SEC Obtains Final Judgment Against Sequential Brands Group, Inc. for Failing to Timely Impair Goodwill
Litigation Release No. 25289 / December 15, 2021
Accounting and Auditing Enforcement Release No. 4277 / December 15, 2021
Securities and Exchange Commission v. Sequential Brands Group, Inc., Case No. 20-CV-10471 (JPO) (SDNY filed Dec. 11, 2020)
The Securities and Exchange Commission today announced that Sequential Brands Group, Inc., agreed to the entry of a final judgment permanently enjoining Sequential from future violations of the antifraud provision of Section 17(a)(3) of the Securities Act of 1933 and certain reporting, books and records, and internal control provisions under the Securities Exchange Act of 1934. The U.S. District Court for the Southern District of New York entered the final judgment against Sequential on December 1, 2021.
The SEC's complaint alleged 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 alleged 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.
Without admitting or denying the allegations of the complaint, Sequential agreed to be permanently enjoined from violating the antifraud provision of Section 17(a)(3) of the Securities Act; the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; the books and records provision of Exchange Act Section 13(b)(2)(A); and the internal control provisions of Exchange Act Section 13(b)(2)(B).
In light of Sequential's financial condition as set forth in filings before the bankruptcy court in the case Sequential Brands Group, Inc., et al., Chapter 11, Case No. 21-11194 (JTD) pending in the U.S. Bankruptcy Court District of Delaware, the final judgment does not impose a monetary penalty.
The SEC's litigation was conducted by Christopher M. Bruckmann and John Bowers, and supervised by Frederick Block. The SEC's investigation was conducted by Ellen Bortz, Richard Johnston, and Paul Gunson, under the supervision of Paul Pashkoff, Jennifer Leete, and Melissa Hodgman.