Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, May 26, 2009

CSK Auto Settles Accounting Fraud Charges

The SEC today instituted settled cease-and-desist proceedings against CSK Auto Corporation (CSK), an auto parts retailer headquartered in Phoenix, Arizona, finding that the company violated the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws in connection with its false financial statements in its annual reports filed with the Commission for fiscal years 2002, 2003, and 2004. CSK filed false financial statements materially overstating its pre-tax income for fiscal year 2002 by approximately 47%, or $11 million; fiscal year 2003 by approximately $34 million, thereby reporting pre-tax income instead of a pre-tax loss; and fiscal year 2004 by approximately 65%, or $21 million.

This is the second enforcement action arising out of the Commission's investigation into CSK's financial fraud. In March 2009, the Commission filed a civil injunctive action in federal court against CSK's former president and chief operating officer, former chief financial officer, former controller, and former director of credits and receivables. See SEC v. Fraser, et al. (Lit Rel. No. 20933). In the pending federal court action, the SEC seeks a permanent injunction from future violations, disgorgement, prejudgment interest, and civil penalties against all defendants, and an order barring certain defendants from serving as a director or officer of a public company.

In the settled cease and desist proceedings against CSK, the Commission found that CSK materially overstated its income by (1) failing to write off vendor allowance receivables that it knew, or should have known, were not collectible, and (2) during fiscal year 2003, improperly recognizing certain vendor allowances. The Commission also found that CSK engaged in several private debt offerings while its false financial statements were outstanding and that it failed to implement internal accounting controls sufficient to provide reasonable assurances that accounts were accurately stated in accordance with Generally Accepted Accounting Principles. The Commission found that, as a result of its conduct, CSK violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, and 13a-1 thereunder.

Based on the above, the Commission ordered CSK to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-1 thereunder. CSK, in agreeing to the settlement, neither admitted nor denied the Commission's findings. (Rels. 33-9032; 34-59973; AAE Rel. 2974; File No. 3-13485)

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