SEC Charges Brand Management Company with Failure to Timely Impair Goodwill

The SEC charged a New York-based brand management company with failure to take into account indisputable evidence of goodwill impairment.

In a complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged the company conducted two internal audits at the end of 2016 that indicated its goodwill was probably impaired. Rather than reduce the value of its goodwill, the SEC stated the company decided to omit the findings from its financial statements and SEC filings by, among other things:

• conducting a "biased, results-driven" goodwill impairment test that did not sufficiently include all events and circumstantial changes of which the company was aware;
• making incorrect and inaccurate disclosures in its Forms 10-Q and 10-K quarterly and annual reports regarding the company's testing policies; and
• failing to disclose to investors and its independent auditor that it no longer utilized the goodwill impairment testing methodology disclosed in its SEC filings.

As a result of its conduct, the company was found to have materially overstated its goodwill, total assets and income from operations, and understated its operating expenses and net losses.

Based on its investigation, the SEC charged the company with violations of Section 17(a)(3) of the Securities Act; Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and Exchange Act Rules 12b-20 ("Additional information"), 13a-1 ("Requirements of annual reports"), 13a-11 ("Current reports on Form 8-K") and 13a-13 ("Quarterly reports on Form 10-Q").

To settle the charges, the SEC requested a judgment against the company to (i) provide permanent injunctive relief and (ii) order payment of civil money penalties, in addition to "other appropriate and necessary equitable relief."