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ANN BIRMINGHAM SCHEEL Acting United States Attorney District of Arizona DENIS J. McINERNEY United States Department of Justice Chief Criminal Division, Fraud Section Patrick F. Stokes (Maryland State Bar Member) Deputy Chief Jennifer R. Taylor (DC Bar #497349) Trial Attorney United States Department of Justice Criminal Division, Fraud Section 1400 New York Avenue, 4th Floor Washington, DC 20005 Patrick.Stokes2@usdoj.gov Jennifer.Taylor3@usdoj.gov Telephone (202) 305-4232/3611 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA UNITED STATES OF AMERICA, v. DON W. WATSON, Defendant. CR09-372-2-PHX-SRB UNITED STATES SENTENCING MEMORANDUM

The United States of America, through its attorneys, Patrick F. Stokes and Jennifer R. Taylor, in accordance with 18 U.S.C. 3553(a) and the United States Sentencing Commission, Guidelines Manual (Guidelines of U.S.S.G. 6A1.2 (Nov. 2010), hereby files this Sentencing Memorandum and requests that the Court impose a sentence of 60 months incarceration for the defendant, the statutory maximum for the convicted offense of conspiracy in violation of 18 U.S.C. 371. I. PRESENTENCE REPORT The United States has no objection to the draft Presentence Report (PSR), 1

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which calculates the defendants total offense level at 43.

The United States

agrees with the Probation Officers sentencing recommendation of 60 months incarceration. II. BACKGROUND CSK Auto Corporation (CSK) was a specialty retailer of automotive parts and accessories, operating more than 1100 stores in the Western United States. The defendant began working at CSK in the mid-1990s as the companys controller. He later became the companys Chief Financial Officer (CFO) until he was replaced in October 2005. He was the companys Chief Administrative Officer from October 2005 until approximately September 2006 when he resigned at the conclusion of CSKs internal investigation. From in or about January 2001 through in or about October 2006, the defendant and his co-conspirators engaged in a scheme to manipulate CSKs earnings by using vendor allowance programs to artificially reduce CSKs expenses and thereby increase CSKs profits. The scheme involved allowances associated with the companys Lets Work Together Program (LWT) that CSK had recognized in its quarterly SEC filings, could not collect, and therefore should have written off at year-end. Watson and his co-conspirators also manipulated earnings by recognizing vendor allowances and other income which CSK had not in fact earned. Watson and other co-conspirators also engaged in fraudulent

accounting tricks to temporarily recognize income, and thereby improve CSKs bottom line, with amounts that CSK had collected for the benefit of a charitable organization, The Boys and Girls Club of America. Watson implemented this

scheme primarily by directing the conduct of subordinates at CSK, for example, by instructing various co-conspirators and employees to conceal uncollectible LWT allowances.

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A.

The Lets Work Together Program.

CSK purchased hundreds of millions of dollars worth of parts and accessories every year from vendors. CSK entered into agreements with many vendors to receive discounts, or allowances, for products CSK purchased in exchange for CSK using the allowances, generally, for marketing of the vendors products for sale in its stores. Among the different types of vendor allowances CSK received, the LWT vendor allowance program was the largest and most lucrative for CSK. CSK typically entered into one-year LWT agreements with vendors, called program years. Until in or about May 2005, CSK did not recognize LWT allowances based on actual purchases of vendor products or actual collections of the allowances from vendors. Instead, prior to the start of an LWT program year, CSK forecasted the 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 the LWT program year. When recognizing LWT allowances, CSK generally treated them as a reduction to its cost of sales. This reduced CSKs expenses and

therefore increased its income. At the same time, CSK increased its LWT account receivable 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 LWT allowance from the amount CSK owed the vendor for the purchase of its products. By issuing a debit memo, CSK collected the LWT allowance and thereby reduced its LWT account receivable for that program year. If CSK issued a debit memo 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

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should have written off these refunds since, by definition, they reflected amounts CSK had not earned. B. Fraudulent Concealment of Uncollectible LWT Receivables.

