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At The Money: Finding the Hidden Alpha in SEC filings · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Honesty is that a
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  Speaker 1: lonely world. Every one is so untrue? Ah, have you
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  Speaker 1: ever wondered what management berries in their SEC filings? Do
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  Speaker 1: they faithfully follow their obligations to their shareholders or do
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  Speaker 1: they see how much they could get away with either
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  Speaker 1: not disclosing or hiding. To help us unpack all of
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  Speaker 1: this and what it might mean for your portfolio, let's
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  Speaker 1: speak to Michelle Leader. She is an SEC filings wonk
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  Speaker 1: and specialist and founder of the research service Footnoted, focusing
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  Speaker 1: on uncovering material information hidden in corporate SEC filings. She's
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  Speaker 1: also the author of the book Financial fine Print, Uncovering
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  Speaker 1: a Company's True Value. So Michelle, let's just start out
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  Speaker 1: with a basic definition. What is disclosure? What are the
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  Speaker 1: rules that the SEC requires all companies to provide to
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  Speaker 1: their investors?
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  Speaker 2: Believe it or not, A lot of the main rules,
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  Speaker 2: or the framework, if you will, it dates back to
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  Speaker 2: nineteen thirty three. Think about that for a minute. That's
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  Speaker 2: the basic framework, if you will. Like the foundation of
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  Speaker 2: the house dates back to twenty you know, nineteen thirty three,
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  Speaker 2: which is kind of amazing. It's ninety two years ago,
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  Speaker 2: and think about how much has changed in the markets.
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  Speaker 2: There's the Internet, for example, and you don't have to
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  Speaker 2: call your broker and say buy me some pork bellies
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  Speaker 2: or whatever. It's really kind of amazing that the primary
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  Speaker 2: framework dates back on over ninety years. Of course it's
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  Speaker 2: been updated, you know, over the years, but this is
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  Speaker 2: sort of the foundation of the house. This is what
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  Speaker 2: companies and their attorneys go back to time and time again.
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  Speaker 2: They'll talk about the nineteen thirty three Act, which of
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  Speaker 2: course came after nineteen twenty nine and the Great Depression,
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  Speaker 2: so and that was what started the SEC.
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  Speaker 1: So let's talk a little bit about the various filings.
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  Speaker 1: Most of us are familiar with the quarterlies, the ten ques,
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  Speaker 1: but there are also eight k's and ten k's and
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  Speaker 1: merger proxies. Tell us the broad documents that every company
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  Speaker 1: is either required to file with the SEC, or when
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  Speaker 1: a specific event happens, is triggered and then has to
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  Speaker 1: do a filing.
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  Speaker 2: Yeah, so at a bare minimum, publicly traded companies have
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  Speaker 2: to file three ten q's a year. That's the quarterly
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  Speaker 2: report and one ten K and that's the annual report.
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  Speaker 2: And then you know eight k's are filed on an
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  Speaker 2: as needed basis, and those are often thought of as
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  Speaker 2: material events, but it's also earnings releases or you know,
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  Speaker 2: maybe a press release. I think a lot of people
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  Speaker 2: think that press releases are equivalent to a k's and
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  Speaker 2: that's actually not true. Companies will often put out a
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  Speaker 2: press release and maybe they'll attach it to an AK,
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  Speaker 2: maybe they won't, but you know, there's a difference between them.
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  Speaker 2: Companies will often disclose something in an AK that they
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  Speaker 2: never intend to put a press release out on.
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  Speaker 1: That's really interesting and to that point, I love this
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  Speaker 1: quote of yours. Companies know they have to disclose bad news,
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  Speaker 1: but they also know they don't have to post it
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  Speaker 1: on a billboard. Explain what are their obligations, what do
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  Speaker 1: they have to say and when?
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  Speaker 2: In general, if something is the definition is basically something
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  Speaker 2: that a reasonable investor would want to know, and that's
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  Speaker 2: what triggers an eight K. A lot of people think
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  Speaker 2: that that, you know, the shorthand is like something material,
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  Speaker 2: but you know, materiality is in the eye of the beholder.
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  Speaker 2: You know, something that might be material to me may
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  Speaker 2: not material to you. And there's a lot of judgment calls.
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  Speaker 2: There's no real like tests. I mean, of course, like
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  Speaker 2: you know, if the CEO resigns, then he you know,
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  Speaker 2: obsconds with like you know, five hundred million dollars. That's
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  Speaker 2: a pretty easy test. But you know, you don't see
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  Speaker 2: a lot of those, right, There's something a lot less
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  Speaker 2: you know, significant, and then there's a discussion of like, well,
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  Speaker 2: do we need to disclose this do we not? And
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  Speaker 2: I've seen it, quite frankly, all over the map. I
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  Speaker 2: mean I've seen companies, for example, you know, the most
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  Speaker 2: minor enforcement thing that a company can do is get
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  Speaker 2: a comment letter from the SEC. And that's basically like, hey,
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  Speaker 2: we noticed this thing, can you explain it a little
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  Speaker 2: bit more? And then the more serious thing is a
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  Speaker 2: weld notice, And I've seen companies like for example, which
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  Speaker 2: is you know, pretty serious. It's it's it involves providing
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  Speaker 2: much more detailed information, attorneys are involved, blah blah blah.
