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What's A Wells Notice — And Why Should Under Armour Investors Care?

Shares of Under Armour Inc (NYSE: UAA) reversed their early morning losses Monday despite being on the receiving end of a warning from U.S. regulators commonly referred to as a Wells notice.

Benzinga · -

Shares of Under Armour Inc (NYSE:UAA) reversed their early morning losses Monday despite being on the receiving end of a warning from U.S. regulators commonly referred to as a Wells notice.

What Happened: Under Armour's ex-CEO and current executive chairman Kevin Plank and CFO David Bergman both received a Wells notice from the Securities and Exchange Commission, the company said in a regulatory filing.

The SEC investigation relates to how Under Armour handled the accounting treatment of sales from the third quarter of 2015 through the end of 2016.

The company is accused of channel stuffing, meaning shipping more items to retailers than they are likely able to sell.

The rationale behind such a move would be to try and pull sales from outer quarters into earlier periods.

A Wells notice indicates the SEC is exploring some form of an enforcement action. However, the notice in no way indicates the agency has concluded there was any wrongdoing. 

"The Wells notices informed the company and the Executives that the SEC staff has made a preliminary determination to recommend that the SEC file an enforcement action against the company and each of the executives that would allege certain violations of the federal securities laws," according to Under Armour. 

Why It's Important: It is "always suboptimal" to be on the receiving end of a Wells notice, CNBC's Jim Cramer said on "Squawk on the Street."

In Under Armour's case, revenue recognition is not the issue and the company won't be restating previous earning reports, Cramer said. 

The company doesn't need to commit accounting wrongoing to hurt itself, as management did that on its own through a poor product line, the CNBC host said. 

"They are in a very competitive category," Cramer said. "They kind of missed being Lululemon Athletica Inc (NASDAQ:LULU) and they couldn't take on Nike Inc (NYSE:NKE).

What's Next: The SEC is unlikely to harshly rule against Under Armour to the point where Plank will be forced to leave the company, Cramer said.

Class A Under Armour shares were trading 1.51% higher at $11.08 at last check Monday. 

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Benzinga file photo by Dustin Blitchok.