Just For Feet
Chuck Boguslaski
Martin Cullen
Dean Moore
1
Just For Feet Overview
• Single store founded in Birmingham, AL in
1977. Went public in 1994.
• Second largest footwear retailer in USA by
1999 with annual sales of $775m.
• Combined 1997 and 1998 profits of $35m of
which 25% believed fraudulent.
• Distressed sale to Footstar Inc. 2000 for
$72m.
• $708m of public shareholder value destroyed
(insiders sold $50m of stock in that time).
2
Fraudulent A/R and Net Income
Overstated Net Income ($M)
10
18%
8
6
Inflated Vendor
Ad Payments
% Pre-Tax Income
Rogers Rebate
4
9%
2
5%
0
1996
1997
1998
3
“Rogers Rebate”
Typical Arrangement
•Pays Rogers for
$1M in ads
Rogers Rebate
Just For Feet
$1M
•Rogers places ads
with media outlets
for $850K and
earns the
difference
$1M
Rebate
Rogers Advertising
Media fee
Media fee
•Pays Rogers for
$1M in ads
•JFF retains the
remainder ($1Mfixed fee)
•Rogers agrees to
fixed fee
•Fixed fee <
$1M – media fee
Media Outlets
4
Timeline
2) Backdate another $3mm for 1997
3) How about another $5.3mm?
4) Just overbook us so that we can
pay ourselves back the $5.3mm
1) “Rogers Rebate” fraud
scheme begins with $730k
5) But just to make things look
better, let’s book a false $2.27mm
receivable from Adidas.
6) Uh oh,..no cash. Let’s just
file for bankruptcy
5
Six Executives Plead Guilty
• Just For Feet
- Adam J. Gilburne, President Superstore Division
- Steven Davis, Advertising Director
• Fila USA
– Jon Epstein, CEO
• Adidas-Salomon AG
– Timothy McCool, former U.S. Sales Director
• Converse
– Steven Dodge, former VP of U.S. Sales
• Logo Athletic
– Thomas Shine, former President
6
Controls
• Look for spikes in A/R at year/quarter end
– Also, unexplained decrease in A/R turnover
• Investigate large A/R transactions
– Or, increases in A/R as a percent of sales
• Check for back-dated transactions
• Perform audit confirmation letters
– But don’t assume your dealing with angels
• Understand the business!
– Examine advertising expenses and the associated
A/R from advertisers
– Why would Just For Feet record an A/R from their
advertising firm???
7