Under Armour

The U.S. Securities & Exchange Commission has filed a preliminary notice for Under Armour, recommending legal actions be taken against the retailer and its executives for violating certain federal securities laws. 

The Wells Notices — which are not formal charges or determinations by the SEC — stemmed from disclosures Under Armour made about between the third quarter in 2015 and Dec. 31, 2016.

Under Armour

An Under Armour store.  AP

Founder and executive chairman Kevin Plank and chief financial officer David Bergman were two of the executives at the activewear and footwear company to receive Wells Notices earlier this month for allegedly pulling forward sales, or using customer sales earlier than anticipated in an effort to boost revenues during the quarter. 

“Specifically, the SEC staff is focused on the company’s disclosures regarding the use of pull forward sales in order to meet sales objectives,” according to a recent 8K filing. 

Under Armour has previously said its actions were appropriate and plans to “pursue the Wells Notice process, which will include the opportunity to respond to the SEC staff’s position and also expect to engage in a dialogue with the SEC staff to work toward a resolution of this matter,” according to the 8K.

The retailer could not be reached for further comment. 

Under Armour’s stock, which is down about 60 percent year-over-year, was down nearly 5 percent during pre-market hours Monday, but rose nearly two percent after the market opened.

“Looking at shares up right now, from an investor perspective, I don’t know that this is viewed as some breaking news,” Simeon Siegel, managing director and senior retail analyst of BMO Capital Markets, told WWD.

He added that “the Under Armour that was focused on growth at all costs, from 2015 and before, does not seem to be the same company as today. The Under Armour of today is focused on a healthy path forward over profits.”

That includes Plank last fall relinquishing control of the company he founded and the retailer’s announcement earlier this year that it was ditching plans to open the 53,000-square-foot flagship along Manhattan’s Fifth Avenue in order to cut expenses.

But Erik Gordon, a professor of business and law at the Ross School of Business at the University of Michigan, Ann Arbor, said the Wells Notices means Under Armour is in “serious trouble.”

“A Wells Notice is double-barrel bad news; it means the government is after you,” said Gordon, who is also a licensed attorney. “It means Under Armour has been talking to the government, giving them documents and information. They’re trying to persuade the government that really there’s nothing there to worry about. But when a company gets a Wells Notice, it means whatever they sent so far, the government is not buying it and is putting them on formal notice that it intends to bring proceedings.

“And the DOJ is involved, which makes it very serious,” he added. 

While the details as to what extent Under Armour may have been involved with pulling forward its sales is still unknown, the proceedings could result in fines and penalties for the company, as well as for some of its executives. Furthermore, shareholders would also be able to take action in the form of civil suits.

Broader picture, the proceedings could serve as a warning for the entire retail industry. 

“Under Armour is not the only company that does it; it’s a long standing practice,” Gordon said. “This could be a signal that the government is on to it — this quarterly channel-stuffing and liberal return policy to make your quarterly numbers and hope somehow that the next quarter you can catch up — and considers it to be illegal.”