Ex-Cutter & Buck president admits to falsifying records

Former Cutter & Buck President Martin Marks pleaded guilty yesterday to a criminal infraction in federal court, ending a 14-month investigation into the sportswear company's attempt to conceal $5.7 million in fraudulent sales for the 2000 fiscal year.

Marks — the highest-level executive to be sentenced in the course of the federal investigation — pleaded guilty before U.S. Magistrate Mary Alice Theiler to falsifying accounting records. He was fined $65,000.

In a separate civil matter, the Securities and Exchange Commission (SEC) charged Marks in federal court with securities fraud and other violations. He settled the charges without admitting or denying them. He was barred from serving as an officer or director of a public company and fined $44,777.

Marks, the third former employee to be sentenced in connection with the company's accounting misdeeds, also was barred from practicing as an accountant in a separate administrative proceeding, the SEC said.

Assistant U.S. Attorney Jeffrey Coopersmith said the criminal investigation is closed, "barring some new evidence that surfaces." The SEC said its civil investigation also is closed.

"You need to follow the evidence where it leads, and you have to lead with the evidence you have," Coopersmith said.

At issue was Cutter & Buck's long-standing and aggressive practice of sending products well in advance of a customer's requested ship date. The practice allowed it to record revenue at the time of the shipment — in essence borrowing sales from future periods. As the company's reliance on early shipments grew, however, it started each quarter with a larger deficit, court records show.

The volume of early shipments rose from an average of several hundred thousand dollars a quarter to $2.3 million for the quarter ended Oct. 31, 1999, and $3.8 million for the quarter ended Jan. 31, 2000.

On April 28, 2000 — two days before the company's 2000 fiscal year ended — Cutter & Buck shipped $5.7 million in merchandise to three distributors and recognized those shipments as revenue for the quarter ended April 30, 2000, court records show.

The distributors acted as warehouses. None was obligated or financially able to pay for the products until they were sold to consumers.

In April 2001, however, the distributors returned roughly $3.8 million in merchandise.

Although the $5.7 million had been recorded as sales from the company's corporate-sales division, the company tried to conceal the returned inventory by spreading it among four divisions.

In December 2002, Cutter & Buck restated its financial results back to 1998 to correct the inflated sales figures.

In the end, three former employees pleaded guilty for their role in the company's accounting misdeeds.

Former Chief Financial Officer Stephen Lowber received the stiffest penalty. He was sentenced in August to three months in jail and three months in home detention, after pleading guilty to being an accessory after-the-fact to wire fraud for his role.

Lowber also paid a $50,000 fine to the SEC and was barred from serving as an officer or director of a publicly traded company.

Former controller Athena Diaz was sentenced to two years probation in November after pleading guilty to a federal felony.

Neither Diaz nor Lowber was charged with concocting the plan to inflate sales. Each was charged for helping to cover it up. Neither benefited financially from the misdeeds.

Marks admitted to having a conversation with Lowber and endorsing the idea to spread the returned merchandise among four sales channels.

In a prepared statement, Alan Zarky said his client pleaded guilty to an infraction, "the lowest possible level of criminal violation."

"Mr. Marks is very happy to put this matter behind him and very appreciative of the friends who have supported him," Zarky said.

Coopersmith said Cutter & Buck is small compared with Enron, WorldCom and other large accounting scandals. However, the case shows "how seriously the justice department takes these matters."

"This sends a strong message, especially in the world of public company executives," Coopersmith said. "There is a message of deterrence."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Information in this article, originally published December 17, was corrected December 17. Former Cutter & Buck President Martin Marks pleaded guilty to a criminal infraction. An earlier version of this story said he pleaded guilty to a criminal misdemeanor.