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Government charges Carter's ex-No. 2 executive with fraud

By Jonathan Stempel

(Reuters) - A former No. 2 executive at Carter's Inc was indicted on Tuesday for allegedly covering up a multi-million-dollar securities fraud at the children's clothing company, the Department of Justice said.

Joseph Pacifico, 62, was charged with securities fraud, causing the filing of false financial statements with regulators, and falsifying corporate books and records while he was president of the company.

The charges against the Atlanta resident were included in an amended indictment against Joseph Elles, 57, who had supervised Carter's wholesale sales accounts for such customers as the department store chain Kohl's Corp , prosecutors said in a statement.

Pacifico was president of Carter's from 2004 until he left the Atlanta-based company in December 2009, and had been Elles' supervisor, prosecutors said. Elles pleaded not guilty last September to 32 criminal counts.

It was not immediately clear whether Pacifico has hired a lawyer for his criminal defense. Scott Sorrels, a lawyer who has represented Pacifico in civil litigation related to Carter's, did not immediately respond to a request for comment. A call to an Atlanta phone number listed for Pacifico was not returned. A copy of the amended indictment was not immediately available.

Carter's brands include its namesake brand and OshKosh B'gosh, and the company operates more than 500 stores.

According to prosecutors, Pacifico was aware by April 2009 that Carter's books had been inflated because Elles and others had misrepresented the timing of millions of dollars of rebates that Elles offered to Kohl's and other retailers that failed to meet targeted profit margins.

This manipulation allowed Carter's to record sales without accounting for the associated costs, which inflated net sales revenue and profit, according to prosecutors.

Pacifico, they added, tried to keep millions of dollars of undisclosed rebates hidden from management, shareholders and auditors by lying, signing false documents, or urging subordinates to cover up the fraud.

The amended indictment alleged that as a result of the fraud and attempted cover-up, Pacifico caused Carter's to materially misstate net income from April to July 2009, and Elles caused Carter's to file materially false financial statements from at least November 2006 to July 2009, prosecutors said.

Carter's announced it had found accounting irregularities on October 27, 2009, causing its shares to fall 23.8 percent that day. It later restated some of its financial statements.

Pacifico and Elles each face as much as 25 years in prison on the securities fraud charges. An initial court hearing for Pacifico has not been set.

"Shareholders expect and deserve far more from their corporate leaders," U.S. Attorney Sally Quillian Yates in Atlanta said in a statement.

The case is U.S. v. Elles, U.S. District Court, Northern District of Georgia, No. 11-00445.

(Reporting By Jonathan Stempel in New York; Additional reporting by Jeremy Pelofsky in Washington, D.C.; Editing by Bob Burgdorfer)

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