While the Martha Stewart trial has been hyped to no end by the media, once captivating those that adored her efforts to bring good taste to the super market checkout line, the case surrounding the flameout at Just for Feet appears to be capturing all the attention and interests of those we see and talk to daily in the Sporting Goods and Athletic Footwear world.
The case surrounding the rise and fall of perhaps one of the most flamboyant and tenacious CEOs this industry has seen in some time is one that sparks incredible curiosity and concern for “whos next”. The infectious enthusiasm of Harold Ruttenberg and some of his team had many executives “drinkin the Kool-aid” when it came to helping them grow their business, but those that were sacrificed early in the governments probe of the failed retailer are apparently giving investigators what they need to paint a clearer picture of the actions of the central cast.
The companys specific actions that may have led to fraud are now being uncovered after a number of lawsuits and a years-long investigation by the U.S. Attorneys office in BHM, The Department of Justices Corporate Fraud Section, and the FBI. Last week, investigators got another step closer to the players that orchestrated and directed the alleged fraud to mislead auditors, falsify records and deceive Wall Street.
The real story this past week wasnt the plea deal that saw Don-Allen Ruttenberg, EVP of the former JFF and son of its founder, charged with conspiracy to commit securities fraud, wire fraud, and submitting false statements to the auditors of his former company. The real news was contained in the suit filed against Ruttenberg in Atlanta by the Securities and Exchange Commission that appears to outline his efforts to arm-twist, threaten and even retaliate against vendors that did not engage in the activities that led to the so many fraud charges in this case.
According to the filing, Ruttenberg distributed an “audit confirmation letter” to numerous vendors as part of the process of JFFs annual audit conducted by Deloite & Touche from February to April 1999. As part of the process, D&T requested that JFFs vendors to confirm amounts owed to JFF.
Unbeknownst to many, but suspected by some, the amounts that JFF was claiming in the Accounts Receivable line didnt jive with reality.
A release last week from the U.S. Attorneys office said, “Ruttenberg caused the company's accounting department to record over $5 million in fictitious accounts receivable allegedly due to JFF from various vendors as of January 30, 1999”, causing JFF to overstate income by the same amount.
As part of the scheme, Ruttenberg allegedly sent the various vendors an audit confirmation letter, requesting that each confirm to Deloitte & Touche that they actually owed JFF certain amounts “for advertising that ran or merchandise sold prior to January 30, 1999”. The requests were termed “Fictitious Co-Op Revenue” claims and “Fictitious Booth Income” claims by the SEC.
Those charged so far on the vendor side appear to have sent the confirmation letter directly back to the auditors, which have resulted in four guilty pleas by vendor executives so far, while one unnamed — and uncharged — executive sent the letter back to JFF.
According the SEC suit, all parties understood that JFFs “receipt of advertising co-op revenue was not guaranteed”, pointing to our industrys most common practices for accruing, allocating and crediting for co-op dollars based on purchases made by the retailer.
During fiscal year 1998 and the first quarter of 1999, Ruttenberg allegedly had JFFs accounting department book “co-op receivables when he knew or was extremely reckless in not knowing that the vendors in question did not owe these funds” to JFF at any time during the affected period.
The suit further contends that Ruttenberg instructed the accounting staff “on how to book journal entries relating to these receivables”. He then allegedly had vendors “provide documents used to confirm, falsely, approximately $19.4 million in co-op receivables recorded for fiscal year 1998 that Just for Feet had not in fact earned during the fiscal year”, according to the SEC suit.
The SEC suit names specific actions Ruttenberg took to persuade representatives of adidas America, Fila USA, and Nike, Inc. to sign the confirmation letters, or $6.2 million of the amount they alleged he knew to be false.
The suit details the activities of the Director of Sales for adidas America at the time. He allegedly signed the letter Ruttenberg sent to him in March 1999 that “fraudulently confirmed” that adidas owed $2.3 million in co-op receivables to JFF when the vendor owed no co-op receivables.
