On September 16, 2019, Marvell Technology Group, Ltd., a producer of semiconductor components used in hard drives, mobile phones, and network devices, agreed to pay $5.5 million to settle SEC charges that it failed to disclose its practice of accelerating, or “pulling in,” sales scheduled for future quarters into current quarters in order to close the gap between its actual and forecasted revenues. According to the SEC order, Marvell pulled in a total of $165 million in revenues across three quarters without disclosing the impact of that practice on the company’s revenues. Although no individuals have been charged by the SEC to date, it remains to be seen, given the nature of the misconduct alleged, whether the agency will ultimately decide to take further action against Marvell’s senior management.

• Declining Market Conditions – The SEC order emphasizes that Marvell’s senior management was aggressively focused on meeting revenue guidance at a time when the company was losing market share in an already declining market. The company’s sales personnel warned senior management that, given the declining market, the company’s reliance on pull-ins “made it all but impossible” for the company to meet its future revenue targets. However, senior management ignored these warnings and directed the employees to continue using pull-ins by shipping “anything and everything possible.”
• Concealment of Pull-Ins – The SEC also alleged that Marvell’s senior management ignored concerns raised by employees that the company’s use of pull-ins misrepresented the market demand for its products. In particular, one employee with responsibilities related to Marvell’s accounting and financial disclosures cautioned senior management that the use of pull-ins could trigger disclosure obligations, citing prior SEC enforcement actions that targeted unusual sales practices. In response, the employee was directed to send an email to senior management indicating that there were no issues with the pull-ins. The SEC order also states that Marvell’s senior management concealed their use of pull-ins from the company’s disclosure committee, board of directors, and independent auditor by deleting references to pull-ins from the board and committee materials.
• Misleading Disclosures – Notably, the SEC did not allege that Marvell’s use of pull-ins violated the revenue recognition rules under GAAP. Instead, the SEC’s charges focus solely on the company’s disclosures. According to the SEC order, Marvell’s failure to disclose its use of pull-ins misled investors by: (i) giving the false impression that the company was able to meet its revenue guidance organically; (ii) masking the adverse impact that pull-ins had on revenue in future quarters; and (iii) masking the company’s declining sales and market share. The SEC alleged that, without this information, investors were unable to evaluate Marvell’s financial results across periods and judge the company’s ability to meet future guidance. This is a good example of how compliance with GAAP does not protect a company against a claim that their financial disclosures were misleading.

The SEC’s settlement order with Marvell can be found here.

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