The two investigations into Advanced Marketing Services' advertising practices produced their first charges last week, with both the Securities and Exchange Commission and the U.S. Attorney's office focusing on the former AMS advertising director for creative services, Marcy Roke. Last Wednesday morning, the SEC filed civil charges against Roke for what it alleges was her participation in schemes to improperly inflate the earnings of AMS. Wednesday afternoon, Roke pleaded guilty to two counts of conspiracy in connection with her participation in a scheme to defraud AMS customers. The criminal charges were brought by the U.S. Attorney for the Southern District of California. Despite Roke's guilty plea in the criminal case, Molly White, a trial counsel with the SEC, said the civil suit will move forward.
Both investigations stemmed from Roke's involvement in schemes that manipulated AMS's advertising policies, although the two probes took slightly different paths. In pleading guilty to the criminal charges, Roke admitted that she conspired with several employees at AMS, including the v-p of advertising and the director of advertising for accounts, in a plan to increase the profitability of the advertising department by inducing publishers to pay for promotions that the company never provided. In one instance, Roke admitted that the number of postcards AMS employees told publishers that they mailed to accounts was inflated. Similarly, Roke admitted that the circulation figures of magazines that publishers advertised in were also inflated.
It is not clear how much money publishers lost because of the fraud, but according to Roke's plea agreement, eight publishers lost $6.8 million, a figure that doesn't include amounts from the more than 100 publishers AMS was reportedly negotiating with. Random House had the largest losses, at $2.6 million, followed by Penguin and S&S, which each lost about $1 million.
The SEC charges also dealt with ways in which Roke allegedly cheated publishers and misled retailers. According to the charges, Roke told AMS sales and advertising personnel that instead of contacting retailers about credit due them for providing certain advertising and promotional services, they should hide the discrepancies from the accounts, a move that decreased AMS's advertising expenses.
According to the SEC, Roke helped to overstate AMS's pretax earnings by 9% in fiscal 2001, 10% in fiscal 2002 and 19% in fiscal 2003. And although the SEC complaint said Roke was motivated by personal gain—she earned more than $200,000 in bonuses and stock sales—her plea agreement suggests that corporate pressures played a role. "Because of the advertising departments importance in generating net income for AMS, top management at AMS placed pressure on the vice president and her staff to meet budget targets each fiscal quarter," the plea said. As budget targets became more difficult to hit, the plea continues, Roke "and others in the advertising department sought out ways to increase the profitability of advertising vehicles sold by AMS." According to terms of her plea agreement, Roke has agreed to cooperate with the U.S. Attorney's continuing investigations. A representative with the SEC also said that its investigation is continuing.