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The Securities and Exchange Commission today announced settled charges against Conn’s Inc., a Texas-based specialty retailer that offers consumer goods and credit financing primarily to credit-restrained customers, and its former Chief Operating Officer for improper accounting practices.

The SEC’s complaint alleges that from at least the second quarter of fiscal 2013 through the second quarter of fiscal 2015, Conn’s and its COO, Michael J. Poppe, a Texas resident, understated the company’s allowance for bad debts and overstated income on its financial statements through improper accounting practices. Conn’s allegedly increased the risk to its credit portfolio by lending to customers with poor or no credit histories. However, Conn’s failed to incorporate this information into the company’s forecasting model, which caused its bad debt expense to be understated and its income to be overstated. Additionally, Conn’s allegedly used a “roll rate” model to forecast its allowance for bad debts that included management bias. Specifically, Conn’s allegedly plugged estimates into this model that reflected unduly optimistic expectations, which were inconsistent with historical roll rates. Conn’s took corrective actions in the second and third quarters of fiscal year 2015, resulting in significant increases to its allowance for bad debts. Conn’s cited to these increases when it reported a loss for its credit segment in the second quarter of fiscal 2015 and a loss for the company in the third quarter of fiscal 2015. The market reacted to Conn’s earnings announcements with 30 percent and 41 percent stock drops, respectively.

Conn’s and Poppe have agreed to settle the SEC’s charges without admitting or denying the allegations in the complaint. Conn’s has consented to the entry of a final judgment imposing a $1.1 million civil penalty and an injunction against future violations of antifraud provision Section 17(a)(3) of the Securities Act of 1933 and the books-and-records and internal controls provisions of 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, 13a-11, and 13a-13 thereunder. Poppe has consented to a final judgment imposing a $50,000 civil penalty and an injunction against future violations of the antifraud provision of Section 17(a)(3) of the Securities Act. The settlement is subject to court approval.

The SEC’s investigation was conducted by Jennifer R. Turner and Laura K. Bennet with assistance from Chris Davis, and was supervised by David B. Reece of the SEC’s Fort Worth office.