The Securities and Exchange Commission said Wednesday that Saks has agreed to settle a lawsuit that Saks Fifth Avenue understated sales to some vendors and didn't record markdowns properly, inflating its earnings.
In a press release, the regulatory agency said the New York retailer has agreed to settle the lawsuit without admitting or denying wrongdoing. The company also agreed to an injunction barring further violations.
The lawsuit, filed Wednesday in federal court in Manhattan, alleged that Sakes Fifth Avenue Enterprises employees engaged in the deceptive practices from at least 1999 to 2003 in order to achieve financial targets.
"Throughout that period, Saks set aggressive financial targets for SFAE and some SFAE employees believed they were expected to achieve these targets by deceptive means if necessary," the lawsuit said. "In addition, as a result of its inadequate internal controls, Saks failed to detect or adequately address the misconduct at SFAE."
A Saks spokeswoman and a lawyer for the company didn't immediately return phone calls seeking comment.
In September 2005, the company restated its results for fiscal years 1999 to 2003 and the first three quarters of 2004 after conducting an internal investigation, the SEC said.
One of the practices was the by certain SFAE buyers to vendors of the sales performance of the vendors' merchandise, according to the complaint.
From 1996 to 2003, more than a dozen employees intentionally understated to the vendors sales of their merchandise, according to the lawsuit. As a result, SFAE was able to collect millions of dollars in vendor-allowance payments to which is wasn't entitled, the SEC said.
The second practice involved the improper deferral of permanent markdowns from one period to another at SFAE, which also began in the mid-1990s, according to the complaint.
Improper rolling of markdowns resulted in Saks' overstatement of its inventory and net income in some reporting periods from which permanent markdowns were deferred, the SEC said.
The SEC alleged that vendor-allowance overcollection at SFAE came to the attention of senior Saks management in August 2002 and in September 2002. However, an internal investigation of the conduct was flawed and "failed to detect the full scope of the problem."
"The internal investigation identified only $716,000 in overcollection, from one vendor, by a single Division 2 buyer and an assistant buyer, during one retail season," the SEC said. "In fact, by the time of the investigation, the vendor-allowance overcollection amounted to approximately $30 million, extended to approximately 12 vendors, involved approximately 11 buyers and assistant buyers, as well as the manager of an SFAE division, and had occurred over seven fiscal years."
Shares of Saks were down 72 cents, or 4.5 percent, to $15.32 in Wednesday afternoon trading.