Under Armour Under Scrutiny: The SEC Sends Out A Wells Notice

*** The writing does not, and is not intended to, constitute legal advice by any means***

Feel free to follow my Instagram @hongjunlive

Last week, I reported on an upcoming class action lawsuit against Under Armour regarding the athletic brand's allegedly baseless claims about its RUSH fabric's efficacy. Then, yesterday, I had a Zoom reunion with Professor Jeffrey Hellman (please take a moment to read his entertaining yet helpful career advice!), and he mentioned about a SEC investigation into Under Armour's purportedly fraudulent accounting practices. Although the initial news was made public back in November 2019, it is still unfolding, so I thought it is worth sharing for educational purposes. According to The Wall Street Journal, the Securities and Exchange Commission ("SEC"), a government agency mandated to protect investors, launched a probe into Under Armour's accounting practices by which the company "shifted sales from quarter to quarter to appear healthier" on the book. The SEC questioned those involved in the matter who are based in Baltimore where the corporate headquarter is located.

Although Under Armour firmly defended the appropriateness of its accounting practices, here is what the company reportedly did to mislead investors about its financial soundness. According to the Wall Street Journal report (linked above), formal executives who asked for anonmity said that Under Amour "would shift business from future quarters, ask retailers to take delivery of merchandise early and reroute products meant for outlet stores to discount chains to count those sales at the end of a quarter", thereby inflating its revenue streams than they actually are. In sum, the company has been recording certain sales that should have been included in Q2 back into Q1. To make it more vividly, I think that it's akin to overstating your income by borrowing money from your future self. The problem with this type of "technique" is that, to keep the trend, you just can't help but keep doing this in the next quarter and then the next next quarter. Although I'm not an accounting expert at all, I learned in Fashion Finance & Law class that you can record a sale of a merchandise once the sale is finalized, meaning when the customer pays for it. 

Fair enough, some point out that what Under Armour has been essentially engaging in is an accepted practice in retail. However, I'm not entirely sure whether taking the route is good for the business. In fact, when the news of the SEC investigation broke out, Under Armour's share price plunged nearly 20% immediately. No wonder its investors went on to sue the company for having misled them about the company's financial health. This type of investor lawsuit is not-so-uncommon in the industry. Although the factual background is different from this case, Victoria's Secret shareholders also sued the lingerie titan when the company allegedly made false and misleading statements about its cash flow problems. Publicly listed companies do have both voluntary and mandatory reporting requirements to the SEC, which is an integral job of their legal teams. The Under Armour shareholder lawsuit is still underway as the plaintiffs amended the initial complaint in light of newly discovered facts. I do not know what would come out of the SEC investigation, but the company received an official notice from the SEC about the agency's intention to bring an enforcement action. It seems like Under Armour is on a streak of fire.