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Just For Feet

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Just For Feet, a footwear retailer founded in Birmingham, AL, in 1977, became the second-largest in the U.S. by 1999, with sales reaching $775 million. However, the company's success was overshadowed by a massive fraud scandal. In the late 90s, profits were reported at $35 million, with 25% suspected to be fraudulent. Following a distressed sale to Footstar in 2000 for $72 million, the company destroyed $708 million in shareholder value. Key executives pled guilty in the infamous "Rogers Rebate" fraud scheme, which led to bankruptcy and raised critical audits and ethical concerns in retail.

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Just For Feet

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  1. Just For Feet Chuck Boguslaski Martin Cullen Dean Moore

  2. 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).

  3. Fraudulent A/R and Net Income 18% % Pre-Tax Income 9% 5%

  4. Pays Rogers for $1M in ads Rogers places ads with media outlets for $850K and earns the difference Pays Rogers for $1M in ads JFF retains the remainder ($1M-fixed fee) Rogers agrees to fixed fee Fixed fee < $1M – media fee “Rogers Rebate” Typical Arrangement Rogers Rebate Just For Feet $1M $1M Rebate Rogers Advertising Media fee Media fee Media Outlets

  5. 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 5) But just to make things look better, let’s book a false $2.27mm receivable from Adidas. 1) “Rogers Rebate” fraud scheme begins with $730k 6) Uh oh,..no cash. Let’s just file for bankruptcy

  6. 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

  7. 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???

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