Former CSK Auto execs indicted on charges of earnings manipulation

Two former top executives of CSK Auto Corp., now owned by Springfield-based O'Reilly Automotive Inc., have been charged with manipulating the company's reported earnings, the U.S. Department of Justice said Wednesday.

The 31 charges cover an alleged scheme spanning from 2001 to 2006, according to a news release. O'Reilly Auto began courting Phoenix-based CSK in spring 2007 and in summer 2008 closed on a deal to acquire the auto parts retailer for $1 billion, including $500 million in debt.

Former CSK President and Chief Operating Officer Martin G. Fraser and former CSK Chief Financial Officer Don W. Watson allegedly schemed to misstate CSK's income by concealing uncollectible receivables that should have been written off, according to the release. The pair has been charged with conspiracy, securities fraud, mail fraud, false filings with the Securities and Exchange Commission, false books and records, and false statements to its auditor. Watson also is charged separately with falsely certifying financial reports.

According to the indictment, CSK purchased hundreds of millions of dollars worth of auto parts each year, and the vendors gave CSK rebates in exchange for CSK using those rebates to market the products in its stores. The rebates lowered CSK's expenses and increased its income.

Instead of writing off the uncollectible receivables, however, Fraser and Watson allegedly moved the rebates from later years to cover shortfalls in earlier years, according to the release. They also moved the uncollectible receivable balances to other years to hide them, and billed vendors to collect rebates that were not owed.

As a result of the scheme, CSK misstated its receivables and pre-tax income in its annual reports in fiscal years 2002, 2003 and 2004 by about $10 million, $24 million and $19 million respectively.

The conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. Each count of securities fraud, false filings, false books and records, and false statements to auditors carries a maximum penalty of 20 years in prison and a $5 million fine. Each count of mail fraud carries a maximum penalty of 20 years in prison and a $250,000 fine. Each charge of falsely certifying financial reports carries a maximum penalty of 10 years in prison and a $1 million fine.

In a related action, former CSK Controller Edward William O'Brien III pleaded guilty on Tuesday to obstruction of justice, according to the release. In summer 2006, he allegedly made material false statements and omitted material information during an internal investigation interview in order to obstruct the SEC's investigation. A sentencing date has not been scheduled.

Also on Tuesday, criminal information was unsealed against former CSK Director of Credits and Receivables Gary Michael Opper, also charging him with obstruction of justice.[[In-content Ad]]