Conn’s Inc, has settled with the SEC and its former COO, Michael Poppe, that it deliberately understated the company’s allowance for bad debts and overstated income in its financial statements.
The company has its head office in The Woodlands and has a market cap of $584 million. It is a retailer of furniture and electronics and many of its customers are sub-prime borrowers.
Conn’s has agreed to pay a $1.1 million civil penalty. Mr Poppe will pay a $50,000 fine.
Mr Poppe joined the company in 2004 as its Controller. He was the CFO from February 2008 through April 2012 and its COO from April 2012 through May 2017.
The charges relate to the period from the quarter ending July 2012 to the quarter ending July 2014. The company made a fateful decision in 2012 to take more of the credit risk in-house.
Last month I wrote about some of the issues the company was facing when current CFO, Lee Wright, was promoted to COO.
The SEC states that Conn’s was using a ‘roll-rate’ model to measure potential credit portfolio losses by segmenting the portfolio into delinquency buckets and applying a roll-rate to each segments. A roll-rate is a measure of the percentage of receivables that will migrate into the next delinquency bucket the following month.
Historically, Conn’s used a roll rate that was based on the previous time period (month, quarter etc) or an average of several recent time periods. From July 2012, the roll rates used in the model were hard-coded plugs that reflected management’s unduly optimistic future expectations.
As a result, the bad debt expense was higher than projected/reserved charge-offs for 14 consecutive quarters. In the quarter ended July 2014, Conn’s finally began to build up its doubtful debt reserve. In the following quarter it removed the management plugs entirely. This caused a $20 million increase to the doubtful debt reserve. Conn’s share price dropped 30% on the day of the Q2 announcement and 41% on the day of the Q3 announcement.
Since October 2014, Conn’s has replaced all of its senior management team. Also, it no longer utilizes a roll rate model to calculate its allowance for doubtful accounts.
Poppe received restricted stock awards
It’s not clear whether Mr Poppe received a severance payment when he left. He had a base salary of $460,000. At the time the SEC filing announcing his departure did not refer to any severance payment. In addition, the annual proxy filed the following year did not list him as one of the top 5 officers.
Mr Poppe only received a cash bonus of $50,000 for the year ended 30 January 2017 and none the previous two years. For those three years, he did receive restricted stock units that were cumulatively valued at almost $3 million in the annual proxy filed for the year ended 31 January 2017. It’s not clear how many were forfeited on Mr Poppe’s departure.