The SEC is shareholders’ best friend in class action against Under Armour

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(Reuters) - The most important filing for shareholders suing Under Armour Inc for allegedly manipulating sales of its sportswear to cover up a decline in demand was not the 192-page amended class action complaint that hit the Baltimore federal court docket with a thump last October.

Nor was it a 68-page brief opposing Under Armour’s motion to dismiss the class action, which lead counsel from Robbins Geller Rudman & Dowd filed in January.

Nope: For plaintiffs in the Under Armour securities class action, the most critical filing was a 13-page, May 7 letter asking U.S. District Judge Richard Bennett of Baltimore to take judicial notice of a $9 million settlement that the U.S. Securities and Exchange Commission struck with Under Armour on May 3.

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Under Armour reached its agreement with the SEC while the company’s motion to dismiss the parallel shareholder class action was pending before Bennett. Shareholders’ lawyers from Robbins Geller told the Baltimore judge that the SEC settlement made his job easy. Although the company did not admit liability in the deal, plaintiffs lawyers argued that the SEC’s consent order with Under Armour confirmed the key allegations in the shareholder complaint, removed any doubt that the company had acted with fraudulent intent and generally “eviscerated” dismissal arguments by Under Armour and former CEO Kevin Plank.

Bennett agreed that shareholders could at least try to prove it. As my Reuters colleague Jonathan Stempel reported on Tuesday, the Baltimore judge denied Under Armour’s motion to dismiss the shareholder complaint, even though he had previously dismissed similar allegations by investors in 2019.

“The SEC’s order includes specific allegations that the company and its top officials, including then-CEO Defendant Plank, were aware of the potential misleading nature of (their) sales practices,” Bennett wrote. The commission’s settlement order, he said, “lends support to the allegations of the plaintiffs in this case.”

The Under Armour case offers proof as vivid as you’ll ever see of the collateral consequences of an SEC settlement in related private litigation.

Corporations, as you know, are always worried about the impact of their SEC deals in parallel shareholder class actions. That’s why the commission traditionally allowed its targets to settle with the government without liability admissions that could come back to haunt companies in suits brought by investors. (The commission moderated that policy in 2012 but still doesn’t require admissions of liability in most settlement agreements.)

Under Armour’s defense lawyers appear to have been thinking about the class action in the deal they struck with the SEC. The company, as I mentioned, did not admit liability in the settlement. It also consented to an order alleging only disclosure violations, not accounting fraud. The SEC order even specified that an alleged violation of those particular disclosure provisions “does not require scienter and may rest on a finding of negligence” – a significantly lower bar than shareholders are required to surmount in securities class actions.

Moreover, as Under Armour counsel from Fried, Frank, Harris, Shriver & Jacobson informed Bennett when they notified the judge about the SEC deal in a one-page May 4 letter, the SEC did not pursue an enforcement action against former CEO Plank or any other corporate executive or board member.

Surely, though, Under Armour would have preferred that its SEC settlement not be disclosed while Bennett was weighing the company’s motion to dismiss the shareholder class action. (I don’t know if Under Armour made any attempt to control the timing of its settlement with the SEC. I posed that question, among others, in emails to the company’s lead counsel, James Wareham of Fried Frank, and to the SEC, but didn’t get a response.)

Robbins Geller immediately capitalized on the SEC settlement. In its May 7 letter to Bennett, the plaintiffs firm quoted liberally from the consent order, which, according to Robbins Geller, confirmed shareholders’ allegations that Under Armour deceived shareholders by covering up the aggressive sales tactics it was using to avoid falling short of analysts’ expectations. Under Armour had argued in its dismissal motion that shareholders failed to provide specific details about these sales tactics, known as pull-forward transactions. The SEC order, Robbins Geller said, specifically identified millions of dollars in pulled-forward sales.

The consent agreement, Robbins Geller said, also left no doubt that Under Armour knew these sales tactics would mask its failure to meet revenue expectations. The SEC may have alleged only disclosure violations, the shareholder firm said, but the commission’s findings "were as meticulous in their detail as they were incriminating for defendants."

Bennett’s opinion denying Under Armour’s dismissal motion relied heavily on the arguments Robbins Geller made in the May 7 letter. He agreed, for instance, that the nature of the violations cited in the SEC order did not preclude an inference that Under Armour acted with fraudulent intent, since the SEC specifically alleged that the company and top officials “were aware of the potential misleading nature of the undisclosed pull-forward sales practices.” The judge also said the SEC order provided the specificity that Under Armour accused plaintiffs of failing to allege.

Would Bennett have allowed investors to proceed even if the company hadn’t settled with the SEC while its dismissal motion was under his consideration? Perhaps. After he dismissed an earlier version of the case back in 2019, the judge allowed plaintiffs to revive their claims following reports that the SEC was investigating Under Armour.

In the January 2020 opinion allowing the case to return to life, Bennett said the existence of the SEC investigation, in addition to shareholders’ previous allegations, “(supports) the conclusion that Under Armour and Plank knew that demand for their products was waning, resorted to risky sales tactics to keep the numbers intact and intentionally misrepresented the level of demand for their products.”

The judge was already inclined, in other words, to countenance the class action before Under Armour’s deal with the SEC was disclosed.

But the SEC consent order sure didn’t hurt investors’ cause. I doubt Under Armour thought its $9 million settlement with the SEC would be the end of its woes. Now it's clear that the deal made things worse.

Read more:

Under Armour shareholders can sue over sales disclosures -judge

Under Armour to pay $9 million to settle SEC charges

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