CSK recognized more in LWT allowances based on overly aggressive forecasts than it in fact earned and could collect in the 2001 through 2003 LWT program years. This resulted in large uncollectible LWT accounts receivable

balances for each program year, that is, the difference between the amounts recognized and the amount actually collected. Rather than writing off these

uncollectable balances (which would have increased CSKs expenses and reduced profits), Watson and his co-conspirators concealed the uncollectible balances from the investing public, shareholders, CSKs independent auditor, the board of directors, and others. The conspirators did this by applying current year LWT collections to prior year shortfalls, by moving prior year uncollectible balances to current years, and by improperly accounting for credit memos. To apply current year collections to cover uncollectible prior year LWT receivables, Watson and other co-conspirators caused CSK to issue improper debit memos and to make unwarranted journal entries. With debit memos, which were generally sent to vendors via the U.S. mail, CSK collected amounts it had already recognized in current LWT program years and misapplied the collections to reduce prior year LWT accounts receivable shortfalls. CSK recorded baseless journal

entries to similar effect: after collecting money owed to it for a current LWT program year, it used journal entries to move some of the collections from the current year to cover up a prior year LWT account receivable balance that was otherwise uncollectible. The effect was to camouflage the shortfall in the prior LWT program year by making it appear that the LWT receivable had been collected in full, thus avoiding a reduction to its income in that year. Watson and other co-conspirators also caused CSK to record journal entries to conceal uncollectible LWT receivables in the absence of collections. 4 For

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example, in or about October 2003, CSK executed a journal entry for approximately $9.3 million that reduced the 2002 LWT account receivable to zero and increased the 2003 LWT account receivable by the same amount. CSK had no legitimate basis for moving the prior year outstanding balance, which was not collectible, to the current year LWT receivable. The result of such journal entries was to disguise uncollectible receivables in prior LWT program years as current year receivables still open to collection. Watson and other co-conspirators also caused CSK to conceal paybacks of allowances it had to refund by improperly accounting for the credit memos used to make the refunds. By making the refunds to vendors, CSK acknowledged that the allowance was no longer collectible, and therefore it should have written off the amount, thereby reducing its income. Instead, in many instances, Watson and

other co-conspirators caused CSK to account for the paybacks by increasing a subsequent year LWT account receivable. By doing so, they made it appear that it had collected the original receivable when in fact it had merely moved the uncollectible balance to a subsequent year. As the CFO, Watson did not prepare the fraudulent accounting entries on his own. Rather, government witnesses would have testified at trial that he

directed others to fill prior year LWT shortfalls with current year collections or by moving balances. In a number of instances, Watson directed other higher-level executives, such as OBrien, the controller, and Opper, the director of credits and receivables, on carrying out accounting misconduct, and these subordinates then directed other subordinates on the implementation of accounting entries to have the desired fraudulent effect. Government witnesses, including members of the Finance and Merchandising Departments, would have testified at trial that, while Watson did not directly participate in the implementation of the accounting entries, he was closely involved in the management of LWT, directed at a high level how LWT shortfalls and collections were improperly accounted for, and was aware that 5

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information about the improper accounting was not being shared with CSKs auditor. For example, in one instance, a government witness would testify, and auditor documents would corroborate, that Watson caused specific false LWT information to be provided to CSKs auditor. 1. CSKs Concealment of Approximately $10 Million in Known Uncollectible Vendor Receivables in Fiscal Year 2002. In fiscal year 2002, CSK failed to write off approximately $10 million in vendor allowances it had recognized in previous LWT program years, primarily in 2001, but could not collect. Watson and other co-conspirators concealed these uncollectible allowances by causing CSK to move them from prior year LWT accounts receivable to the 2002 LWT account receivable. The effect of their

actions was to give the false appearance that the prior year LWT receivables had been collected in full when in fact they were uncollectible and should have been written off. The primary way that Watson and other co-conspirators caused CSK to hide these uncollectible amounts was through improper journal entries. CSK recorded journal entries to transfer uncollectible balances to the 2002 LWT account receivable and to move collections for the 2002 LWT program year back to cover uncollectible allowances in the 2001 LWT account receivable. In a few instances, CSK even used journal entries to move uncollectible 2001 LWT allowances, amounts that initially had been properly written off, into the 2002 LWT account receivable, thereby avoiding the reduction in its 2001 income. Watson and other co-conspirators also caused CSK to issue credit memos to vendors for refunds connected to earlier LWT program years. Instead of writing off these paybacks as uncollectible and thereby reducing its income, CSK recorded the refunds as increases to its 2002 LWT account receivable.

