A Scottish council is embroiled in legal action against one of the world’s leading sportswear firms over allegations a local government pension fund lost millions of pounds as a result of the company’s fraudulent accounting and sales practices.
Lawyers for Aberdeen City Council claim that Under Armour artificially inflated the price of its shares and revenue using “illicit” sales techniques and “a facade of consistent growth,” which left investors counting the cost as the value of its stock drastically fell.
The North East Scotland Pension Fund (NESPF), which administers the pension scheme for more than 70,000 public sector workers across the Aberdeenshire area, acquired more than £20 million of Under Armour stock five years ago.
However, the company’s share price has since nosedived, with the sportswear giant subject to an investigation by US authorities into its practices.
The council is the lead plaintiff in a class action lawsuit in a US court against Under Armour, seeking damages as well as costs and expenses. Legal filings state that the pension fund suffered losses of more than £6.5m as a result of the firm’s alleged misconduct.
Over much of the last decade, Under Armour appeared to be one of the world’s best-performing sportswear companies, registering a streak of 26 consecutive quarters of at least 20 per cent growth between 2010 and 2016.
The company rose to prominence after striking extensive deals with professional teams and individual players across American football, baseball, and basketball, a strategy which saw it close the gap on industry giants Nike and Adidas.
It went on to aggressively expand its reach globally, penning lucrative sponsorship deals with elite stars from the world of sport, including Sir Andy Murray, Trent Alexander-Arnold, Anthony Joshua, Michael Phelps, and Jordan Spieth. It has also sponsored teams including Southampton FC and former athletes such as Muhammad Ali.
Documents obtained by Scotland on Sunday show that over the course of 2016, the NESPF invested heavily in the US-based firm, acquiring more than 815,000 of its class A and class C shares.
According to the value of each deal, the pension fund acquired more than $28.78m (£20.3m) worth of Under Armour stock over the period, with the shares purchased across scores of separate transactions.
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However, the price of the stock soon plummeted. While the NESPF went on to offload hundreds of thousands of its shares, the selling price was often less than half of that they paid for them.
The council’s lawyers argue that around the time Under Armour was enjoying unprecedented growth, and the pension fund was acquiring tens of millions of pounds of its stock, the company was actively concealing its problems and “improper” accounting practices so as to preserve its “carefully cultivated image as a fast growing, premium sports brand.”
A newly amended complaint, filed in the US District Court of Maryland, alleges that Under Armour’s “concealed” practices included pulling forward sales from future quarters to artificially boost revenue and hit aggressive sales goals.
It also claims that Under Armour’s founder and then CEO, Kevin Plank, “personally cashed in” on the artificial inflation of the firm’s share price, selling $138.2m (£99.4m) of his own stock between November 2015 and April 2016 in sales that were “suspicious in timing and amount.”
Under Armour has rejected the allegations as being without merit, and said that its disclosures and accounting practices have been “entirely appropriate.”
The firm’s lawyers have applied to dismiss the complaint by the council and other plaintiffs. In their motion, they argue that the allegations Under Armour pulled forward orders merely describe “legitimate pull in sales” and do not constitute fraud.
They add in their submission that Mr Plank’s sales of his stock were not suspicious, pointing out that it formed part of a publicly announced strategy.
Under Armour did not respond to enquiries from Scotland on Sunday.
The firm has been under investigation by the US Department of Justice and the US Securities Exchange Commission over its so-called ‘pull forward’ sales strategy.
Aberdeen City Council is pursuing the legal action because it is the administering authority of the NESPF, as well as its legal advisor. The fund, which is overseen by a pensions committee made up of nine of its councillors, has total assets worth in excess of £4.3bn, according to its most recent annual report.
The council is being represented by Robbins, Geller, Rudman & Dowd LLP, a California-based law firm specialising in securities fraud and antitrust cases.
Both the council and NESPF declined to answer enquiries from Scotland on Sunday about the cost of the US legal action to date, and whether the fund continued to hold Under Armour stock. The cost of the action is expected to be significant, given the dispute has been ongoing for the past four years.
The NESPF mainly looks after the pensions of past and present local authority employees throughout Aberdeen, Aberdeenshire, and Moray, but its participating employers include the Scottish Fire and Rescue Service, Scottish Water, and Visitscotland, as well as smaller organisations such as Moray College and Nestrans.
The NESPF said that any losses suffered by the pension fund do not impact on individual pension values or rights.
In a statement, the fund said: “As this is an ongoing legal case, the fund will make no further comment.”
A spokeswoman for Aberdeen City Council said: “As this is an ongoing legal case, Aberdeen City Council as the administering authority of NESPF will make no further comment.”
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