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  Speaker 2: And you know, I've seen some companies not disclose a
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  Speaker 2: weld notice, and I've seen some companies disclose a comment letter.
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  Speaker 2: So it really can be all over the map. And
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  Speaker 2: that's what makes it a little bit confusing and a
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  Speaker 2: little bit you know, hard to figure out. You can't
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  Speaker 2: always if this happens, we have to disclose. Sometimes there's
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  Speaker 2: a lot of wiggle room in.
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  Speaker 1: There for people are just curious. The comment letters tend
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  Speaker 1: to be pretty minor. A WELLS notice typically get sent
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  Speaker 1: to a firm when the SEC has concluded an investigation
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  Speaker 1: and is planning on bringing an enforcement and action. I
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  Speaker 1: would imagine that's fairly material all the time. Am I wrong?
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  Speaker 2: You would think? But I've seen companies wait instead of like,
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  Speaker 2: you know, instead of putting out an AK that they've
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  Speaker 2: received a WELLS notice, they'll say that they you know,
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  Speaker 2: they'll wait until the queue to disclose that. And you know,
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  Speaker 2: of course the queue is all focused on the earnings.
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  Speaker 2: So it's like, you know, buried in there somewhere, usually
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  Speaker 2: in their legal disclosure or maybe a risk factor, you know,
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  Speaker 2: other tricky things that companies will do all of a sudden.
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  Speaker 2: I've seen this over and over again, Like instead of
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  Speaker 2: US subpoena, they'll say subpoenas, they'll suddenly make something plural.
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  Speaker 2: They won't put out a press release and say, oh, hey,
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  Speaker 2: by the way, we out another subpoena. And you know,
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  Speaker 2: companies play these kind of tricks. I mean, they do
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  Speaker 2: subtle changes, and it's really up to you as the
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  Speaker 2: investor to catch them.
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  Speaker 1: So what are some of the more common tricks you
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  Speaker 1: see that management uses to technically comply with the law
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  Speaker 1: and disclose material bad news to investors while at the
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  Speaker 1: same time trying to minimize attention to that.
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  Speaker 2: Yeah, I mean probably the number one thing, you know,
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  Speaker 2: I see is like companies waiting until late on a
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  Speaker 2: Friday or the Wednesday before Thanksgiving with some reason they
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  Speaker 2: can choose when they want to disclose. The rule is
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  Speaker 2: actually you have to disclose within four business days, but
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  Speaker 2: of course, with holidays and other things that can often
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  Speaker 2: be you know, stretched. It's not as if, like, you know,
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  Speaker 2: the CFO suddenly resigns and you've got to disclose it
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  Speaker 2: that minute. I've seen companies wait four days to disclose that,
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  Speaker 2: you know, and that's following the letter.
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  Speaker 1: Of the law.
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  Speaker 2: Now, I would think that if the CFO suddenly resigns
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  Speaker 2: from the company, as an investor, you want to know
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  Speaker 2: about that right away.
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  Speaker 1: Yeah, So the Friday night data dump after four o'clock
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  Speaker 1: but before the SEC closes at five point thirty is legal,
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  Speaker 1: but sounds a little sketchy. How often do you find
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  Speaker 1: these sorts of things are disclosing information that ultimately affects
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  Speaker 1: the stocks price.
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  Speaker 2: I would say, you know, pretty often, although it's not
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  Speaker 2: an instantaneous thing. You know, a lot of what I
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  Speaker 2: do is I see an early warning sign. You know,
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  Speaker 2: here I'm out in LA and I often think about
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  Speaker 2: it as going to the dermatologist and saying, hey, I
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  Speaker 2: see this mole on my upper arm. Is that cancer?
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  Speaker 2: Or do I not have to worry about it? You know,
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  Speaker 2: that's the type of thing I think. It's like it's
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  Speaker 2: an early warning sign that there could be a potential problem.
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  Speaker 2: But you know, rarely I would say, do you find
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  Speaker 2: like what I would call like what someone might call
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  Speaker 2: a smoking gun. It's not like, you know, like, oh,
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  Speaker 2: the CEO embezzled, you know, five hundred million dollars whatever,
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  Speaker 2: and we're filing for bankruptcy, you know, Monday morning type
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  Speaker 2: of thing.
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  Speaker 1: Tell us about the non disclosure disclosure. I love that phrase.
