As the Advanced Marketing Services Chapter 11 Filing takes more twists and turns (many of them appear in a post below) it’s helpful to turn the clock back a few years and go through the accounting scandals, fraudulent claims, federal investigations, criminal charges, civil actions, guilty pleas and resignations that have dogged AMS for years – and are almost certainly the strongest mitigating factors leading to their bankruptcy filing. What emerges is a story of a company that preferred self-aggrandizement to truth, bold claims instead of realistic expectations and a ship that started sinking years ago until the wreckage became so decimated that the only real recourse, especially for suddenly-struggling independent publishers, is to splinter and start over.
When AMS bought Publishers Group West in 2002, all looked good, as the company reported total sales of $763 million built upon supplying books to wholesalers such as Costco and Sam’s Club. In fact, the company had been reporting strong sales for several years. But mere months later, in July 2003, things turned for the worse and the stench grew ever thick. That’s because the US Attorney’s Office in San Diego launched an investigation into AMS’s accounting practices, revealing the company overstated its pre-tax earnings by about 9 percent in fiscal 2001, 10 percent in fiscal 2002 and 19 percent in 2003. The San Diego Union-Tribune, which was all over the story at the time and as it developed over the course of several years, reported that publishers were deceived – to the tune of millions of dollars – into believing AMS had done various marketing activities to promote their books that it had not. In addition, AMS executives misrepresented the company’s actions, according to the SEC, and did so from approximately 1999 through 2003 inclusive. Those strong sales weren’t nearly as strong after all.
Three of those executives, Sandra Miller Christie (vice president of advertising), Marcy Wilson Roke (director of advertising creative services) and Karyn Ann Larko (director of advertising for customer accounts) were caught in the probe and subject to criminal charges and civil action by the SEC. Roke settled her case with the SEC in September 2005 and required to pay a $25,000 penalty, plus $56,458 from ill-gotten annual bonuses, the sale of company stock and interest. She was also sentenced to five years’ probation and 500 hours of community service after pleading guilty to fraud charges. Larko also received five years’ probation after a similar guilty plea, and only last month, Christie was sentenced to 36 months in prison for her role in falsifying earnings. AMS was also required, in the wake of criminal and civil action, to pay publishers $9 million to compensate them for the deception. (More about this and other settlements is available in the 8K report filed to the SEC earlier this year.)
But AMS’s problems weren’t only limited to Christie, Larko and Roke. In April 2004, the company’s then-chief executive, Mike Nicita, left AMS after news of the scandal and was replaced six months later by Bruce Myers, who installed a new team. He was gone 18 months later, replaced by Gary Rautenstrauch last May. And in 2005, the company’s stock became effectively worthless when the SEC ruled to de-list the stock from major markets, which led to major shareholder Robert Robotti trying to gain a foothold within the company (in the end, he got a seat on the board, but in the wake of the bankruptcy, his stock has plummeted to $650,000.) And last but not least, AMS hasn’t reported financial results for more than three years, and has yet to restate its financial results dating back to its 2003 fiscal year.
The end result is that a company with so much criminal and civil baggage was destined to implode, in a big way. It was just a matter of when.