In an order dated May 3, 2021, the Securities and Exchange Commission charged sports apparel company Under Armour, Inc. with securities violations for allegedly misleading its investors about the bases of its revenue growth and failing to disclose known uncertainties about its ability to meet future revenue projections. In particular, the order charged Under Armour with violating the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933, as well as Section 13(a) of the Securities Exchange Act of 1934 and various other reporting rules. Notably, the charged violations do not require scienter. Rather, a showing of negligence is sufficient.
The Order found that, in order to meet its analysts’ revenue projections despite underperforming sales revenues in 2015 and 2016, Under Armour accelerated or “pulled forward” $408 million in existing orders that customers had requested be shipped in future quarters. The Order further found, in doing so, Under Armour misled its investors by attributing its reported revenue growth to various other factors without disclosing the material information about the impacts of the pull forward. The Order noted one particular impact that Under Armour failed to disclose was that its reliance on pull forwards increased uncertainty about its ability to meet future revenue projections. In other words, the SEC found Under Armour misled its investors about the reasons for its financial performance, and concealed known uncertainties about its business.
Under Armour settled the SEC’s charges by agreeing to pay a $9 million penalty and without admitting or denying the SEC’s findings. The SEC did not require that Under Armour retain a compliance consultant or implement any specific changes to its disclosure policies and procedures.
In a press release issued by the SEC, Kurt Gottschall, Director of the SEC’s Denver Regional Office advised: “When public companies describe how they achieved financial results, they must not misstate any information that is material to investors.”
The Order, and the SEC’s comments, demonstrate the SEC’s continued willingness to pursue enforcement actions against public companies for purported violations of federal securities laws. Accordingly, public companies must ensure that they have adequate disclosure policies and procedures to ensure that its qualitative financial discloses, including, but not limited to, disclosures relating to “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” contain all material information.