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  Speaker 2: Companies know that they have to disclose stuff, and you
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  Speaker 2: know what they often do is they'll give you the
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  Speaker 2: bare minimum of fact. And that's what they do. So
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  Speaker 2: they might say, like, for example, you know, director Alan
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  Speaker 2: Smith resigned on a Friday, but they don't tell you that.
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  Speaker 2: You know, oh, maybe he was a member of the
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  Speaker 2: audit committee, or maybe he was the former CEO of
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  Speaker 2: the company, or maybe he was chairman of the audit committee,
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  Speaker 2: or you know, any number of other information, and that
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  Speaker 2: requires you to go to another filing, the proxy statement
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  Speaker 2: really to figure out was he a longtime director? Had
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  Speaker 2: he only served on the board for three months? You know,
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  Speaker 2: all of these things are you know, information that companies have,
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  Speaker 2: but they're not providing it to their investors. So that's like,
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  Speaker 2: that's what I would call non disclosure disclosure. It's like
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  Speaker 2: they're giving you the bare minimum but not giving you
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  Speaker 2: anything more.
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  Speaker 1: So let's talk about some metadata red flags something else,
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  Speaker 1: a phrase I've picked up from you. I've read discussions
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  Speaker 1: about repeated amendments of various filings or reports that are
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  Speaker 1: consistently late. How much of this is just, Hey, the
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  Speaker 1: world is complex and sometimes these things don't happen on time.
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  Speaker 1: And how much of this is potentially predictive of real
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  Speaker 1: problems at the company.
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  Speaker 2: Well, I would say anytime a company can't get its
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  Speaker 2: ten K or ten Q in on time, that's a
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  Speaker 2: potential problem. If that happens repeatedly. You know, that's pattern recognition, right,
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  Speaker 2: Like if it goes on for a quarter for you know,
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  Speaker 2: several quarters or you know longer, that's you know, a
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  Speaker 2: potential problem, right companies know, you know, for the most part,
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  Speaker 2: they have to get their cues in forty days after
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  Speaker 2: the close of the quarter, and so you know, if
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  Speaker 2: they don't. Those companies that don't get their filings their
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  Speaker 2: ten q's in on time, if they're on a September quarter,
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  Speaker 2: that's an indication of a potential issue. You know, if
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  Speaker 2: it's the third time they haven't been able to get
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  Speaker 2: their ten q in on time, you know, and of
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  Speaker 2: course there's accept and maybe the company is going through
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  Speaker 2: a big merger, right, Like you know when you saw like,
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  Speaker 2: for example, like the Albertson's Kroger thing, you know, a
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  Speaker 2: couple of years ago, you know, there was like problems
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  Speaker 2: there because like you know, it was like they were
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  Speaker 2: trying to merge the company and there was all this
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  Speaker 2: regulatory stuff and you know, so like if you can
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  Speaker 2: easily explain elate filing, Okay, you know I wouldn't say
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  Speaker 2: that every single time a late filing is a problem,
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  Speaker 2: but I would say more often than not it.
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  Speaker 1: Is, so your website is called footnoted. Tell us an
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  Speaker 1: example of what looked like a minor footnote in a
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  Speaker 1: company filing or disclosure that you spotted that later turned
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  Speaker 1: out to be a really big story.
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  Speaker 2: Well, I think, you know, there's a couple of examples.
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  Speaker 2: One is like zoetis the major animal pharmaceutical company. You know,
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  Speaker 2: I started looking into them earlier, well late last year,
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  Speaker 2: I would say, the towards the tail end of twenty
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  Speaker 2: twenty four, and I put out some research to my
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  Speaker 2: clients back in February of this year. At the time.
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  Speaker 2: You know, I think they were underplaying there the dangers
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  Speaker 2: associated with one of their so called blockbuster drugs, this
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  Speaker 2: drug called Thebrella.
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  Speaker 1: If I recall, their drug was causing seizures and deaths
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  Speaker 1: on in dogs that had no previous history of that
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  Speaker 1: they literally should not have been released to the veterinary community.
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  Speaker 1: Give us another example that that a footnote turned out
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  Speaker 1: to be a big story.
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  Speaker 2: Yeah. Well, back in you know, in twenty and twenty two,
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  Speaker 2: you know, Nicola had like a what I would call
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  Speaker 2: a seemingly minor disclosure. It was about a sudden resignation,
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  Speaker 2: you know, by an executive, not the CEO or CFO,
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  Speaker 2: just another you know, like another person who was a
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  Speaker 2: named executive that's a formal term, which is usually the
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  Speaker 2: five top executive of the company. Suddenly, you know, and
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  Speaker 2: it seemed kind of unimportant, but then it turned out
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  Speaker 2: to be an early sign of like basically rats abandoning
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  Speaker 2: the ship. And of course we all know Nicola want
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  Speaker 2: them filing for bankruptcy, and so it's kind of like
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  Speaker 2: following those breadcrumbs and trying to figure out what's really
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  Speaker 2: going on at the company. You know, what are they disclosing,
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  Speaker 2: what are they trying to tell investors? How can i
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  Speaker 2: you know, try to figure out what's going on.