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By moving prior year LWT receivables to the 2002 LWT account receivable, CSK effectively acknowledged that the prior balances were not collectible in those prior years. Thus, CSK should have written off the amounts. A write-off in fiscal year 2002 would have decreased its pre-tax income, as reported in its 2002 Form 10-K it filed on May 5, 2003, by approximately $10 million. Instead, as a result of the fraudulent scheme, CSK reported pre-tax

income approximately 33 percent higher. 2. CSK's Concealment of Approximately $23 Million in Known Uncollectible Vendor Receivables in Fiscal Year 2003. In fiscal year 2003, CSK failed to write off approximately $23 million in uncollectible LWT allowances it had recognized in prior LWT program years, mostly as part of the 2002 LWT program year. Watson and other co-conspirators concealed these uncollectible allowances by causing CSK to move them to the 2003 LWT account receivable, thereby giving the false appearance that the allowances had been collected in full in the prior LWT program years. Watson and his co-conspirators caused CSK to conceal uncollectible allowances in the 2002 LWT account receivable by issuing debit memos that applied collections for the 2003 LWT program year to the 2002 LWT receivable. This reduced the 2002 account receivable and effectively moved the uncollectible balance to the 2003 LWT account receivable. Watson and other co-conspirators

also caused CSK to issue credit memos for the 2001 and 2002 LWT programs to vendors for refunds. Instead of writing off these amounts as uncollectible, CSK recorded the paybacks for the prior LWT program years as increases to its 2003 LWT account receivable. The effect of this was that CSK reduced uncollectible prior-year LWT receivables by moving them to the 2003 LWT account receivable. Watson and other co-conspirators also caused CSK to make improper journal entries that moved uncollectible 2002 LWT receivable balance to the 2003 7

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LWT receivable. By doing so, CSK reduced the 2002 LWT receivable to zero, giving the appearance that CSK had collected the balance in full, when in fact it had simply moved the uncollectible balance to the 2003 LWT program year. CSK should have written off these uncollectible allowances it had moved to its 2003 LWT account receivable. If it had written off the amounts in fiscal year 2003, the latest point at which it would have known these amounts were uncollectible, it would have reported in its 2003 Form 10-K filed on April 15, 2004, a pre-tax loss of approximately $7 million. Instead, CSK reported pre-tax income of approximately $16 million. 3. CSK's Concealment of Approximately $19 Million in Known Uncollectible Vendor Receivables in Fiscal Year 2004. In fiscal year 2004, CSK failed to write off approximately $19 million in uncollectible vendor allowances it had recognized in 2004 and prior years. Watson and his co-conspirators covered up the uncollectible allowances by causing CSK to move them to the 2004 and 2005 LWT accounts receivable. CSK issued debit memos that applied vendor allowance collections for the 2004 program year to the 2003 LWT account receivable. CSK also improperly applied 2004 LWT collections it had received off-invoice to the 2003 LWT receivable. CSK tracked this amount and failed to reclassify the collections to the 2004 program year. CSK also issued credit memos that misapplied vendor

allowance refunds to vendors, amounts Watson and other co-conspirators knew were uncollectible, as increases to the 2004 and 2005 LWT accounts receivable. As a result of these tactics, Watson and other co-conspirators caused CSK to conceal the uncollectible LWT allowances, rather than writing them off, by hiding them in the 2004 and 2005 accounts receivable. Watson and other co-conspirators knew in fiscal year 2004 that approximately $19 million in LWT receivables was uncollectible, and thus CSK 8

