The plaintiffs alleged, , that Crocs, its management, and Crocs’ auditor had violated § 10(b) of the Exchange Act by fraudulently representing both the value of Crocs’ inventory and the competence of its internal controls with regards to financial reporting.According to the complaint, Crocs knew well before 2008 that the “bulk” of its inventory could not be sold at cost because it “consisted of unsalable or unsuitable shoes.” Thus, the complaint alleged that Crocs violated generally accepted accounting principles (“”) by valuing its inventory at cost on the 20 Form 10-Ks.
Eventually, the plaintiffs and the Crocs defendants agreed to a proposed settlement, for which the district court issued its final approval in September 2014.
The court subsequently dismissed the action against the Crocs defendants, and National Roofing then voluntarily agreed to dismiss its appeal with prejudice.
Thus, only National Roofing’s motion to dismiss and the claims against Crocs’ auditor appeared before the Tenth Circuit.
According to the plaintiffs’ complaint, Crocs continued to use “archaic, error-prone Excel spreadsheets” to track inventory and forecast sales, despite the fact that the company’s massively expanding business was quickly outpacing the usefulness of its inefficient system.
The plaintiffs alleged that, due to its disorganized methods for tracking inventory, Crocs not only frequently bulk-ordered unsalable shoes but also consistently failed to meet the demand for its best-selling shoes.
As a result of its inventory and distribution difficulties, Crocs sustained a four-fold increase in its inventory from August to December 2006, followed by similar increases throughout 2007 and into 2008.
Nevertheless, the company valued its inventory at cost on both the 20 Form 10-Ks that it filed with the Securities and Exchange Commission (“”).
Furthermore, in both years, Crocs’ auditor, issued unqualified audit opinions approving both Crocs’ financials and its internal controls.
Eventually, Crocs began disclosing its issues with its inventory and distribution, and by November 2008, the company wrote down the value of its inventory by over seventy million dollars.