The Securities and Exchange Commission has announced that it has entered into a non-prosecution agreement with Carter's Inc., an Atlanta-based children's clothing marketer. This is the first use by the SEC of a non-prosecution agreement to resolve an enforcement investigation under the SEC's new cooperation initiative, which it announced in January 2010. In the Carter's matter, the SEC filed a civil injunctive action against a former Carter's sales executive, alleging that he caused Carter's revenues to be overstated from 5% to 19.1% between the first quarter of 2006 and the third quarter of 2008 by granting Carter's largest customer bigger sales rebates than the company budget allowed. The executive subsequently created false internal reports and provided false Sarbanes-Oxley certifications to senior management, which led to the overstated income and the understatement of expenses.

In announcing the non-prosecution agreement, the SEC emphasized that Carter's unlawful conduct was relatively isolated and that the company promptly investigated the alleged misconduct and reported it to the SEC. The SEC also found it significant that Carter's provided extensive cooperation with the SEC during the investigation and undertook substantial remedial actions. Under the terms of the non-prosecution agreement, Carter's must continue to cooperate with the SEC in full and use its best efforts to obtain full and complete cooperation of its current and former directors, officers, employees and agents. In addition, with respect to public statements, Carter's agreed not to deny the factual basis of the non-prosecution agreement except in legal proceedings in which the SEC is not a party.

The long-term impact of Carter's and the SEC's use of the non-prosecution agreement remains to be seen. The SEC, however, has stated that incentivizing appropriate corporate responses to misconduct is in the best interest of companies, shareholders and the SEC. While companies are encouraged to act quickly and appropriately in response to securities law violations, companies must also take care to assess the impact of the obligations under a non-prosecution agreement, and also the impact a non-prosecution agreement may have on related litigation.