of auto parts every year, and its vendors gave CSK allowances, or rebates, for products CSK purchased in exchange for CSK using the allowances, generally, for marketing of the vendors products for sale in its stores. The vendor allowances reduced CSKs expenses and thus increased its income. As the indictment alleges, instead of writing off these uncollectible receivables, the conspirators concealed them by moving vendor allowance collections from later years to cover the shortfalls in prior years; by moving uncollectible receivable balances to subsequent years to hide them; and by billing vendors to try to collect allowances CSK was not owed. As a result of the scheme, CSK allegedly misstated its receivables and pre-tax income in its annual reports (Forms 10-K) in fiscal years 2002, 2003, and 2004 by approximately $10 million, $24 million, and $19 million, respectively. The conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. Each charged count of securities fraud, false filings, false books and records, and false statements to auditors carries a maximum penalty of 20 years in prison and a $5 million fine. Each charged count of mail fraud carries a maximum prison sentence of 20 years and a $250,000 fine. Each charged count of falsely certifying financial reporters carries a maximum penalty of 10 years in prison and a $1 million fine. In related actions, Edward William OBrien III, the former controller of CSK, pleaded guilty on April 7, 2009, to obstruction of justice. According to court documents, in approximately summer 2006, OBrien corruptly made material false statements and omitted material information during an internal investigation interview in order to influence, obstruct, and impede the SECs investigation. OBrien admitted that at the time of the interview, he knew the SEC was investigating allegations of fraud in connection with financial disclosures by his employer. A sentencing date has not yet been set for OBrien. In addition, a criminal information was unsealed on April 7, 2009 against Gary Michael Opper, the former director of credits and receivables at CSK, charging him with obstruction of justice. In another related action, the SEC filed a civil enforcement action against Fraser, Watson, OBrien and Opper on March 5, 2009.