Kevin Plank gushed about his business on a call with Wall Street analysts in October 2015.
The company’s track record of rapid profit and revenue growth “gives us great confidence for the future,” Plank said on the call. “We are just getting started.”
Six days later, Plank entered into a scheduled stock selling plan — a common way for public company executives to sell stock in accordance with federal regulations — that netted him $138 million over the following six months, a period when the company continued to report a fast rise in revenue.
The public comments and financial statements of Under Armour executives from late 2015 to early 2017 were the subject of a four-year accounting probe by the U.S. Securities and Exchange Commission, which charged Under Armour with violating securities laws. In its May 3 order, the SEC said the Baltimore-based company failed “to disclose material information about its revenue management practices that rendered statements it made misleading.” Under Armour agreed to pay $9 million to settle the claims without admitting or denying the charges. Neither Plank nor any other executive was charged.
A group of pension retirees and other investors who originally filed a class-action lawsuit against Under Armour in 2017 are now citing the settlement, in a letter to a federal judge, as a reason the litigation should move forward. The suit alleges that Under Armour artificially increased quarterly revenue numbers to conceal slowing sales and that Plank personally profited from the company’s “artificially inflated” valuation. Plaintiffs allege that Plank adopted his prearranged stock trading plan at a time when he knew about an internal effort to mislead investors.
Under Armour, which is asking the judge to dismiss the case, also last week cited the SEC’s decision not to charge Plank or any other executive. The company has argued in court records that there is no evidence it deceived investors and has said Plank’s stock sales followed a regular pattern of trading.
Nate Tamarin, an external spokesman for Under Armour, said in a statement that the SEC told the company it would not be taking any action against Plank or other executives. He said Plank has always been focused on the company’s customers, employees, partners, community and shareholders, “and to suggest otherwise is not supported by facts."
Plank stepped down from his role as chief executive in 2019 but retains the roles of executive chairman and brand chief. His attorney, Lorin L. Reisner, said in an emailed statement that Plank “acted properly and lawfully in all respects. Any suggestion otherwise is unfair and unsupportable.”
Under Armour initially succeeded in getting the shareholder lawsuit dismissed in 2019, when a U.S. district judge in Maryland found that the plaintiffs did not have enough evidence to prove intent of wrongdoing, according to court documents. But the case was reopened last year after the judge determined that new evidence — including revelations that the SEC and the Justice Department were investigating the company’s accounting practices — was relevant to allegations that Under Armour executives acted with an intent to do wrong.
In its order, the SEC said Under Armour’s top executives knew revenue was not growing as fast as analysts had predicted and took steps to “close the gap.” Their efforts included shipping products to retailers months ahead of schedule and accounting for those sales earlier than planned, a practice known as “pulling forward” revenue, the order said. Because this revenue represented goods Under Armour actually did sell, the SEC said it did not find that the company violated accounting rules and claimed that it committed fraud by negligence, rather than willful wrongdoing.
Despite the SEC issuing a formal warning last year that it could charge Plank and one other executive, the agency did not name any individuals in the settlement or allege any improper stock sales.
A spokesman for the SEC did not respond to multiple requests for comment. The Justice Department has not announced any actions against Under Armour or its executives, and a spokesperson for the agency did not respond to a request for comment.
Maryland’s U.S. district court is now reviewing Under Armour’s motion to dismiss the shareholder lawsuit again. The lawsuit is seeking damages for any investor who purchased shares during the period in which the plaintiffs allege the stock price was artificially inflated, from Sept. 16, 2015, to Nov. 1, 2019.
The legal battle is unfolding at a time when some public officials are advocating for stricter limits on when and how corporate insiders may buy and sell stock.
In February, a group of Senate Democrats led by Sen. Elizabeth Warren (Mass.) called for stronger SEC oversight of prearranged stock trading plans, known as 10b5-1 plans, which they said give some executives cover for trading on confidential information and put ordinary investors at a disadvantage to wealthy executives. The lawmakers cited recent research that showed corporate insiders sometimes undermine the purpose of 10b5-1 plans by executing stock sales shortly after a plan is adopted, when their inside information is most relevant to the company’s stock performance.
The SEC’s order, a 12-page chronology peppered with quotations from internal company emails, says that Under Armour managers began noticing weakening sales around mid-2015. The company believed the slowdown was partly a result of warmer-than-average weather sapping demand for high-priced cold-weather apparel, the order said.
To avoid missing analyst estimates for third-quarter earnings that year, the company’s senior management directed the finance and sales teams to identify orders customers had placed for future quarters that could be shipped early and accounted for in the current quarter’s revenue, the SEC said. Pulling forward revenue is not illegal, because it reflects goods that companies actually do sell, accounting experts said.
