Back in 2000 I pioneered using the Freedom of Information Act (FOIA) as a research tool with the SEC. Through the years we discovered countless undisclosed SEC probes and helped thousands of professional investors learn to interpret those that are disclosed. In fact, SEC comment letters are now posted now to the internet for free largely a result of my early efforts with the FOIA (This is the letter I sent to the SEC (link is external) in 2004 on that proposal.).
I’ve personally met with untold numbers of sophisticated investors and spoken at professional gatherings across the country about what we learned from our FOIA work and how SEC investigations really work.
This is my first in a series of articles I plan to post on things you as an investor need to know when it comes to SEC activity. If you like them, please let me know and I will gladly write more.
I leave you with kind wishes,
Let’s start with some basic knowledge you need to have when it comes to SEC investigations —
- Public companies are not technically required to disclose the existence of all SEC probes. Consistently, I hear investors say they thought otherwise.
- When a public company discloses the existence of SEC activity of any kind it is likely because they felt the situation was serious enough it HAD to be disclosed.
- Public companies hate talking about anything bad. Never forget that.
Public companies are not technically required to disclose the existence of all SEC probes.
Time and again, I am amazed to find out how few people actually know that public companies are not “required” to disclose when they have an SEC investigation. This is because public companies are only required to disclose matters that they deem “material”.
The consequences of undisclosed SEC investigations can be severe. We also know some SEC investigations go nowhere, so we are not necessarily critical of a company for not disclosing all the probes they have – or that we discover though our FOIA work.
Here’s the problem: Management, who could have self-serving reasons for not disclosing an investigation, gets to be the judge of what is and isn’t material. It’s not at all hard to imagine investors having a view that differs from management on these judgment calls.
The volume of undisclosed SEC activity we find, sometimes at just one company, is so high we find it hard to believe all of those management teams involved did not judge anything sufficiently material to warrant disclosure. But it happens.
Unless the SEC steps in and forces a company to disclose certain information (and that can take months or even years) the company gets to decide whether you need to know, what you need to know, and when you get to know it.
Feels a bit unbalanced, don’t you think? But that’s the way it is. So how do you protect yourself? Read on.
When a public company discloses the existence of SEC activity — of any kind — it is likely because they felt the situation was serious enough it HAD to be disclosed.
Trust that! Trust that they know this is a serious problem. That’s almost certainly why they disclosed.
Once, after speaking at a CFA breakfast meeting, a person who identified himself as an attorney experienced in such matters came up to me and said that management’s perception of the exposure being serious is the only reason a company will disclose an SEC probe. It was a strong view I couldn’t corroborate on my own. But I will tell you I wasn’t surprised.
In short, whenever a company discloses something bad, you can trust that the act of disclosure itself tells you that management judged the matter serious. This is true no matter how soothing the words or assurances are.
Also, keep in mind that Wall Street analysts are generally not a good source for helping you to interpret SEC probes that are disclosed.
Just as I’ve been amazed at how few people knew companies don’t have do disclose their SEC investigations, I’ve been equally surprised at just how misinformed even professional investors are when it comes to interpreting SEC matters.
For many reasons, they also tend to shy away from pressing a company too hard on an SEC exposure (though we would recommend otherwise).
Public companies hate talking about anything bad. Never forget that.
Public companies love happy talk. Wall Street analysts do too. As a result in our experience we’ve found that means most companies will not tell something bad that is impacting them until it becomes serious: Often too late for you to avoid losing money.
This often includes disclosure – or failure to disclose – SEC investigations. Even then, they may use spin and clever word choice to minimize the impact of the bad news. Never forget that.