Risk & Compliance

Sequential Brands Accused of Accounting Fraud

The SEC says senior finance personnel improperly accounted for goodwill to create a false impression of the company's financial health.
Matthew HellerDecember 11, 2020

Brand management company Sequential Brands has been charged with ignoring “clear evidence” of goodwill impairment to create a false impression of financial health while its stock price was falling.

The U.S. Securities and Exchange Commission said Sequential began improperly accounting for goodwill in the fourth quarter of 2016, turning a net loss into a profit, after conducting internal fair value calculations that showed it would fail the first step of its disclosed two-step impairment test.

The company allegedly carried the deception forward for three more quarters until it finally impaired all of its goodwill — totaling $304 million — in the fourth quarter of 2017.

Sequential avoided the goodwill impairment through “the acts and omissions of its senior accounting and finance personnel,” including its then-CFO, its president and interim CFO, and its vice president of finance, the SEC said in a civil complaint.

While the commission did not name those individuals, company records show Gary Klein was appointed CFO in 2012 and was replaced on an interim basis by Andrew Cooper in 2017.

“We allege that Sequential ignored clear evidence of goodwill impairment, and thereby delayed alerting investors to its declining economic prospects,” Melissa R. Hodgman, an associate director in the SEC’s Division of Enforcement, said in a news release.

Sequential owns and manages retail brands including Jessica Simpson, Joe’s Jeans, And 1, Avia, Ellen Tracy, and Caribbean Joe. Its intangible assets, including goodwill, “constituted the overwhelming majority of the company’s assets” and its stock price was “a particularly important consideration” in its goodwill impairment testing, the SEC noted.

The disclosed goodwill impairment testing policy stated that Sequential considered its market capitalization to represent estimated fair value.

According to the SEC, Sequential ignored the objective evidence of its internal calculations, instead performing a “strained, biased, and outcome-driven qualitative analysis” that “unreasonably concluded that goodwill was not impaired” by the stock price decline.

“By avoiding an impairment to its goodwill in 2016, Sequential’s financial statements and SEC filings materially understated its operating expenses and net loss and materially overstated its income from operations, goodwill, and total assets,” the commission alleged.

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