Krispy Kreme Doughnuts said on Friday that the Securities and Exchange Commission had upgraded its inquiry of the company's financial reporting practices into a formal investigation.
The company previously disclosed that federal regulators had informally requested information on how it accounted for buying back franchises, and information on a significant reduction in its earnings forecast.
A formal investigation gives the SEC the authority to issue subpoenas to obtain documents and call witnesses to testify.
Krispy Kreme quickly emerged as an investor darling when it went public in 2000, but its sales growth has slowed and its share price has dropped since the company reported substantial declines in earnings and disclosed the accounting investigation in July. After reaching a high of US$49.37 in August last year, the company's stock price has declined nearly 75 percent. Upon disclosure of the formal SEC investigation on Friday, shares fell US$0.56 to US$12.51.
The SEC, as a matter of course, does not comment on continuing investigations. Krispy Kreme said that it was cooperating fully with the regulators and declined to comment beyond a 27-word disclosure statement.
Scott Livengood, Krispy Kreme's chief executive, said in a statement soon after the SEC's informal inquiry was made public that he was confident of the company's practices.
"Krispy Kreme has no higher priority than the confidence of our shareholders, customers and employees," he said.
While the disclosure of the formal investigation did not come as a surprise to investors, some said they still remain concerned.
"We are committed the holding, but we are watching it," said Michael Crofton, president of the Philadelphia Trust Co, which recently bought more than 400,000 shares.
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