The SEC alleged that Under Armour violated securities law when it failed to disclose this practice to investors. That quarter, the company pulled forward $45 million, helping it beat analyst estimates for revenue and continue its streak of rapid revenue growth.
On the call with analysts, Plank and other executives talked up the company’s bullish growth prospects, according to a recording and transcript of the call reviewed by The Washington Post. When one analyst asked whether the warm weather would affect the company’s sales that year, the executives said they didn’t see a major impact.
“We’ve really worked closely with our partners to create offerings that aren’t just relying on big puffer jackets that are sitting in retail stores, that if it doesn’t snow, aren’t going to sell,” Plank said on the call. “It’s a work in process, but weatherproofing our business has been a real focus for our company.”
Less than a week later, Plank set up his prearranged stock trading plan to sell a portion of his stake in Under Armour, which the company said in a filing he was doing “for asset diversification, tax and estate planning and charitable giving purposes.”
Executives of public companies often schedule stock sales ahead of time to comply with SEC rules and avoid accusations that they may be trading on nonpublic business data before it is shared with other investors. These 10b5-1 plans, named after the SEC rule that established them in 2000, are commonly used by executives who want to sell some of their shares and diversify their holdings over a set period of time and have no intention of benefiting from inside information about their companies, said Daniel Taylor, an associate professor of accounting at the Wharton School of the University of Pennsylvania.
Plaintiffs in the class-action suit claim that Plank helped inflate the value of Under Armour shares by misleading investors about the growth of the business and then “took advantage of this artificial inflation” by scheduling a 10b5-1 stock trading plan in October 2015 and selling a large number of shares in November 2015 and April 2016, when the stock was near an all-time high.
Under Armour has argued in court records that Plank’s stock sales were neither unusual nor suspicious and that they were made as part of a pre-announced plan to increase his liquidity without decreasing his control over the company.
Plank regularly sold shares in preplanned stock trades from 2011 through 2015. The third quarter of 2015 was the first quarterly period in five years in which he sold no shares. That was immediately followed by a $100 million stock sale during one week in November 2015 — the most lucrative cluster of sales he had ever carried out in one quarter, regulatory filings show.
In a statement, Under Armour spokesman Tamarin said Plank sold stock regularly over 18 consecutive quarters and paused trading for two quarters in 2015 “as the Company was working through a publicly disclosed recapitalization.”
After the pause, Plank sold a larger amount of stock in the November 2015 share sale “to catch up for pausing immediately prior to that.” When taking together all of Plank’s transactions for the year, he actually sold more shares for more money in 2014 — before the period of alleged misleading statements — than he did in 2015, filings show.
The purpose of Under Armour’s 2015 recapitalization, according to a company filing, was to create a new class of shares with zero voting power. Creating these shares allowed Plank to sell some of his stake without sacrificing his control over the company, and “remain in a position to influence our direction for many years,” Under Armour’s board of directors said in the filing.
In 2016, Under Armour shipped larger and larger amounts of customer orders ahead of schedule to keep up with growth targets, according to the SEC order. In some cases, retailers didn’t want the inventory so early and demanded discounts in exchange for taking the shipments. In a September 2016 email cited by the SEC, one customer said: “We just brought a bunch of your goods in early to help out your quarter. . . . Now you want more. . . . More..More..more..30% [price discount] please.”
Plank sold $38 million in shares during the spring of 2016. The stock price peaked at $44 in April of that year, then gradually slid downhill as investors saw rivals including Nike and Adidas gaining ground on Under Armour’s apparel business.
By late 2016, senior management had grown concerned that the company would not meet analyst estimates, even after pulling forward sales, according to the SEC order. In a December 2016 meeting, a senior executive said that the company had “been living in this bubble for a while” and that pulling forward revenue each quarter was not healthy, the order said. The senior executive made a commitment: “We’re not going to take from next year.”
In total, the company had pulled forward $408 million in orders over six quarters, the SEC said.
Under Armour alarmed investors in January 2017, when it reported one of its slowest periods of growth in its history as a public company. As the stock price tumbled more than 20 percent, Plank tried to reassure Wall Street that the company’s problems related to clothing assortment, lighter mall traffic and more competitive holiday discounting.
“We understand very clearly the root causes and reasons behind this imbalance, are humbled by it,” Plank said on a call with analysts. “I want to be clear: Our growth story is intact.”
For most of the past four years, Under Armour shares have traded at less than half of the value at which Plank sold them. The executive still owns more than 68 million shares, or about 15 percent of the company, and retains majority voting control, according to Bloomberg data. Filings show he has not made any preplanned stock sales since 2016.
Correction: An earlier version of this story incorrectly said that an SEC rule established 10b5-1 plans in 2002. The story has been updated to show that the rule was in 2000.