HP Channel Sales at Center of $6 Million SEC Penalty

HP shareholders are getting justice. The Securities and Exchange Commission (SEC) slapped the vendor with a $6 million penalty for misleading investors. The Commission said HP made inaccurate disclosures related to its channel sales accounting, reporting and practices.

The vendor paid the penalty to settle the SEC charges for misleading investors, the U.S. government agency announced. More specifically, the Commission found that HP violated the antifraud, reporting and disclosure control provisions of federal securities laws.

The vendor didn’t admit or deny the SEC’s charges, which date back to early 2015 through mid-2016. The SEC is an independent government agency whose mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The order stated that in an effort to meet quarterly sales targets, regional managers at HP used a variety of incentives to accelerate, or “pull-in” to the current quarter, sales of printing supplies that they otherwise expected to materialize in later quarters.

Additionally, the SEC outlined shady tactics in an effort to meet revenue and earnings targets. Managers in one HP region sold printing supplies at substantial discounts to resellers known to sell HP products outside of the resellers’ designated territories. This violated HP policy and distributor agreements.

That’s not all. The order found that HP failed to disclose its internal channel inventory ranges. These ranges, described on quarterly earnings calls, included only channel inventory held by channel partners to which HP sold directly. It didn’t include inventory sold by partners further down the distribution chain. This resulted in disclosing only a partial and incomplete picture of the health of HP channel sales.

This action reduced its net revenue by approximately $450 million during the third and fourth quarters of 2016.

Investors

“Investors are entitled to accurate disclosures of business trends that are likely to have a material impact on a company’s future revenues or operating profits,” said Melissa Hodgeman, an associate director in the SEC’s division of enforcement. “HP’s failure to disclose the foreseeable negative impact of its use of pull-ins and other sales practices created a misleading and incomplete picture of the company’s financial condition.”

Taking a trip back through time, recall that in October 2014, HP announced plans to separate into two companies. HP Inc. would be a personal systems and printing company. Hewlett Packard Enterprise (HPE) would be a technology infrastructure, software and services company. The company split was official in November 2015, more than one year later.

The separation of the company business was a strategic. Each company would have improved clarity of focus, finances and flexibility. This would help each respond to a changing market while generating value for shareholders.

When the company announced the spinoff, shareholders were told that following the transaction, they would own shares of both HP and HPE. Meg Whitman was CEO at the time.

HP didn’t respond to inquiries about the SEC matter.