Friday, January 13, 2006

Fighting Joe and the SEC Get Tough


During the call, IBM Chief Financial Officer Mark Loughridge told analysts to "update" their models to reflect the new expense for the just-elapsed first quarter. A chart distributed with the call suggested that analysts lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents. They did just that.


Thus today’s Wall Street Journal describes how IBM guided the barking seals I otherwise refer to as Wall Street’s Finest to lower their expectations for IBM’s first quarter 2005 earnings in a “hastily arranged conference call” last April, shortly before IBM actually reported those earnings.

When the earnings came out nine days later, however, IBM reported only $0.84 of earnings, net of $0.10 worth of options and stock-based compensation that IBM had successfully trained the barking seals to consider “non-recurring”—as though compensation for the human beings who run the company isn’t an actual expense and won’t recur.

Hence, $1.04 of expected earnings had mutated into $0.84 of actual earnings: a big miss.

Somewhat surprisingly, even the best-trained among Wall Street’s Finest recognized a failure to score, despite IBM’s last-minute attempt to move the goal-posts without anyone noticing.

“A Material Miss…and Acknowledgement of Weaker Revenue Growth,” one post-earnings headline read. “Not Great, but not Terrible Either,” ran another, while “IBM: Pass the Alka-Seltzer, Please,” was perhaps the most artistic way to express disappointment with IBM while demonstrating empathy with clients who don’t like to hear bad things about the stocks they own.

IBM’s share price dropped more than ten bucks in the days following the Alka-Seltzer episode, which, I gather, is the subject of the SEC Wells Notice to IBM. Quotes the Journal article:

Securities lawyers unconnected with the case have said that IBM may have been obligated during the options conference call to give investors more detail about the shortfall in the quarter, which had ended days before. Under securities law, they say, companies have some latitude to determine whether to announce known shortfalls early -- but if they don't, they generally can't put out other earnings-related news.

I’m no expert on SEC-related disclosure issues. At the time it happened, however, it seemed obvious to me and most everybody else who follows the company that IBM had thrown some dust in the air to obscure a basic earnings miss. After all, $0.84 looks a lot worse to analysts expecting $1.04 than it does to analysts expecting $0.90.

That’s my opinion based purely on an admittedly cynical view of the earnings-management practices of public companies developed in 25 years of quarterly-earnings reports. It is not based on any particular knowledge of what was going on or not going on inside IBM.

But why is the SEC doing this Wells-Notice stuff now? Looking at the calendar, I see that it is mid-January 2006, almost a year since IBM tried to finesse numbers lower under the screen of “non-recurring” type compensation expenses. To its credit, the SEC's recent action was in fact preceded by an “informal” investigation begun last June—but that was seven months ago.

Which means the poor shlubs who owned IBM stock prior to that first quarter earnings report and held onto it in the wake of management’s pre-earnings conference call in which numbers were taken down without really being taken down, but then sold their stock at a loss in the days following the actual earnings miss, are long gone.

Which means all this Wells-Notice stuff is, in my opinion, irrelevant, and once again the SEC, having noticed a draft coming from the direction of a barn door through which a horse has vanished and made its way across the country-side to the other side of the mountain, has decided to investigate just how the heck that door was left open and what can be done to secure the door.

Surely there are companies that have mishandled their public disclosure obligations more recently than last April.

But, then again, if Joe Biden—remember, the Senator who ran for President with a plagiarized speech?—can get outraged about what a guy might or might not have done twenty years ago in college, I guess whatever it was IBM might or might not have done nine months ago probably seems like it’s worth wasting time on.

“I didn't even like Princeton,” Biden told Alito on Tuesday. “I mean, I really didn't like Princeton. I was an Irish Catholic kid who thought it had not changed like you concluded it had.”—Associated Press.

Tough stuff, Senator! You and the SEC go boy!


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

11 comments:

BDG123 said...

Now I'm not much for the SEC stuff because corporate America has leeway to say and do darn near anything they want. ie, Corporate governance is as big a joke as ever. But I do love the Biden commentary.

Ole Joe is quite an arrogant SOB. Deep down he's an intellectually superior elitist but he's tried to keep it under wraps. I remember when I was a kid seeing his acerbic stab at someone who questioned his grades around the time of his run for the Presidency. "I'm sure I have an IQ higher than you" was his paraphrased response. That'll surely be dug out along with him lying about his grades if his ego gets the best of him and he actually thinks he can win the Presidency again.

I despise that jerk so much that I Googled him and found a hilarious blog link dedicated to the twirp.

http://beldar.blogs.com/beldarblog/2005/06/does_bidens_pla.html

Also thought the readers would like to see Henry Blodget's blog commentary about Google given your recent post.

http://www.internetoutsider.com/

Its_strange said...

I guess Jeff and his political party need a jerk like Biden around so the focus ain't always on Delay and his crowd.. Clinton did nothing about our national joke ,the SEC, and Bush has done the same and we have done the same.

john lichtenstein said...

Matt Welch over at Reason posted a few paragraphs from the transcript. For public meltdown lovers, this is pure gold.

Its_strange said...

I just read the SEC compliant against TTWO. These ttwo people didn't just park games a time or two , it seems like better than 10-12 times . They also just plain made sales up . I gotta believe the SEC had the DoJ look at it all . I will be shocked if they don't act .

Its_strange said...

The SEC complaints reads like the analysts and the company were in talks all the time . Here, read it

http://www.sec.gov/litigation/complaints/comp19260.pdf

This has a serious stink to it

k said...

What are your thoughts on how conniving some of the guys of Enron were? I got to tell you, Enron: The Smartest Guys in the Room totally opened my eyes about the depths of their deceit.

iocaste said...

Wells notices issue only after extensive investigation, doc production, depositions, etc. Hence the delay.

Dan Beisiegel said...

Insightful post! Keep up the good work.

Jeff Matthews said...

"K": regarding Enron, I actually think "Conspiracy of Fools" is a better inside view of what went on at Enron, and should be required reading of any securities course.

Its_strange said...

Patrick and Roddy Boyd and Phil and Mary are going at it on thesanitycheck.com blog . And it looks to me they want to drag Cramer into it .

Marc Cuban will be guest host on CNBC this Tuesday . ...

AllenCap said...

I think the real joke going on now is with sovereign bancorp. Don't like the nasty calls to replace management by your 2 largest shareholders? Why not just dilute their position and entrench management by selling 19.9% of yourself because if it was just .1% more the owners of the company would actually have to vote on it....gasp.

And the NYSE in a post-enron and post world com world sees nothing wrong with it.

THAT is a travesty.....maybe the SEC could spend a little time on that one.