The Securities and Exchange Commission has charged New York-based brand-management company Sequential Brands Group Inc. with failing to impair its goodwill as required by accounting principles and the federal securities laws.
The SEC’s complaint alleges that Sequential failed to properly assess its goodwill for potential impairment after several months of declining stock prices followed by a precipitous drop in early November 2016.
According to the complaint, in December 2016, shortly after Sequential passed its annual goodwill testing, the company conducted internal calculations showing that, in light of the declining stock price, Sequential would fail the first step of its disclosed two-step impairment test.
The complaint alleges that the company ignored this objective evidence of impairment. Instead, the complaint alleges, Sequential performed a qualitative analysis that omitted any mention of its internal calculations, as well as numerous other negative developments in the company’s business, leading it to unreasonably conclude that goodwill was not impaired.
As alleged, by avoiding an impairment to its goodwill in 2016, Sequential inflated its income from operations, created a false impression of its financial condition, and misstated its financial statements and reports for almost a year. Sequential allegedly continued to improperly account for goodwill in the next three quarters, before belatedly impairing all of its goodwill—totaling $304 million—in the fourth quarter of 2017.
“We allege that Sequential ignored clear evidence of goodwill impairment, and thereby delayed alerting investors to its declining economic prospects,” said Melissa R. Hodgman, an Associate Director in the Division of Enforcement. “Companies carrying goodwill on their books and testing for impairment must consider and appropriately weigh all relevant facts and circumstances when evaluating whether to impair goodwill and must do so in a timely fashion.”
The complaint, filed in federal district court in Manhattan, charges Sequential with violating antifraud, reporting, books and records, and internal controls provisions of the federal securities laws and seeks injunctive relief and civil monetary penalties.
The SEC’s investigation, which continues, was conducted by Ellen F. Bortz, Richard E. Johnston and Paul C. Gunson, and supervised by Jennifer S. Leete. The litigation will be led by Sarah Heaton Concannon.