Under Armour stands by accounting practices despite Wells Notices

Dive Brief:

In a Monday filing, Under Armour reported it received Wells Notices from the Securities and Exchange Commission in relation to an investigation that's been underway since July of 2017 into the retailer's accounting practices. A Wells Notice means that the investigation has been completed and the SEC might bring civil action against the company; it also gives the retailer a chance to respond with additional information before the SEC decides to formally charge the parties.
The Wells Notices were directed to Under Armour as a company, former CEO Kevin Plank and CFO David Bergman, and are related to Under Armour's use of "'pull forward' sales" — customer sales that are executed earlier than planned — to meet its sales targets. The company said in the SEC filing that it stands by its actions and intends to respond to the SEC.
As of yet, the SEC has not alleged any violations, according to the filing. It has, however, recommended an "enforcement action" against both the company and the listed executives for violations of federal securities laws. Under Armour did not immediately respond to Retail Dive's request for comment.

Dive Insight:

A conclusion to Under Armour's years-long investigation by the SEC may be afoot, as the organization has filed Wells Notices against the company and two of its executives. Under Armour will likely have 30 days to respond to the SEC and argue for why charges should not be brought against it and its executives.

When news broke of the investigation last year, legal experts pointed to Under Armour's swift turnover in the top finance spot as a potential concern, but noted that pulling forward sales was not necessarily illegal. Much depends on the specifics of those sales and how Under Armour was booking them.

"If the goods are coming back, but you get to make the sale in the quarter and the return is in the next and you book the return and hope people don't recognize it, that's troubling," Karen Brenner, executive director of law and business at New York University's Stern School of Business, said at the time. "If a customer says, 'Sure, I'll take the good. I want you to agree that if I don't sell X amount in Y period of time, you'll give me some credit against it,' that may be a legitimate business decision that's correctly booked. So it really depends upon the facts and circumstances surrounding the transactions and that's what the investigation will unearth."

The fact that Wells Notices have now been filed suggests that the SEC thinks it found violations in Under Armour's practices. From 2010 to 2012, only about 20% of companies that were sent Wells Notices ended up not facing charges.