Former Executive of Auto Parts Retailer Sentenced to 24 Months in Prison for Fraud Scheme

WASHINGTON—The former chief financial officer of CSK Auto Corp. was sentenced late yesterday to 24 months in prison for his role in a scheme to manipulate CSK’s earnings and double-bill CSK’s customers, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; Special Agent in Charge James L. Turgal of the FBI’s Phoenix Field Office; Special Agent in Charge Dawn Mertz of the Internal Revenue Service-Criminal Investigation (IRS-CI) Phoenix office; and Inspector in Charge Pete Zegarac of the U.S. Postal Inspection Service (USPIS) for the Phoenix Division.

Don W. Watson, 55, of Gilbert, Ariz., was sentenced by U.S. District Judge Susan R. Bolton in the District of Arizona in Phoenix. In addition to his prison term, Watson was sentenced to three years of supervised release. Restitution will be determined by the court at a later date.

Watson pleaded guilty on May 13, 2011, to one count of conspiracy to commit securities and mail fraud. Watson admitted in his plea that, from 2001 to 2006, he and others conspired to misstate CSK’s income by concealing that the company had tens of millions of dollars in rebates from vendors that CSK had claimed as income that were never collected. As a result of the fraud scheme, CSK reported millions of dollars more in pre-tax income than it in fact earned. In addition, Watson admitted in his plea that he and others intentionally caused CSK to double-bill vendors millions of dollars that CSK was not owed.

According to court documents, CSK operated under the brand names Checker Auto Parts, Schucks Auto Supply, and Kragen Auto Parts. During the time of the conspiracy, 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 court documents, CSK purchased hundreds of millions of dollars worth of auto parts every year. Its vendors gave CSK allowances, or rebates, for products CSK purchased in exchange for CSK using the allowances for marketing of the vendors’ products for sale in its stores. By reducing the cost to CSK of the products it purchased from vendors, the allowances increased CSK’s income. Watson admitted that, instead of writing off allowances that CSK had claimed but could not collect, he and others concealed the uncollectible amounts by causing vendor allowances from later years to be moved to cover the shortfalls in prior years and by causing vendors to be billed for allowances CSK was not owed.

As a result of the scheme, CSK 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, $23 million and $19 million, respectively.

In related actions, Edward W. O’Brien III, the former controller of CSK, and Gary M. Opper, the former director of credits and receivables at CSK, pleaded guilty to obstruction of justice in April 2009. Sentencings for O’Brien and Opper are scheduled for Nov. 7, 2011, before Judge Bolton. CSK recently entered into a non-prosecution agreement with the Department of Justice, in which it agreed to pay a penalty of $20.9 million and abide by conditions of the agreement for a period of two years. 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 was prosecuted by Deputy Chief Patrick Stokes and Trial Attorneys Jennifer R. Taylor and Andrew H. Warren of the Criminal Division’s Fraud Section. The case was investigated by the FBI, IRS-CI and the USPIS. The department thanks those agencies, as well as the SEC, for their substantial assistance in this matter.