The former chief financial officer of CSK Auto pleaded guilty to conspiracy to commit securities and mail fraud in connection with a scheme to misstate the company's reported earnings from 2001 through 2006, according to the government.
Don W. Watson 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.
According to the government, CSK misstated its receivables and pre-tax income in its annual reports in fiscal years 2002, 2003 and 2004 by about $10 million, $23 million and $19 million, respectively.
Watson pleaded guilty before US District Judge Susan R. Bolton in Arizona.
The conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine.
Watson is scheduled to be sentenced on September 19."Don Watson made the crucial mistake of thinking he was above the law," said Assistant Attorney General Lanny A. 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."
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.
Watson and the former president and chief operating officer of CSK were originally indicted on April 7, 2009.
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, which was conducting an investigation into misstatements of CSK's expenses and income from 2001 through 2004 with regard to vendor allowances.
O'Brien and Opper are scheduled to be sentenced July 25.