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should have written this amount off that year. This would have reduced CSK's pre-tax income for fiscal year 2004 by approximately $19 million. 4. CSK Filed a Restatement Containing Materially False Information. By early-2005 CSK's board of directors and independent auditor determined that CSK had improperly accounted for some of its vendor allowances over the past several years. When CSK filed its 2004 Form 10-K on May 2, 2005, it included a restatement of its financial statements for prior periods including 2002, 2003, and the first three quarters of 2004 (the "First Restatement"). The First Restatement restated some of the vendor allowances recognized in these periods. For example, it wrote off uncollectible amounts found in the 2003 LWT receivable that included uncollected balances from prior LWT program years. The restatement also included paybacks made in 2003 and 2004 for earlier LWT program years that should have been written off in those earlier years. As a result of the restatement of vendor allowances in the First Restatement, CSK increased its expenses and lowered its pre-tax income. The First Restatement, however, failed to disclose the fraudulent scheme Watson and other co-conspirators had devised. Instead, CSK falsely attributed the vendor allowance restatements to non-fraudulent accounting errors. As a result, Watson and other co-conspirators were able to continue to conceal the approximately $19 million in known uncollectible vendor allowances they had caused CSK to conceal in its 2004 and 2005 LWT accounts receivable. 5. False Billings to Cover Up Uncollectible Allowances in the 2004 LWT Receivable. Within months of having filed the First Restatement, CSK attempted to collect a large, uncollectible receivable balance hidden in CSK's 2004 LWT receivable, approximately $15 million by CSK records, by issuing false debit memos. At the end of the second quarter in 2005, CSK issued debit memos to 9

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vendors to collect approximately $30 million in outstanding LWT receivables. As Watson and other co-conspirators knew, approximately half of the amount contained in the debit memos was uncollectible because it had already been collected by CSK and moved to prior LWT program years or paid back as refunds. When vendors disputed the false debit memos, Watson and other coconspirators continued to try to hide the uncollectible allowances. For example, in some cases CSK negotiated with vendors to leave some debit memos in place in exchange for offsets against future allowances CSK anticipated earning. Also, CSK issued credit memos which, in some instances, falsely described the bases for the paybacks as being related to, for example, pricing increases-steel surcharge or warranty, as opposed to LWT. D. Earnings Manipulation through Improper Recognition of Allowances and Other Income. At the end of fiscal year 2003, CSK improperly recognized additional warranty allowances from two vendors, which resulted in an increase in CSK's income. As Watson knew, though, CSK had a warranty deficit at the time of approximately $13 million. In the regular course of business, CSK collected

money from vendors to cover customer returns based on warranties, which CSK accrued in its warranty account. The warranty deficit meant that customer returns had exceeded the amounts received from vendors to cover warranty returns by approximately $13 million. Ed O'Brien, CSKs former controller, instructed

Watson and CSKs president, Martin Fraser, that, consistent with GAAP, the warranty deficit needed to be written off, but Watson and Fraser refused. Instead of using the approximately $4 million in additional warranty allowances to reduce the warranty deficit, Watson (and Fraser) caused CSK to recognize it as additional LWT allowances, thus increasing CSK's income by approximately $4 million. Watson also caused CSK to temporarily recognize income that CSK had earmarked for payment to a charitable organization. Starting in the late-1990's, 10

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CSK raised money for the Boys and Girls Club of America, an organization that provided services for disadvantaged youth, by selling calendars depicting vintage classic cars, music CD's, and other items. The net proceeds raised by these sales were donated to the Boys and Girls Club to support their chapters and transportation needs in connection with youth-oriented programs. CSK typically accrued a liability for the proceeds it raised-that is, it accounted for the funds as amounts it owed to the Boys and Girls Club. However, through journal entries posted to the last day of the fiscal year for 2001 through 2004, Watson caused subordinates to move the funds raised from the liability account to income, thus boosting CSK's income at year end by a corresponding amount. In the next fiscal year, Watson caused some of the amounts to be moved back into the liability account in recognition of the fact that the amounts were owed to the Boys and Girls Club and were not income to CSK. Watson also disputed CSK's obligation to pay the proceeds it raised to The Boys and Girls Club, maintaining that they could consider it as income if they wanted. From 2001 through 2004, CSK raised approximately $2,767,613 in net proceeds from the sale of calendars but only paid The Boys and Girls Club approximately $1,123,613. After the internal

investigation uncovered the diverted funds, CSK paid the remaining money to The Boys and Girls Club. III. APPROPRIATE GUIDELINES RANGE The Probation Officer has calculated the defendants offense level to be 43. In particular, the Probation Officer assessed a base offense level of 6, a 20-level adjustment for loss of more than $7 million, a 6-level adjustment for the number of victims exceeding 250, a 2-level adjustment for sophisticated means, a 4-level adjustment for a violation of securities law and for the defendant being an officer of a publicly traded company, a 4-level enhancement for role in the offense, a 2level enhancement for obstruction of justice, a 2-level enhancement for abuse of a position of trust or special skill, and a 3-level reduction for acceptance of 11

