Former CFO of National Auto Parts Retailer Pleads Guilty to Scheme to Manipulate Corporate Earnings
Topics: CSK Auto, Don W. Watson
U.S. Attorney’s Office, District of Arizona
May 13, 2011
WASHINGTON—Don W. Watson, former chief financial officer (CFO) of CSK Auto Corp. (CSK), pleaded guilty today in U.S. District Court for the District of Arizona to conspiracy to commit securities and mail fraud in connection with a scheme to misstate the company’s reported earnings from 2001 through 2006, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; Kevin Perkins, Assistant Director of the FBI’s Criminal Investigative Division; Inspector in Charge Pete Zegarac of the U.S. Postal Inspection Service (USPIS) Phoenix Division; and Victor S.O. Song, Chief of the Internal Revenue Service-Criminal Investigation (IRS-CI).
Watson, 55, of Gilbert, Ariz., pleaded guilty before U.S. District Judge Susan R. Bolton. Watson admitted 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 vendor rebates that CSK had claimed as income but were never collected. The rebates were in fact not owed to the company or could not be collected and therefore should have been written off CSK’s books. As a result of the fraud scheme, CSK reported tens of millions of dollars more in pre-tax income than it in fact earned.
“Don Watson made the crucial mistake of thinking he was above the law,” said Assistant Attorney General Breuer. “He used his position as CFO to manipulate CSK’s books and lie about the company’s true worth. In doing so, he misled shareholders and the investing public. We are determined to continue investigating and prosecuting corporate executives who, like Watson, should know better.”
“Fraud and dishonest dealings have no place in the American marketplace. The FBI and our law enforcement partners will use our resources to identify and investigate companies like CSK that do not follow the rules,” said Assistant Director Perkins of the FBI’s Criminal Investigative Division.
“The U.S. Postal Inspection Service will continue to partner with fellow law enforcement agencies to bring those conducting mail fraud to justice,” said Phoenix Division Postal Inspector in Charge Zegarac. “Postal Inspectors will continue to aggressively investigate those who use the U.S. Mail to perpetuate schemes manipulating corporate earnings.”
“High-ranking corporate officials hold positions of trust not only in their companies but also in the eyes of the public. In this investigation, Mr. Watson broke that trust by misstating CSK’s receivables and pre-tax income in its annual reports by millions of dollars,” said IRS-CI Chief Song. “The license to run a business is not a license to conduct criminal activity.”
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 rebates increased CSK’s income. Watson admitted that, instead of writing off rebates that CSK had claimed but could not collect, he and others concealed the uncollectible amounts by causing vendor rebates from later years to be moved to cover the shortfalls in prior years and by causing vendors to be billed for rebates 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.
Watson and the former president and chief operating officer of CSK were originally indicted on April 7, 2009. The conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. Sentencing for Watson has been scheduled for Sept. 19, 2011.
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. O’Brien and Opper admitted to making material false statements during an internal investigation of CSK’s accounting practices knowing the information would be passed on to the Securities and Exchange Commission (SEC), which was conducting an investigation into misstatements of CSK’s expenses and income from 2001 through 2004 with regard to vendor allowances. Sentencings for O’Brien and Opper are scheduled for July 25, 2011, before Judge Bolton.
The case was prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Jennifer R. Taylor of the Criminal Division’s Fraud Section, with assistance from the U.S. Attorney’s Office for the District of Arizona. The case was investigated by the FBI, IRS-CI and USPIS. The Department would also like to acknowledge the substantial assistance of the SEC in the investigation.
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