The suit then claims that “Ruttenberg pressured the executive into signing the confirmation by claiming that it was merely an internal document”. Ruttenberg also allegedly told the him that adidas was the last vendor that had not signed a confirmation letter. The SEC also said that Ruttenberg “knew and acknowledged adidas “in fact did not owe any co-op receivable funds”.
The suit then alleges that the “Adidas representative”, at Ruttenberg's instruction, sent the false confirmation to Deloitte and Touche.
After sending the false confirmation, Adidas sent a “Disclaimer” to Ruttenberg stating that the confirmation would become invalid if Just for Feet attempted to use it, without other evidence, to collect any of the credits purportedly owed to it by Adidas. Ruttenberg did not disclose this disclaimer to the Deloitte auditors.
adidas Tim McCool entered a guilty plea in September 2003 on charges of conspiracy to submit false statements and to causing false entries to be made in the books and records of JFF.
Also outlined in the suit is Ruttenbergs interaction with the former CEO of Fila USA, who reportedly “similarly signed a letter” Ruttenberg sent to him, “fraudulently confirming that Fila owed $1.38 million in co-op receivables to Just for Feet as of January 30, 1999”, but the letter explicitly stated that the confirmation was in connection with the D&T audit.
The SEC charges that Ruttenberg knew that Fila owed only $171,442 to JFF at January 30, 1999. Ruttenberg reportedly also “pressured the Fila executive into signing the confirmation and directed him to send it directly to the Deloitte auditors”. The CEO “complied” with Ruttenberg's demands and sent the letter to the auditors.
Jon Epstein, Filas former CEO, was charged with one count of conspiracy to provide false statements to auditors and falsify books and records and entered a guilty plea in December. He was not named in this suit.
One company not mentioned to-date in the investigation is Nike. But the SEC suit does charge that “Nike's Strategic Account Manager for the Southeast wrote and sent to Don-Allen Ruttenberg two confirmation letters in March 1999”, at Ruttenbergs request. “Ruttenberg provided the letter to Deloitte in connection with the audit” the suit alleges.
The first letter confirmed that JFF had $2.15 million in “available” co-op funds from Nike as of January 30, 1999, but JFF had only approximately $600,000 in available co-op allowances from Nike at the end of January 1999 and had not earned any of this amount. Nike allegedly sent another letter that confirmed that Just for Feet had accrued, as of January 30, 1999, $509,000 in “Margin enhancement Co-Op”, or markdown money. The suit claims that Ruttenberg knew that the statement was invalid because “Nike did not offer margin enhancements”.
No Nike personnel have been charged in the probe.
The SEC also suit claims that Ruttenberg pressured executives from Asics, New Balance, Reebok International, and The Timberland Company during March and April 1999 and each refused to sign the letters.
The letters in question would have “fraudulently verified $13.2 million in co-op receivables purportedly owed to Just for Feet as of January 30, 1999”. The suit claims that Ruttenberg and others kept the numbers on the books, attributing about $971,135 for Asics, $4.3 million for New Balance, and $6.8 million to Reebok. Each company owed JFF nothing in co-op receivables, according to the suit. Additionally, JFF booked approximately $1.3 million in unearned co-op from Timberland when in fact TBL owed JFF only $105,000.
Just for Feet had any even more gutsy scheme when it started recognizing a vendors fixturing systems or “booths” as a asset, even though most companys maintain ownership of those units they place a retail.
The SEC suit claims that Ruttenberg and others “also caused vendors to bill Just for Feet for the purchase of sales booths which the vendors had previously located in Just for Feet stores at no expense” to JFF. Just for Feet then recorded the booths as assets, according to the suit, and JFF “initially paid the charges, but in return obtained a credit on merchandize purchases”.
This accounting enabled JFF to decrease its expenses and thereby increase net income before taxes. The suit said that JFF “engaged in round-trip transactions by receiving back the funds it used to buy these booths and then recognizing these funds as reductions in expenses, increasing income”. Oh, it gets better.
