Compass Diversified Stock Plunges On ‘Most Significant Loss’ After Fraud Forces Removal Of Three Years Of Financials

• The company said that the fraud impacted the company’s financial statement in multiple ways and anticipates filing new financial statements shortly.
• An executive said that the cost of the Lugano fraud will, by a wide margin, represent the most significant loss Cody has experienced since its inception.
• Retail investors, analysts await restated financial statements.

Shares of Compass Diversified (CODI) fell a steep 18% on Friday after the company announced it must restate its financial results for fiscal year 2022 to 2024 after its probe led to findings of fraud at its subsidiary Lugano.

The company has removed financial information for the years 2022 to 2024 from its website, citing non-reliance.

“I want to begin by saying that this has been, without question, the most challenging period in Cody's history,” CEO Elias Sabo said in a call. He further added that the fraud at Lugano was “pervasive, complex and isolated to that business.”

Probe And Findings

Compass Diversified announced in early May that its audit committee has initiated an investigation into the financing, accounting, and inventory practices of Lugano. The subsidiary’s CEO Moti Ferder subsequently resigned from the company without any severance compensation.

As per Sabo, Ferder and his family have fled the U.S. and permanently relocated to Israel. The audit committee probe has concluded and discovered “deliberate and systemic fraud,” he added.

“The former Lugano CEO engaged in a scheme to significantly overstate Lugano's sales and profits, misrepresent the existence and value of Lugano's inventory, and keep potential financial liabilities off Lugano's books and records. His efforts to hide his fraud were extensive,” Sabo said. He added that Ferder created fake sales transactions to inflate Lugano’s reported revenues, claimed inventory that either didn't exist or didn’t belong to Lugano and entered numerous financing agreements with third parties that he kept off the company’s balance sheet.

Impact Of The Fraud

CODI is a holding company that acquires and actively manages middle-market businesses. It acquired Lugano Diamonds & Jewelry, Inc., a designer, manufacturer and marketer of one-of-a-kind jewelry in September 2021.

The company said that the fraud impacted the company’s financial statement in multiple ways and anticipates filing new financial statements shortly. The company also intends to file its first, second, and third quarter 2025 financials over the coming weeks.

“At a high level, the restatement significantly reduced our reported inventory. Consolidated inventory for 2024 was reduced by greater than $375 million, or nearly 40%...further, Lugano's revenue declined by more than 85% from previously reported levels following the removal of the fraudulent revenue,” a company executive said.

Lugano filed for Chapter 11 protection under the U.S. Bankruptcy Code on November 16. “Regardless of what we ultimately recover from Lugano bankruptcy, the cost of the Lugano fraud will, by a wide margin, represent the most significant loss Cody has experienced since its inception,” the executive added.

Analyst Take

According to William Blair, who has an ‘Outperform’ rating on the shares, Compass Diversified is worth at least $10 per share excluding Lugano. The firm said that it now awaits the restated financials.

Blair's "back-of-the-envelope" estimate suggests Compass would need to raise about $500 million to reach its target leverage. Excluding Lugano, the company's 2025 subsidiary core profit results are tracking in line with expectations of mid-single-digit growth to $330 million-$360 million, the firm added.

How Did Stocktwits Users React?

On Stocktwits, retail sentiment around Lugano jumped from ‘Neutral’ to ‘Bullish’ territory over the past 24 hours, while message volume stayed at ‘high’ levels.

A Stocktwits user said that they will stick with the company for now and highlighted that the company’s other subsidiaries seem to be doing well and expressed anticipation for restated financials.  

Another slammed the company management for failing to identify the fraud at Lugano earlier.

CODI stock has dropped 74% this year. 

Also See: New York Times Sues Perplexity AI Over Unauthorized Content Use: What Does The Lawsuit Say?

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