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Watson Don Sentencing Memo

Watson Don Sentencing Memo

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Published by Ray Stern

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Published by: Ray Stern on Sep 09, 2011
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10/28/2013

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12345678910111213141516171819202122232425262728ANN BIRMINGHAM SCHEELActing United States AttorneyDistrict of ArizonaDENIS J. McINERNEYUnited States Department of JusticeChief Criminal Division, Fraud SectionPatrick F. Stokes (Maryland State Bar Member)Deputy Chief Jennifer R. Taylor (DC Bar #497349)Trial AttorneyUnited States Department of JusticeCriminal Division, Fraud Section1400 New York Avenue, 4
th
Floor Washington, DC 20005Patrick.Stokes2@usdoj.govJennifer.Taylor3@usdoj.govTelephone (202) 305-4232/3611
UNITED STATES DISTRICT COURTDISTRICT OF ARIZONAUNITED STATES OF AMERICA,v.DON W. WATSON,Defendant.CR–09-372-2-PHX-SRBUNITED STATES’ SENTENCINGMEMORANDUM
The United States of America, through its attorneys, Patrick F. Stokes andJennifer R. Taylor, in accordance with 18 U.S.C. §3553(a) and the United StatesSentencing Commission, Guidelines Manual (“Guidelines” of “U.S.S.G.” § 6A1.2(Nov. 2010), hereby files this Sentencing Memorandum and requests that theCourt impose a sentence of 60 months’ incarceration for the defendant, thestatutory maximum for the convicted offense of conspiracy in violation of 18U.S.C. §371.
I.PRESENTENCE REPORT
The United States has no objection to the draft Presentence Report (“PSR”),1
Case 2:09-cr-00372-SRB Document 224 Filed 09/08/11 Page 1 of 20
 
12345678910111213141516171819202122232425262728which calculates the defendant’s total offense level at 43. The United Statesagrees with the Probation Officer’s sentencing recommendation of 60 months’incarceration.
II.BACKGROUND
CSK Auto Corporation (“CSK”) was a specialty retailer of automotive partsand accessories, operating more than 1100 stores in the Western United States.The defendant began working at CSK in the mid-1990s as the company’scontroller. He later became the company’s Chief Financial Officer (“CFO”) untilhe was replaced in October 2005. He was the company’s Chief AdministrativeOfficer from October 2005 until approximately September 2006 when he resignedat the conclusion of CSK’s internal investigation.From in or about January 2001 through in or about October 2006, thedefendant and his co-conspirators engaged in a scheme to manipulate CSK’searnings by using vendor allowance programs to artificially reduce CSK’sexpenses and thereby increase CSK’s profits. The scheme involved allowancesassociated with the company’s “Let’s Work Together” Program (“LWT”) that CSK had recognized in its quarterly SEC filings, could not collect, and therefore shouldhave written off at year-end. Watson and his co-conspirators also manipulatedearnings by recognizing vendor allowances and other income which CSK had notin fact earned. Watson and other co-conspirators also engaged in fraudulentaccounting tricks to temporarily recognize income, and thereby improve CSK’s bottom line, with amounts that CSK had collected for the benefit of a charitableorganization, The Boys and Girls Club of America. Watson implemented thisscheme primarily by directing the conduct of subordinates at CSK, for example, by instructing various co-conspirators and employees to conceal uncollectibleLWT allowances.2
Case 2:09-cr-00372-SRB Document 224 Filed 09/08/11 Page 2 of 20
 
12345678910111213141516171819202122232425262728
A. The “Let’s Work Together” Program.
CSK purchased hundreds of millions of dollars worth of parts andaccessories every year from vendors. CSK entered into agreements with manyvendors to receive discounts, or allowances, for products CSK purchased inexchange for CSK using the allowances, generally, for marketing of the vendors’ products for sale in its stores. Among the different types of vendor allowancesCSK received, the LWT vendor allowance program was the largest and mostlucrative for CSK. CSK typically entered into one-year LWT agreements withvendors, called “program years.”Until in or about May 2005, CSK did not recognize LWT allowances basedon actual purchases of vendor products or actual collections of the allowancesfrom vendors. Instead, prior to the start of an LWT program year, CSK forecastedthe amount of allowance CSK expected to earn during that program year. CSK then recognized the forecasted LWT allowances each month on a straight-line basis, that is, one-twelfth of the forecasted amount CSK expected to earn in theLWT program year. When recognizing LWT allowances, CSK generally treatedthem as a reduction to its cost of sales. This reduced CSK’s expenses andtherefore increased its income. At the same time, CSK increased its LWT accountreceivable for that particular program year by the amount of LWT allowance CSK anticipated earning.CSK used several methods for collecting allowances from vendors,including issuing invoices to vendors known as “debit memos,” or “billbacks,”which notified a vendor that CSK was deducting the amount of the LWTallowance from the amount CSK owed the vendor for the purchase of its products.By issuing a debit memo, CSK “collected” the LWT allowance and therebyreduced its LWT account receivable for that program year. If CSK issued a debitmemo to collect more than it should have, it refunded the excess to vendors with a“credit memo,” also referred to as a “payback.” Under accounting rules, CSK 3
Case 2:09-cr-00372-SRB Document 224 Filed 09/08/11 Page 3 of 20

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