The suit then goes on to allege that JFF changed the accounting system for booth assets and income to eliminate the involvement of the vendors entirely for the fiscal year 1998, ended January 30, 1999.
Just for Feet then just “projected the dollar amount of booths it wanted to receive during the year, divided the amount by twelve months, and started booking $174,362 per month of booth income through projected reductions of advertising expense”.
The suit alleges that JFF booked in November 1998 another $5.2 million of booth income on top of the monthly allocation for a total of roughly $5.4 million for October 1998. “There was no supporting documentation attached to the fraudulent journal entry”, the suit says. “Just for Feet then fraudulently booked an additional $2.25 million of booth income over the remaining three months of the fiscal year.”
The suit says that even though no cash or co-op credits actually changed hands during fiscal year 1998, JFF fraudulently increased its net income by $9 million through the scheme. The suit further lays out the actions by JFF and Ruttenberg to “substantiate the $9 million booth income amount”. Deloitte & Touche prepared confirmations to the vendors after year-end to verify the dollar amount of booths received during the year and Ruttenberg signed all of the confirmation letters and mailed them to “various sales directors and corporate officers of the vendors”.
The confirmation letters stated “the balance owed by Just for Feet, Inc. as of January 30, 1999 for store booths and fixtures shipped to them during the year ended January 30, 1999 is $[amount varied by vendor].” Although the letters actually represented the confirmations of “payables”, they were used to justify the fraudulent value of assets.
The SEC said most vendors “cooperated and returned the confirmation letters” to the auditors because it “pleased an important customer” among other reasons.
But there was also apparently retribution for some that didnt play the game .
For instance, The Rockport Company, LLC, a subsidiary of Reebok International LTD, refused to supply D&T with an letter confirming that Just for Feet was “owed” $606,000 for booths. Just for Feet reportedly then retaliated by “withholding $600,000 on a March 1999 payment for merchandise”, claiming that Rockport owed JFF the money for “booth” co-op. The suit alleges that after Rockport issued an invoice for the $600,000 that JFF refused to pay and Rockport cut off shipments.
According to the SEC, an internal Rockport e-mail said that Just for Feet's withholding of the $600,000 payment “smells like a book cooking to offset the fixturing [sic] amortization's that we said they couldn't take.”
After “further discussions” with Ruttenberg, Rockport eventually submitted a $600,000 invoice for “retail fixtures for 1998” to Just for Feet, which JFF paid. The SEC said the effect of the transaction was that Rockport ended up receiving the money that Just for Feet legitimately owed to it while Just for Feet received a bill substantiating, falsely, that it had purchased the booths.
The SEC alleges that Just for Feet and Ruttenberg held the $600,000 that Just for Feet owed Rockport “hostage” until JFF received the bill that it needed to support its fraudulent booth project.
So, it appears that the “interviews” with industry executives have born fruit for the prosecution and the SEC in this matter. It may also shed some light on the reasons why sentencing appears to be delayed in most of the actions. It looks as though that the execs that sent letters directly to the auditors were charged, but those that gave the info to Ruttenberg or others at JFF have been spared for now.
“The progress in this investigation continues, and with each new plea we come closer to bringing all who betrayed Just For Feet investors' confidence to justice,” said U.S. Attorney Alice H. Martin in a press release.
The conspiracy charge against Ruttenberg carries a maximum penalty of five years in prison and a fine of $250,000 and the charge of making false statements to auditors of a publicly traded company carries a max penalty of 10 years in prison and a fine of $1 million. The suit seeks to have him barred from serving as a company officer or director of a publicly traded company, repayment of any “ill-gotten gains”, as well as certain civel penalties and interest.
In other news related to this ongoing investigation, the rumors about the senior Ruttenberg appear to be true. Harold Ruttenberg has reportedly been hospitalized in Birmingham with a form of brain cancer
Reached for comment, U.S. Attorney Alice Martin would not comment on Ruttenberg's condition or whether he is a target of the investigation in a local report.
>>> Lesson learned? Dont sign anything…
