Fashion Week Faux Pas by Saks

Even luxury fashion pillar Saks Fifth Avenue isn't immune from apparent misconduct to achieve its financial goals, federal securities regulators say.

Employees of Saks Fifth Avenue Enterprises, a division of the company, engaged in deceptive practices to meet "aggressive" financial targets from the mid-1990s to 2003, according to a civil action filed Wednesday by the Securities and Exchange Commission in federal district court in Manhattan.

The tony department store agreed to settle the case without admitting or denying the commission's allegations, and agreed to an injunction that bars it from future such securities violations.

Saks was tripped up, the commission said in its complaint, when some of its employees "believed they were expected to achieve these targets by deceptive means if necessary."

Saks also lacked "adequate internal controls," which resulted in the department store inflating its earnings for fiscal years 200 through 2003, as well as the second quarters of the 1999 and 2001 fiscal years, federal regulators charged.

There was no immediate comment from Saks, a Tennessee corporation based in Manhattan. It sells top-of-the-line goods, mostly to women, in its 54 stores located in 25 states.

In its complaint, the S.E.C. said that for eight years, starting in 1996, more than a dozen employees were involved in understating sales of vendors' merchandise. The company collected millions of dollars in vendor payments that it wasn't entitled to, and those were used to pad the store's income for several reporting periods, according to the complaint.

That included overstating its fiscal year 2003 net income by 42.6 percent, regulators said. And even though excess collection of certain vendor allowances came to the attention of senior Saks management in August and September 2002, the company's internal investigation then failed to detect the scope of the problem or to adequately address it, the complaint charged.

Another deceptive practice the store used was overstating its inventory by improperly deferring permanent markdowns from one period to the next, regulators complained. That allowed Saks to overstate its inventory and net income in some reporting periods.

by Elizabeth Olson