Saks’ Rebates: Epilogue


A little over two months ago, Saks Fifth Avenue disclosed that it was conducting an internal investigation into “improper collections of vendor markdown allowances.” In short, someone in the organization was bilking suppliers for reimbursements.

The audit committee’s investigation is pretty much complete according to the company’s press release on Monday.

Chief findings: “The Audit Committee’s investigation concluded that during the Company’s 1999-2003 fiscal years, the total markdown allowances improperly collected from vendors was approximately $20 million… No improper collections during the 2004 fiscal year were identified.”

Chief teaser: “Now that the Audit Committee’s investigation is completed, management is undertaking its work to confirm the amount of total vendor markdown allowances determined to have been improperly collected and to determine if any markdown allowances were improperly collected before fiscal 1999.

Chief consequences: (again, from the press release):

— Individuals at SFAE [Saks Fifth Avenue] who were directly involved in the over-collection of vendor allowances are being asked to resign or are being terminated.

— Donald Watros, the Chief Administrative Officer of SFAE, has been asked to resign with forfeiture of vested options and other financial penalties.

— Individuals at SFAE who were determined to have failed to adequately supervise those directly involved in such over-collections, or otherwise performed inadequately in respect of this issue, are receiving disciplinary actions ranging from termination to reprimand.

— Brian Martin, who was General Counsel of the Company at the time of the 2002 investigation and is now a Senior Vice President of the Company with responsibility for certain SFAE real estate matters, has been asked to resign.

— Donald Wright, who is now and since before 2002 has been the Chief Accounting Officer of the Company, has been asked to resign.

Stern stuff; it sounds like this is an Audit Committee that found religion. They may yet need it: Saks still faces an SEC investigation; an inquiry from the office of the United States Attorney for the Southern District of New York; and a shareholder derivative action against the board and certain executive officers for breach of fiduciary duties in failing to correct or prevent problems with the accounting and internal controls. The investigation of the markdown allowances back to 1999 won’t be completed anytime soon: Saks won’t release its 2004 financial statements until that’s done, and they’re not expected to be released until September 1. It’s still going to be one busy audit committee.

Chairman Donaldson’s Comments At CFA Institute

SEC Chairman William Donaldson was the keynote speaker at the 2005 CFA Institute Annual Conference in Philadelphia on Sunday, May 8. The man has no small experience on Wall Street – remember, he was the “Donaldson” in “Donaldson, Lufkin & Jenrette” – and I found his reminiscences about the changing nature of research to be a good refresher on how researched reached its present state. (Lots of facts, not necessarily all well-connected – a little like it was in the ’50’s, as he described it.)

More notable were his maybe-warnings of regulatory interest in the business of fixed income analysts: “…here are still questions facing fixed-income research that are substantially the same as those that laid the groundwork for the Global Settlement. For example, is it the case that fixed-income analysts are any less susceptible to pressure from their colleagues in investment banking, from the debt syndicate desk, or from corporate clients themselves? Industry participants, including issuers and customers, should continue to be proactive in self-examining and addressing conflicts as they arise: How are you managing the pressure created when an issuer threatens to retaliate against the analyst or the firm? What about the pressure created when an institutional investor threatens to withdraw business from the firm if the analyst downgrades a portfolio security?

To the extent that bond analysts have been able to resist the pressure to hype favoured banking clients, has it been because of the counterweight provided by the institutional nature of the buy-side customer base? If so, what will happen as the character of that customer base begins to shade more into baby-boomer retiree retail?

I hope those of you in fixed-income research will turn your attention to questions such as these, and ask whether there is something to be learned from the history that gave rise to the Global Settlement.”

[”Global Settlement” refers to the deal cut with the big investment firms for their misleading research during the 90’s bubble, which was to fund independent research. And no, we at the AAO did not partake in the settlement.]

Most trenchant, I think, were his remarks on short-termism and the related accounting angle:

“Over time, analysts have become obsessed with the question of whether a company meets its quarterly private investment trust numbers, and not with whether a company is built to last. And because of the considerable clout of the sell-side analyst, this shift from long-term-thinking to short-term results has echoed through to company managements and to professional investors. The focus on short-term results has, I believe, had a counter-productive influence on companies, on investors and on analysts themselves.