Plaintiffs in a 4-year-old shareholder lawsuit against Under Armour are arguing that their class action case is bolstered by the company’s settlement of federal regulators’ charges earlier this month that the brand misled investors about its sales growth in 2015 and 2016.
Baltimore-based Under Armour neither admitted nor denied those charges, which resulted from a U.S. Securities and Exchange Commission investigation into the sports apparel maker’s accounting practices. Under Armour agreed to pay $9 million in a settlement with the agency.
In a May 7 letter to the federal judge handling the lawsuit, plaintiffs argue that the SEC’s findings confirm their allegations against the company and its founder and former CEO, Kevin A. Plank. Plank stepped down as CEO in 2019 but remains executive chairman and brand chief.
The company and Plank “knowingly orchestrated and participated in an undisclosed, six-quarter-long scheme designed to conceal the company’s declining revenue and maintain its 26-consecutive-quarter, 20% revenue growth streak,” misrepresenting financial results, says the letter on behalf of plaintiffs North East Scotland Pension Fund, Monroe County Employees’ Retirement system and KBC Asset Management.
Under Armour representatives could not be reached for comment on the letter Thursday evening.
The SEC’s order found that for six consecutive quarters beginning in the third quarter of 2015, Under Armour “pulled forward” a total of $408 million in existing product orders that customers, such as retailers, had requested be shipped in future quarters.
“This settlement relates to the company’s disclosures and does not include any allegations from the SEC that sales during these periods did not comply with generally accepted accounting principles,” Under Armour had said in announcing the settlement.
Plaintiffs filed the original lawsuit in February 2017 in U.S. District Court for Maryland, alleging company failures to disclose that “Under Armour’s revenue and profit margins would not be able to withstand the heavy promotions, high inventory levels and ripple effects of numerous department store closures and bankruptcy of The Sports Authority.”
At the same time, the lawsuit said that Plank “saw the writing on the wall” and “began shifting the company’s capital structure by selling more of his stake to prevent any individual loss, yet maintain control of the company.”
In November 2015 and April 2016, Plank sold a substantial amount of his company stock for $138.2 million, “shortly after making material misstatements and omissions,” the plaintiffs say in an amended lawsuit filed in October.
Those sales included 1.3 million shares of Class B common stock in November 2015 for nearly $1 million, or roughly 36% of shares he could sell without losing control of the company, and more than 1 million Class C shares for more than $38 million in April 2016, or 42% of shares that could be sold without giving up control, according to the complaint.
Under Armour is seeking to dismiss the lawsuit and in a court document filed March 12 called the plaintiffs’ allegations unfounded.
Plaintiffs failed to show that Under Armour’s accounting practices were improper, and instead attempted to portray legitimate “pull forward” sales as accounting violations, Under Armour said in a response.
“What is more, plaintiffs concede that the company’s financial statements were certified by independent auditors and have not been restated,” the documents say.
As for Plank’s sale of company shares, plaintiffs failed to show that his sales were out of line with prior trading practices. And they never proved what he knew about the company’s prospects when he sold the shares, the filing said.
Shareholders suing the company “fail to account for the fact that Mr. Plank publicly declared his intention to continue selling shares in June 2015 — months before the relevant allegations in this case.”