Companies Strategically Obscure Negative Information in SEC Filings

Key Quotes

"Believe it or not, a lot of the main rules or the framework, if you will, it dates back to 1933. Think about that for a minute. That's the basic framework, if you will, like the foundation of the house, it dates back to, you know, 1933, which is kind of amazing. It's 92 years ago, and think about how much has changed in the market."

Michelle Leder highlights that the fundamental framework for corporate disclosure, established by the 1933 Act, remains largely in place despite significant market evolution. Leder points out the surprising antiquity of these rules, noting how much the financial landscape has transformed since their inception.

"Companies know they have to disclose bad news, but they also know they don't have to post it on a billboard. Explain what other obligations, what do they have to say, and when, in general, if something is the definition is basically something that a reasonable investor would want to know, and that's what triggers an 8-K."

Michelle Leder explains that while companies are obligated to disclose material information, they often do so in a manner that minimizes attention. Leder clarifies that the trigger for an 8-K filing is information a "reasonable investor" would deem important, but the interpretation of materiality involves significant judgment.

"Companies will often disclose something in an 8-K that they never intend to put a press release out on. That's really interesting."

Michelle Leder points out a subtle but significant difference between press releases and 8-K filings. Leder notes that companies may use 8-Ks to disclose information that they do not wish to publicize broadly through a press release.

"I've seen companies wait instead of like, you know, instead of putting out an 8-K that they've received a Wells Notice, they'll say that they, you know, they'll wait until the 10-K to disclose that. And, you know, of course, the 10-K is all focused on the earnings, so it's like, you know, buried in there somewhere, usually in their legal disclosure or maybe a risk factor."

Michelle Leder illustrates how companies can strategically delay the disclosure of significant negative events. Leder explains that instead of immediately filing an 8-K for a Wells Notice, a company might wait to bury this information within the annual 10-K filing, often in less prominent sections.

"So what are some of the more common tricks you see that management uses to technically comply with the law and disclose material bad news to investors while at the same time trying to minimize attention to that? Yeah, I mean, probably the number one thing, you know, I see is like companies waiting until late on a Friday or the Wednesday before Thanksgiving with some reason they can choose when they want to disclose."

Michelle Leder identifies common tactics companies employ to technically adhere to disclosure rules while downplaying negative information. Leder highlights the practice of releasing sensitive information late on Fridays or before holidays, leveraging these times to reduce public and media scrutiny.

"Tell us about the non-disclosure disclosure. I love that phrase. Companies know that they have to disclose stuff, and, you know, what they often do is they'll give you the bare minimum of facts, and that's what they do. So they might say, like, for example, you know, director Alan Smith resigned on a Friday, but they don't tell you that, you know, oh, maybe he was a member of the audit committee or maybe he was the former CEO of the company."

Michelle Leder describes the concept of "non-disclosure disclosure," where companies provide technically accurate but intentionally incomplete information. Leder explains that by offering only the most basic facts, such as a director's resignation, companies avoid revealing crucial context that could signal greater significance to investors.