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responsibility. The Probation Officers assessment results in a Guidelines range of life. As Watson pleaded guilty to one count of the Indictment charging him with a violation of 18 U.S.C. 371 and the remaining charges of the Indictment will be dismissed, his maximum period of incarceration is 60 months. Watson stipulated to a base offense level of 6 and a 2-level adjustment for sophisticated means in his plea agreement. The parties are free to argue on any other applicable adjustments and enhancements. The United States agrees with

Probation Officers calculation and reasoning for the adjustments and enhancements identified in the PSR. A. Loss Amount

Section 2B1.1(b)(1)(M) of the Sentencing Guidelines identifies a 20-level adjustment for loss amounts exceeding $7 million. There are two categories of victims in this scheme: shareholder victims and vendor victims. Based upon the analysis done in the shareholder class action lawsuit against CSK, shareholder loss in this matter could exceed $12 million, thereby increasing the appropriate adjustment under the Guidelines. However, due to the difficulty of proving actual shareholder loss through an event study, the government instead relies on the intended loss to vendors for purposes of loss calculation. The government has analyzed loss based upon the double billing of vendors in 2005, which is addressed more fully on pages 9 through 10, supra, and this analysis demonstrates, conservatively, an intended loss amount of more than $9 million. In addition, Watsons co-conspirator, Gary Opper, who was CSKs director of receivables and credits, calculated the loss amount of the double billing during the course of the conspiracy as approximately $15 million. Opper provided this calculation to

Watson and discussed it with him and other co-conspirators in approximately May 2005. As described above, despite seeing this analysis, Watson instructed Opper to double bill the vendors. In calculating loss amounts under the Guidelines, actual loss means the 12

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reasonably foreseeable pecuniary harm that resulted from the offense. U.S.S.G. 2B1.1, application note 3(A)(i). Reasonably foreseeable pecuniary harm is

defined as including harm that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of the offense. Id.,

application note 3(A)(iv). Intended loss means means the pecuniary harm that was intended to result from the offense and includes intended pecuniary harm that would have been impossible or unlikely to occur. U.S.S.G. 2B1.1,

application note 3(A)(ii). Here, Watson directed his co-conspirators to issue debit memos to vendors that essentially billed them for $15 million in LWT allowances that had already been paid or were not owed. Watson knew that the impact of such double billing would be that vendors would pay CSK money that was not owed or, more likely, the amount CSK owed the vendors for goods would be inappropriately reduced. After vendors discovered the false billing scheme, most of them obtained repayments or refunds from CSK. As these amounts were repaid by CSK after the discovery of the scheme, these amounts should not be credited to the defendant in the loss calculation. See U.S.S.G. 2B1.1, comment. (n.3(E)(i)) (2006). B. Number of Victims, Violation of Securities Law, and Officer of Publicly Traded Company. Section 2B.1(2)(C) identifies a 6-level adjustment for fraud involving more than 250 victims. Here, Watson directed a massive accounting fraud scheme that artificially boosted CSKs reported earnings to the public. The scheme lasted

approximately five years in a publicly traded company with approximately 30,000 investors impacted by the scheme. Section 2B.1(15)(A) identifies a 4-level adjustment for securities fraud where the defendant at the time of the offense was an officer or a director. Here, the defendant pleaded guilty to conspiracy to commit securities fraud. Watson admitted in the plea agreement that he and his co-conspirators willfully caused 13

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CSK to fraudulently recognize millions of dollars of income in its publicly filed financial statements from 2001 through 2005. (Plea Agreement, at 7 9.) The defendant also stipulated that during the course of the conspiracy, he was the CFO and signed the Forms 10-K filed with the Securities and Exchange Commission stating that they did not contained any materially untrue statements, fairly presented the financial condition of CSK, and did not contain any fraud.

C.

Role.

Section 3B.1(a) identifies a 4-level increase for an organizer or leader in criminal activity involving five or more participants. Watson was the CFO during the course of the five-year conspiracy and was the leader from the conspiracys inception. According to OBrien, Opper, and other CSK executives, Watson took a lead role within CSK in setting LWT forecasts, directing subordinates to cover up LWT shortfalls through accounting manipulations, and instructing subordinates to mislead CSKs auditor. In particular, government witnesses, including OBrien and Opper, were prepared to testify that they briefed Watson prior to sending out debit memos in 2005 that the amounts included approximately $15 million that CSK had already collected, and Watson instructed them to still send the debit memos. In addition to supervising OBrien and Opper as part of the conspiracy, Watson also oversaw at least three other co-conspirators in the Finance Department and several in the Merchandising Department. D. Abuse of Position of Trust.

