NEW YORK — Things just went from bad to worse for Iconix Brand Group.
As if a plunging share price and the departure of many members of its top management — including founder and long-time chairman and chief executive officer Neil Cole — weren’t enough, the brand management firm said Monday that it has received a formal order of investigation from the Securities and Exchange Commission. It wasn’t immediately clear if the probe is still based around the company’s accounting treatment for certain ventures or if the formal order means the investigation has broadened beyond that scope.
With an active investigation in place, the SEC’s Division of Enforcement can now issue subpoenas to compel witnesses to testify. Those subpoenas can also compel the production of accounting records or other information the federal agency deems relevant.
Iconix said it “intends to fully cooperate with the SEC.” Officials at the SEC declined comment.
Whether it’s the same investigation or a broader one, Wall Street didn’t take a charitable view of Iconix’ travails. The news of the opening of an official investigation sent the company’s shares down 24 percent on Monday to close at $5.66 in Nasdaq trading. The stock has fallen more than 77 percent this year, dropping from a year high of $37.29 to the current level of less than $7.
The company had already been engaged in a “comment letter process” with the SEC in connection to how it accounted for the treatment of certain joint venture transactions. Specifically, the discussion involves the accounting treatment for the formation of the firm’s international joint ventures under GAAP. Iconix recognized gains surrounding the formation of the joint ventures — $46.5 million in 2014, $24.6 million in 2013, and $5.6 million in 2012. The question is whether they should have been consolidated, which would require the gains to be reversed and treated as non-controlling interests. The firm has joint ventures in Canada, India and Southeast Asia.
In August, Iconix said the matter was part of an “ongoing period review” of its annual report, or Form 10-K, for the year ended Dec. 31, 2014.
Sources have told WWD they believe the discussions with the SEC may have begun in late March or early April.
That first salvo was an informal stage under which the SEC gathers information to determine if it wants to pursue a matter further. With the agency’s enforcement division involved, the SEC is now conducting a probe for any possible securities law violations. The SEC can also — if it finds cause — bring an action in a federal court or before an administrative law judge. In more serious matters, the SEC can refer matters to the U.S. Department of Justice for criminal prosecution.
In the case of Iconix, the investigation is in the very early stages, so there is no way of knowing at this point if any securities law violations have taken place. That said, a formal investigation opens the door to a fact-finding mission beyond information that so far has been provided to the SEC just by Iconix. The investigators can eyeball stock trading activities, talk with investors, dig deeper into company records, and even speak with whistleblowers, if there are any.
The SEC staff probably also is aware of the shareholder lawsuits, all seeking class-action status, that have been filed Iconix and former management alleging securities law violations. As the investigation nears completion, certain individuals who might be defendants are likely to receive a so-called Wells Notice giving them time to respond as to why an enforcement action should not be brought. Even after all that time and effort, upon receipt of responses from those issued Wells Notices, the staff still has the option to recommend that no enforcement action be taken.
Iconix already has had a tumultuous 2015 and the SEC news means things are unlikely to get any easier for the company early next year.
In November said it would restate its financial statements for fiscal 2013 and the fourth quarter, fiscal 2014 and each quarter in the fiscal year, and the first and second quarters of fiscal 2015. The restated financials have since been filed by the company.
The brand management firm saw several executives exit, starting in March with the resignation of chief financial officer Jeff Lupinacci. His successor, David Jones, was named cfo and executive vice president in June. Lupinacci was followed a month later by chief operating officer Seth Horowitz, who held the job for just over a year. That position is not being replaced. Horowitz joined Iconix in April 2012 as president of its men’s division, and was promoted to chief operating officer in March 2014.
Iconix has said that the departures of Lupinacci and Horowitz were unrelated.
Perhaps the biggest surprise occurred in August when Cole said he was stepping down. He continued with Iconix through September as a special adviser to help with the firm’s transition period. Cole founded the company in 2005. Before that, he headed up Candie’s, a brand that is now under the Iconix umbrella.
Peter Cuneo, a board member, was appointed by the Iconix board in August to serve as chairman and interim ceo. Cuneo has been on the board since October 2006. He was previously the president and ceo of Marvel Entertainment.
In his first conference call to Wall Street analysts following the report of second-quarter results in August, Cuneo said the company was resetting guidance for full-year 2015, with licensing revenue to achieve low-single-digit growth from 2014 that was projected in the range of $410 million to $425 million. Earlier 2015 projections had been estimated at $490 million to $510 million, as of April.
By the time the firm posted third-quarter results in November, it revised 2015 licensing revenue guidance even lower to $370 million to $380 million from the $410 million to $425 million projected in August. The reason was due in part to the retail shelf space allocation to the “Star Wars” movie franchise instead of to the Peanuts brand and to “underperforming licenses in China,” the firm said.
Cuneo has maintained that there are still growth opportunities for Iconix in the U.S. He has also said that management does not plan to sell any brands under its portfolio.
With no resolution of the SEC matter in sight, the company might have a hard time selling anything anyway. There have been rumblings in the market that Iconix’s brand management competitors — Authentic Brands Group, Sequential Brands Group, Saban Brands and Marquee Brands — were eying some of Iconix’ brands. Financial sources said this month that the SEC matter would need to be resolved before potential buyers would even entertain making an offer, whether for a brand asset or the company in its entirety.
As a brand management firm, Iconix buys the intellectual property assets of brands, and works with licensees who produce the products. The brand management firm is responsible for maintaining a cohesive positioning for each brand.
There are 35 brands under Iconix’s umbrella, either through direct ownership of the IP assets or through investment interests. They include Candie’s, Joe Boxer, Badgley Mischka, Rampage, Mossimo, Ocean Pacific, Rocawear, Lee Cooper, London Fog, Danskin, Ed Hardy, Strawberry Shortcake and Peanuts.