Tag: failure to disclose material trend
Just in time for Thanksgiving, SEC charges Elanco with undisclosed stuffing—channel stuffing, that is
In this settled action, In the Matter of Elanco Animal Health, Inc., Elanco, a manufacturer and seller of animal health products, such as flea and tick medications, was charged with “failure to disclose material information concerning its sales practices that rendered statements it made about its revenue growth misleading.” As alleged by the SEC, “Elanco would entice distributors to make end-of-quarter purchases in excess of then-existing customer demand by offering them incentives such as rebates and extended payment terms. These incentives allowed Elanco to improve its revenue each quarter, but caused distributors to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would have missed its internal revenue and core growth targets in each quarter in 2019.” Essentially, we’re talking here about channel stuffing. As the practice continued, it contributed over the period to “channel inventory increasing by over $100 million in gross value…during 2019, creating a build-up of excess inventory at distributors and a reasonably likely risk of a decrease in revenue and revenue growth in future periods. But, for each quarter during the Relevant Period, Elanco failed to disclose the significant impact of its Quarter-End Incentivized Sales and the reasonably likely risk that these sales practices could have a negative impact on revenue in future quarters.” The SEC charged that these disclosure failures rendered the positive statements that Elanco made about revenue materially misleading. And let’s not forget the disclosure controls violations. In settling the action, Elanco agreed to pay a civil money penalty of $15 million.
Failure to disclose “revenue management scheme” leads to SEC action
In this Enforcement Order, the SEC described a “revenue management scheme” orchestrated by the respondent, Marvell Technology Group, and the imposition on Marvell of a $5.5 million penalty and cease-and-desist order—not because of the scheme itself, but rather because the company failed to publicly disclose the scheme in its MD&A or to discuss its likely impact on future performance. The Order demonstrates that, even if a scheme involving unusual sales practices may not amount to chargeable accounting fraud, failure to disclose its distortive effects can be misleading and result in violations of the Securities Act and Exchange Act.
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