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Retail Chain Pleads Guilty To Income Tax, Securities Violations

July 31, 1992

FRESNO, Calif. (AP) _ Gottschalks, a major West Coast department store chain, was indicted Thursday on federal charges of income tax and securities fraud. The company immediately pleaded guilty.

Gottschalks was fined $1.5 million, the maximum penalty under law, but will end up paying the government more than $4 million for unpaid taxes, a penalty assessment and interest.

The federal government charged the company violated Security and Exchange Commission rules after developing a computer program that could overstate sales results during specific quarters. The program could record discount sales at full retail price and then shift the lower prices to another quarter.

The government said that that practice allowed Gottschalks to falsely overstate sales by $400,000 in the second quarter of 1990.

In addition, the government charged that Gottschalks backdated documents so it could claim a $3.7 million deduction in 1986, before the Tax Reform Act was enacted. In reality, the company had failed to make a tax deductible contribution to an employee insurance plan before the tax law changed.

Gottschalks announced at its annual meeting on July 16 that it had reached a plea bargain agreement that resolved all criminal charges against the chain.

The corporation agreed to plead guilty to one count each of conspiracy to defraud the Internal Revenue Service, conspiracy to file false statements with the Securities and Exchange Commission and filing false statements with the SEC for the second quarter of 1990.

There was insufficient evidence to file charges against Gottschalks Chairman Joe Levy or President Gerald Blum in the income tax case, Chief Assistant U.S. Attorney Bob Twiss said.

″The securities investigation is still open, and I cannot say who are the targets,″ he added. A federal grand jury previously indicted former chief financial officer Robert E. Lawson, former controller Jack Farnesi and two consultants on charges of conspiring to falsify documents. Lawson and Farnesi were fired during the investigation.

Gottschalks, founded in 1904 by the grandfather of Levy and Blum, was the largest privately owned department store chain in California before it went public in the mid-1980s.

Gottschalks stock sells on the New York Stock Exchange.

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