Section 3B1.3 identifies a 2-level increase for abuse of a position of public or private trust or use of special skill. Persons holding such positions ordinarily are subject to significantly less supervision than employees. U.S.S.G. 3B1.3, comment. (n.1). Watson was the CFO of a publicly traded company during the conspiracy. He held the top position at CSK relating to the companys financial and accounting matters and had limited oversight by anyone in the company. Watson directed those beneath him, such as OBrien, the controller, to improperly 14

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account for LWT, which caused CSK to misrepresent its profits in its financial statements and to conceal its true financial state from CSKs public auditor. Watson oversaw the entire fraudulent scheme, enjoyed substantial autonomy in doing so, and held one of the most important positions of trust in corporate financial matters, as he was responsible for signing and certifying CSKs financial statements, advising the board of directors of CSKs financial state, and interacting with auditors. E. Obstruction.

Section 3C1.1 identifies a 2-level increase for obstructing or impeding the administration of justice with respect to the investigation, prosecution, or sentencing of the offense of conviction. Here, the Securities and Exchange

Commission was investigating CSK based upon its two restatements of earnings for the 2003 through 2005 fiscal years. CSK hired the law firm, OMelveny & Myers, to do an internal investigation, and it periodically reported the progress of its investigation and findings to the SEC. As part of its internal investigation, the law firm interviewed Watson, and he denied any involvement in or knowledge of the fraud scheme. As Watson was aware of the SEC investigation, the evidence strongly supports an inference that he knew that the results of that investigation, including his false statements during his interview by the law firm, were being reported to the SEC. In addition, Watson was deposed by the SEC in November 2010 in connection with the SECs filed action against him, and he denied any knowledge of fraud relating to the vendor allowance program or accounting improprieties at CSK. IV. SENTENCING FACTORS In imposing a sentence in this case, the Court must look to 18 U.S.C. 3553(a). This section requires that the Court consider, among other things, (a) the nature and circumstances of the offense and the history and characteristics of the defendant; and (b) the need for the sentence to reflect the seriousness of the 15

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offense, promote respect for the law, provide just punishment for the offense, and afford adequate deterrence to criminal conduct. See 18 U.S.C. 3553(a). As noted above, the United States believes the Section 3553(a) factors warrant a sentence of 60 months incarceration. A. Nature and Circumstances of the Offense and the History and Characteristics of the Defendant. One key factor the Court must consider is the nature and circumstances of the offense and the history and characteristics of the defendant. See 18 U.S.C. 3553(a)(1). The defendant led an extensive and pervasive fraud scheme that

lasted approximately five years. The defendant relied on numerous individuals to carry out the fraud scheme, from low level Finance Department employees, to managers and, ultimately, other executives. Together they misrepresented CSKs financial health by lying about one of CSKs largest sources of income, the LWT program. Watson not only held the top financial position in the company CFO but he led the conspiracy as well. In his role as the CFO, Watson actively

deceived and lied to CSKs board of directors, independent auditor, the public in the financial statements that were signed and certified by him, and the SEC. As CFO, he personally directed those beneath him, including other co-conspirators, to engage in accounting manipulations that artificially decreased CSKs expenses to increase profits that met the companys earnings forecasts. He also approved the double-billing scheme that sought to collect from vendors LWT amounts the vendors had already paid. Members of the conspiracy reported to Watson (and Fraser, CSKs president), and Watson enjoyed little oversight by anyone at CSK on financial matters since he held the top position in that area. Watson was well compensated for his position as CFO. Watsons participation in this extensive accounting fraud scheme of a publicly traded company warrants a significant sentence of 60 months incarceration, the statutory maximum.

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B.

Seriousness of the Offense, Respect for the Law, Just Punishment for the Offense, and Deterrence to Criminal Conduct.

The Court must also consider the need for the sentence imposed to reflect the seriousness of the offense, promote respect for the law, provide just punishment for the offense, and afford adequate deterrence. 3553(a)(2). See 18 U.S.C.

