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The SEC's complaint, filed in federal court in San Jose, alleges that shortly after pre-announcing its fiscal 2003 earnings, West Marine determined that it needed to change the way in which the company valued its inventory. That change reduced the value of its inventory by approximately $13.2 million, dramatically decreasing the company's previously-announced earnings. Rather than disclose this change to investors and report reduced earnings in its annual report, the SEC alleges that West Marine sought an offset and eventually devised a solution of capitalizing certain store occupancy expenses such as rent and utilities. This change in accounting methodology was neither disclosed to investors nor in compliance with Generally Accepted Accounting Principles (GAAP). According to the SEC, West Marine failed to properly disclose these significant accounting changes to its auditor by suggesting that its accounting methodology was consistent with prior years.
By capitalizing store occupancy costs, West Marine improperly increased its pre-tax income for the year, offsetting the undisclosed reduction in earnings caused by the change in inventory valuation. As a result, the company's annual report filed in March 2004 was misleading. Moreover, the SEC alleges that the improper accounting resulted in similarly misleading registration statements and periodic reports to investors filed in 2005 and 2006. The wrongful conduct was ultimately uncovered in 2007, when the company restated its financial results for fiscal years 2002 through 2005.
Without admitting or denying the SEC's allegations, West Marine agreed to a permanent injunction against future violations of Section 17(a)(2) and (a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, and 13a-13 under the Exchange Act. [SEC v. West Marine, Inc., Case No. CV-09-3379 PVT (N.D. Cal.] (LR-21150; AAE Rel. 3019)
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