updated 9/27/2004 12:19:15 PM ET 2004-09-27T16:19:15

Shares of Tommy Hilfiger Corp. fell to a 52-week low Monday after the clothing company said it is the subject of a federal grand jury investigation focused on whether its commission rate to an international subsidiary is justified.

New York Stock Exchange-listed shares traded midday at $10.41, down $2.76 or 21 percent. Earlier, they went as low as $9.75, below the prior 52-week low of $11.68 set Sept. 26. The stock's year-high $18.25 was set April 13.

Shares were halted late Friday when the Hong Kong-based company said its U.S. unit received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking documents dating back to 1990 concerning the commissions.

The U.S. Attorney sought documents related to buying commissions paid to an unidentified non-U.S. unit for product development, sourcing, production scheduling and quality control functions, the company said.

Prudential Equity Group downgraded shares to "underweight" from "overweight" on Monday, citing the investigation. The firm also cut its 12-month price target to $8 from $18.

"If the investigation proves valid, the company could be looking at significant back taxes and potential fines," Prudential analyst Lizabeth Dunn said.

Dunn wrote that she believes investigators are looking into whether the company has been shifting around income to avoid paying taxes. "It is difficult to know the magnitude of the potential liability, but our best estimate is more than $100 million."

Such a liability would eliminate most of the company's net cash but would not create a liquidity crunch, she said.

Dunn doesn't own shares of Tommy Hilfiger, and the company isn't a client of her firm.

The company declined further comment Monday, and the U.S. attorney also declined comment.

Merrill Lynch said Tommy Hilfiger's various divisions are required to pay its Far East buying offices commissions that are an effective royalty on Tommy's wholesale businesses in the United States and Europe.

Those commissions, analyst Virginia Genereux said in a morning research note, "effectively shifted profits to lower tax jurisdictions."

Genereux doesn't own shares of Tommy Hilfiger, but Merrill Lynch is a market maker for the stock.

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