Brand-management company Iconix Brand Group and three of its former top executives were charged Thursday by the Securities and Exchange Commission for engaging in accounting fraud.
Iconix and two of the executives agreed to settle, with litigation still pending against the company’s former CEO.
The agreement Iconix reached with the SEC resolved a previously disclosed investigation into certain accounting and reporting issues occurring during 2013 through the third quarter of 2015. The SEC’s complaint against former Iconix CEO Neil Cole and former Chief Operating Officer Seth Horowitz alleges both devised a fraudulent scheme to create fictitious revenue.
According to the SEC’s complaint, Cole and Horowitz realized substantial profits on Iconix stock sales as a result of the alleged fraud. To aggravate matters further, Cole and Horowitz allegedly destroyed evidence and caused Iconix to make false and misleading statements in response to an SEC inquiry into the company’s joint ventures.
The SEC separately charged Iconix with fraud for recognizing false revenue and manipulating its reported earnings in 2014; entering into transactions to conceal distressed finances at two licensees who could not meet licensing royalty payments owed to Iconix; and failing to recognize over $239 million in impairment charges for three brands over a multiyear period.
Additionally, Iconix and its former Chief Financial Officer Warren Clamen failed to recognize losses from the company’s failing licensees, disclose Iconix entered into transactions to secretly and temporarily bolster its licensees’ finances, and properly test for impairment, according to the SEC order against Clamen. As a result of these accounting improprieties, Iconix overstated net income by hundreds of millions of dollars between 2013 and the third quarter of 2015.
From a compliance standpoint, a lot can be learned from the alleged internal accounting control failures of Iconix. “During the relevant period, Iconix’s corporate culture, tone at the top, and deficient internal accounting policies, procedures, and training created an environment in which accounting improprieties, particularly with regard to impairment, were likely to occur,” the SEC’s complaint against Iconix states.
Among its deficient internal accounting controls, according to the SEC’s complaint, Iconix:
- Failed to implement internal accounting policies, procedures, or controls reasonably designed to identify indicators for impairment and to cause the company to conduct appropriate and timely impairment testing;
- Failed to identify any group or individual in the company as responsible for recognizing indicators of impairment or provide sufficient training on impairment accounting;
- Failed to provide specific training or instruction to key participating executives on identifying indicators of impairment or impairment accounting;
- Failed to have a have a process in place to require the then-CEO and then-COO to provide key impairment information to the finance function;
- Failed to implement internal policies and procedures setting out a process for verifying and testing the reasonableness of information, if any, provided; and
- Failed to implement internal accounting controls that required it to consider the indicators of impairment present in 2013 and 2014, “which resulted in its unreasonable failure to properly test for impairment and to timely write-down the amount of the intangible assets associated with its brands.”
Additionally, Iconix’s finance function “relied on Iconix’s then-CEO and then-COO to timely provide them with key information—including assessments of future royalty projections and the licensees’ ability to sell Iconix’s brands—and to flag potential impairment issues for further review,” the SEC’s complaint states. At the same time, however, “it was widely known throughout Iconix that the then-CEO exerted undue pressure on other members of management to find ways to avoid impairment.”
Without admitting or denying the allegations, Iconix agreed to a $5.5 million civil penalty, “an amount that reflects the company’s cooperation and remediation efforts,” the SEC said. Horowitz, who is cooperating with the SEC, consented to injunctive relief and a permanent officer-and-director bar and has agreed to disgorgement and prejudgment interest of over $147,000 and a penalty in an amount to be determined at a later date. The settlements are subject to court approval.
In its ongoing litigation against Cole, the SEC is seeking monetary and injunctive relief, including a permanent officer-and-director bar, and reimbursement to Iconix of certain incentive-based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act.
Clamen, without admitting or denying the SEC’s findings, has agreed to cease and desist from future violations of the securities laws and pay disgorgement and prejudgment interest of nearly $50,000 and a $150,000 penalty. The order suspends Clamen from appearing and practicing before the Commission as an accountant and provides Clamen the right to apply for reinstatement after three years.
In parallel actions, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Cole and Horowitz. Horowitz has pleaded guilty to those charges.
Lorin Reisner and Richard Tarlowe of law firm Paul Weiss, and counsel for Cole, issued the following statement: “Neil Cole acted lawfully and properly in all respects, and this case should not have been brought. All of the transactions at issue were fully reviewed and approved by Iconix’s legal, finance, and accounting professionals, and Mr. Cole reasonably relied on those professionals. Mr. Cole has had a distinguished career as a brand management innovator and pioneer, and he acted in the best interests of Iconix and its shareholders at all times. Good faith business conduct by a senior business executive should not be criminalized. These charges are completely baseless.”
“Iconix and its board of directors have cooperated with the SEC throughout the duration of its investigation,” the company stated. “During the four years since these issues came to light, Iconix and its board of directors have appointed new executive leadership and have taken significant steps to remediate and strengthen the company’s compliance and reporting functions.”
“I am pleased that we were able to resolve this legacy matter that arose under previous management over four years ago,” said Iconix Chief Executive Officer Bob Galvin. “Working alongside our board of directors over the past several years, Iconix has put in place significant, additional measures to ensure that the company’s financial reporting, compliance, and governance practices fully meet legal and good governance standards.”