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  Speaker 1: How do you separate what's really a material red flag
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  Speaker 1: and something that might actually be tradeable to adjust the
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  Speaker 1: normal CYA language that's in every legal document of corporation produces.
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  Speaker 2: I think that's a great question, and quite frankly, Barry,
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  Speaker 2: it's kind of tricky, right, Like it's it's there is
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  Speaker 2: a lot of CYA language in the filings, and it
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  Speaker 2: can be problematic. I mean, i'd like to think that,
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  Speaker 2: you know, after twenty years of reading SEC filings pretty
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  Speaker 2: you know, intensely or intensively that. I'm pretty good. My
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  Speaker 2: BS meter is pretty well defined, and I can kind
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  Speaker 2: of tell when something is cya versus something is you know,
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  Speaker 2: more serious. But yeah, I mean, of course there is
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  Speaker 2: a lot of that language. You know, the filings are
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  Speaker 2: ultimately by lawyers. Now, maybe they're written by lawyers, I've
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  Speaker 2: seen a lot more these days. Maybe they're written by
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  Speaker 2: you know, chat ept or whatever AI, whatever AI platform
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  Speaker 2: they want to use to write these filings, But ultimately
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  Speaker 2: it's the lawyers that are signing up, and lawyers are
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  Speaker 2: obviously tend to be risk averse.
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  Speaker 1: Given the ubiquity of of AI these days, How significant
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  Speaker 1: is AI in things like corporate filings and how how
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  Speaker 1: do you use AI to kind of figure out what's
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  Speaker 1: going on with with all these different things?
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  Speaker 2: Well, I think AI is pretty significant in corporate filings.
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  Speaker 2: You're seeing it, you know, more and more, and I've
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  Speaker 2: certainly I think I've read a journal story like, you know,
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  Speaker 2: two or three weeks ago that talked about filings and
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  Speaker 2: quarterly reports and even conference called trans you know, conference call.
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  Speaker 2: You know, scripts are being written by AI and you know,
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  Speaker 2: being used to kind of train executives on how to
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  Speaker 2: answer questions you know, whereas before it used to be
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  Speaker 2: sort of in person and you know, kind of that thing.
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  Speaker 2: So I think like AI is, of course, you know,
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  Speaker 2: becoming much more common in this type of thing. What
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  Speaker 2: I think is you know, interesting. And then of course
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  Speaker 2: there's the tools that are being used to uncover what's
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  Speaker 2: going on in the filings. I do use AI. There's
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  Speaker 2: a tool that I've been using a lot lately. It's
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  Speaker 2: called fin tool, and it's interesting because it's really AI
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  Speaker 2: definitely designed around SEC filings as opposed to a more
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  Speaker 2: generic AI like a chat or like you know, claud
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  Speaker 2: or you know, pick your AI tool of ploice. This
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  Speaker 2: one's strictly focused on SEC filings and financial disclosures, and
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  Speaker 2: I find it to be pretty good. Of course, AI
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  Speaker 2: is not perfect, and so you have to kind of,
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  Speaker 2: you know, figure things out. It's not going to get everything,
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  Speaker 2: but I think, you know, increasingly it's becoming it could
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  Speaker 2: be a helpful tool in trying to detect patterns. So like,
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  Speaker 2: for example, if I wanted to know like how many CFOs,
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  Speaker 2: let's just say company X has had in the past
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  Speaker 2: ten years, you know, in the past, I would have
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  Speaker 2: had to dug through different filings you know, I mean,
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  Speaker 2: you know, Bloomberg would of course have that information on
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  Speaker 2: the terminal, but you know, that's the type of thing
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  Speaker 2: that AI can really help you with things like that,
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  Speaker 2: Like is kind of going through and putting the pieces.
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  Speaker 1: Together really really interesting. So to wrap up, if you're
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  Speaker 1: an active trader, or if you buy speculative stocks, or
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  Speaker 1: even if you have questions about the management of some
• 15:26
  Speaker 1: of the companies you own, it might be useful to
• 15:29
  Speaker 1: pay attention to their SEC filings, especially the things they
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  Speaker 1: may not want you to see. Items they're dumping on
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  Speaker 1: a Friday evening or barely meeting the minimum disclosure requirements.
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  Speaker 1: There's a there's gold in them. There are hills if
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  Speaker 1: you know where to look and if you know how
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  Speaker 1: to interpret it. I'm Barry Ridolts. You're listening to Bloomberg's
• 15:54
  Speaker 1: at the Money, but
• 15:57
  Speaker 2: From on