Fraud cases are serious offenses, and those who commit such

offenses deserve particularly severe sentences because the nature and complexity of the fraud they commit requires such significant time and resources to detect, prosecute, and deter. A sentence of 60 months (the statutory maximum) would appropriately reflect the seriousness of the offense to which the defendant pleaded guilty and provide just punishment in this case. Imposing a sentence of 60 months would also afford both specific and general deterrence, as required by 18 U.S.C. 3553(a)(2)(B). The defendant, an officer of a publicly traded corporation, knowingly and intentionally facilitated an extensive fraud scheme for more than five years that overstated CSKs pre-tax income over a period of three years by approximately $52 million and sought to steal another approximately $15 million from CSKs vendors through doublebilling. The defendants lengthy participation and leadership role in the conspiracy warrants a sentence that will impress upon him, as well as others, that such conduct will not be treated lightly or tolerated. General deterrence alone can justify substantial sentences, even where such sentences are not necessary to achieve specific deterrence. United States v.

Sagendorf, 445 F.3d 515, 518 (1st Cir. 2006). Fraud offenses are serious, and a substantial sentence of 60 months will ensure that would-be violators do not receive the message that the gain to be derived from misrepresenting corporate profits and lying to investors and auditors outweighs the potential consequences. Here, where the defendant facilitated an extensive fraud scheme over a series of 17

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years, a significant sentence is necessary to send a strong deterrence message to others. If the sentence truly is to reflect the seriousness of the offense, promote respect for the law, provide just punishment for the offense, and afford adequate deterrence to criminal conduct, it must be substantial. See 18 U.S.C. 3553(a)(2). This is particularly true here in light of the size and duration of the fraudulent scheme, the nature of the scheme that caused misrepresentations to the investing public, auditors, and governmental investigatory agencies, as well as the defendants personal misrepresentations to such entities. An insubstantial sentence would signal that the type of long-standing, egregious fraud in which the defendant engaged is somehow deserving of special consideration from the Court. Moreover, if individuals who defraud corporate shareholders and the investing public believe that the penalty for doing so is trivial, then no disincentive exists to prevent those who are better equipped with the means to commit fraud from doing so. Here, the guidelines calculate the defendant at level 43. The defendant

pleaded guilty to an offense with a statutory maximum of 60 months incarceration, which already reflects a significant benefit to him. Accordingly, a maximum sentence of 60 months is warranted and appropriate. C. The Need to Avoid Unwarranted Sentencing Disparities.

The United States recommendation that the Court impose a sentence of 60 months will not create any unwarranted sentencing disparities between the sentence imposed on Watson and those imposed on OBrien and Opper. Unlike Watson, OBrien and Opper have cooperated with the United States during its investigation and trial preparation in this matter. Watson held the highest financial position in the company certainly higher than his co-conspirators, was involved in the scheme from its inception, and was at the pinnacle of the conspiracy. OBrien and Opper, who pleaded guilty to obstruction of justice, did not join the conspiracy until later and were directly managed and supervised by Watson. 18

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Watson, as the most culpable member of the conspiracy, should receive a more severe sentence than these co-conspirators. D. Restitution

As indicated in the PSR, the United States created a website for shareholders and vendors, sent numerous mailings, and ran newspaper advertisements in an effort to contact victims and advise them of the status of this case. The United States received responses from five victims but has seen no paperwork and therefore cannot substantiate the loss amounts identified by these victims, which total $147,820.09. The United States has also not been able to determine whether these victims or any other shareholder loss should be offset based upon recovery from the class action lawsuit. VII. CONCLUSION In accordance with the foregoing and for the reasons stated herein, the United States respectfully requests that the Court impose a sentence of 60 months incarceration for Watson. Respectfully submitted this 8th day of September, 2011.

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Respectfully submitted, ANN BIRMINGHAM SCHEEL Acting United States Attorney District of Arizona DENIS J. McINERNEY United States Department of Justice Chief, Fraud Section Criminal Division /s/ Patrick F. Stokes Patrick F. Stokes Deputy Chief, Fraud Section Jennifer Taylor Trial Attorney, Fraud Section

CERTIFICATE OF SERVICE This is to certify that a copy of the above document has been furnished to counsel of record by filing with ECF. /s/ Jennifer R. Taylor Trial Attorney, Fraud Section

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