Former President of Atlanta-Based Public Company Indicted in Multi-Million-Dollar Securities Fraud Cover-Up
Served as Second-in-Command of Children’s Clothing Company Carter’s Inc.

ATLANTA—JOSEPH PACIFICO, 62, of Atlanta, was indicted today 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. The charges are part of a superseding indictment that charges PACIFICO and another former top executive, JOSEPH M. ELLES, 57, of Las Vegas, Nevada, with 37 federal crimes relating to their alleged roles in accounting irregularities at the major children’s clothing company Carter’s Inc. PACIFICO’s initial appearance in court on the charges has not yet been scheduled.

United States Attorney Sally Quillian Yates said of the case, “The indictment of this case investigated by the President’s Financial Fraud Task Force demonstrates that we will follow the evidence wherever it leads, even to the top of the corporate ladder. Joseph Pacifico, the former number two executive at Carter’s Inc., based in Atlanta, 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. Shareholders expect and deserve far more from their corporate leaders.”

Brian D. Lamkin, Special Agent in Charge, FBI Atlanta Field Office, stated, “Such actions by a senior corporate officer as charged in the superseding indictment impact not only the company in which he served but the many shareholders who make investment decisions based on that company’s financial statements. The FBI will continue to work with its various law enforcement partners and the U.S. Attorney’s Office as it aggressively investigates those who engage in corporate fraud.”

According to United States Attorney Yates, the charges, and other information presented in court: PACIFICO served as president of the Atlanta-based children’s clothing company Carter’s Inc. from 2004 until December 2009. PACIFICO was a senior executive officer of the company and the highest-ranking executive in the Carter’s sales organization. He supervised the company’s head of wholesale sales, defendant JOSEPH M. ELLES, and the company’s wholesale sales accounts, including Kohl’s Department Stores.

Carter’s is registered with the U.S. Securities and Exchange Commission (“SEC”), and its stock is publicly traded on the New York Stock Exchange. It is obligated to report its financial results in annual and quarterly filings with the SEC, so that members of the public can make informed investment decisions. The securities laws also require Carter’s to make and keep accurate corporate books and records.

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.” 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 ELLES manipulated the company’s accounting for millions of dollars in rebates to Kohl’s by misrepresenting that the rebates related to sales made in current fiscal years or quarters, rather than the prior years or quarters in which the sales were actually made. This caused Carter’s to record all of the sales revenue from selling goods in a particular year or quarter without accounting for all of the expenses (“accommodations” or “margin support”) that the company was incurring in connection with those sales.

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.

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 and then resigned in December 2009. ELLES left the company earlier in 2009, working for the company in a consulting capacity for three months after resigning in March 2009.

The grand jury previously returned a 32-count indictment against ELLES on September 21, 2011 containing charges for securities fraud, causing the filing of false financial statements, falsifying corporate books and records, wire fraud, and mail fraud.

The securities fraud charges against PACIFICO and ELLES each carry a maximum sentence of 25 years in prison and a fine of up to $250,000. The charges against PACIFICO and ELLES 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. The wire and mail fraud charges against ELLES alone each carry a maximum sentence of 20 years in prison and a fine of up to $250,000. 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.

This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

This case is being investigated by special agents of the Federal Bureau of Investigation. The SEC has conducted a separate investigation of possible civil violations of the U.S. securities laws, and in December 2010 reached a non-prosecution agreement with Carter’s and filed a civil enforcement action against ELLES alleging securities fraud, insider trading, and other securities violations. That case remains pending.

Assistant United States Attorney David M. Chaiken is prosecuting the case.

Members of the public are reminded that the indictment contains only allegations. A defendant is presumed innocent of the charges, and it will be the government’s burden to prove a defendant’s guilt beyond a reasonable doubt at trial.