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- [00:01]
Hannah Fry
I'm Hannah Fry, and I'm on a.
- [00:02]
Michelle Leder
Mission to find out about a mysterious day called Q Day, which experts think.
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Hannah Fry
Could be the moment our most precious.
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Michelle Leder
Encrypted data is suddenly at risk.
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Hannah Fry
Learn more later in the podcast.
- [00:15]
Odoo Advertiser
Running a business is hard enough. Don't make it harder. With a dozen apps that don't talk to each other, one for sales, another for inventory, a separate one for accounting. That's software overload. Odoo is the all in one platform that replaces them all. CRM, accounting, inventory, E Commerce, hr. Fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you try Odoo for free@odoo.com.
- [00:43]
Amazon Five Star Theater Narrator
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- [01:28]
Bloomberg Audio Studios Podcasts Radio News.
- [01:35]
Barry Ritholtz
Honesty is such a lonely word.
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Everyone is so untrue.
- [01:49]
Have you ever wondered what men management berries in their SEC filings? Do they faithfully follow their obligations to their shareholders, or do they see how much they could get away with either not disclosing or hiding? To help us unpack all of this and what it might mean for your portfolio, let's speak to Michelle Leder. She is an SEC filings wonk and specialist and founder of the research service Footnoted, focusing on uncovering material information hidden in corporate SEC filings. She's also the author of the book Financial Fine Print Uncovering a Company's True Value. So, Michelle, let's just start out with a basic definition. What is disclosure? What are the rules that the SEC requires all companies to provide to their investors?
- [02:47]
Michelle Leder
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 dates back to 1933, which is kind of amazing. It's 92 years ago. And think about how much has changed in the markets. There's the Internet, for example, and you don't have to call your broker and say, buy me some pork bellies or whatever. It's really kind of amazing that the primary framework dates back over 90 years. Of course, it's been updated, you know, over the years. But this is sort of the foundation of the House. This is what companies and their attorneys go back to time and time again. They'll talk about the 1933 act, which of course came after 1929 and the great Depression. So that was what started the sec.
- [03:39]
Barry Ritholtz
So let's talk a little bit about the various filings. Most of us are familiar with the quarterlies, the 10Qs, but there are also 8Ks and 10Ks. And merger proxies tell us the broad documents that every company is either required to file with the SEC or when a specific event happens, is triggered and then has to do a filing.
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Michelle Leder
Yeah, so at a bare minimum, publicly traded companies have to file three 10 Qs a year. That's the quarterly report and one 10 K and that's the annual report. And then, you know, eight Ks are filed on an as needed basis. And those are often thought of as material events. But it's also earnings releases or, you know, maybe a press release. I think a lot of people think that press releases are equivalent to 8Ks, and that's actually not true. Companies will often put out a press release and maybe they'll attach it to an 8k, maybe they won't. But, you know, there's a difference between them. Companies will often disclose something in an 8k that they never intend to put a press release out on.
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Barry Ritholtz
That's really interesting. And, and to that point, I love this quote of yours. Companies know they have to disclose bad news, but they also know they don't have to post it on a billboard. Explain what, what, what other obligations, what do they have to say? And, and when, in general, if something.
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Michelle Leder
Is the definition is basically something that a reasonable investor would want to know. And that's what triggers an 8K. A lot of people think that, that, you know, the shorthand is like, something material. But, you know, materiality is in the eye of the beholder. You know, something that might be material to me may not be material to you. And there's a lot of judgment calls. There's no real, like, tests. I mean, of course, like, you know, if the CEO resigns and he, you know, absconds with like, you know, $500 million, that's a pretty easy test. But, you know, you don't see a lot of those. Right. There's something a lot less, you know, significant. And then there's a discussion of like, well, do we need to disclose this, do we not? I've seen it, quite frankly, all over the map. I mean, I've seen companies, for example, you know, the most minor enforcement thing that a company can do is get a comment letter from the sec. And that's basically like, hey, we noticed this thing. Can you explain it a little bit more? And then the more serious thing is a Wells notice. And I've seen companies like, for example, which is, you know, pretty serious. It involves providing much more detailed information, attorneys are involved, blah, blah, blah. And, you know, I've seen some companies not disclose a Wells notice, and I've seen some companies disclose a comment letter. So it really can be all over the map. And that's what makes it a little bit confusing and a little bit, you know, hard to figure out. You can't always say, if this happens, we have to disclose sometimes. There's a lot of wiggle room in there.
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Barry Ritholtz
For people who are just curious, the comment letters tend to be pretty minor. A Wells notice typically gets sent to a firm when the SEC has concluded an investigation and is planning on bringing an enforcement action. I would imagine that's fairly material all the time. Am I wrong?
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Michelle Leder
You would think. But I've seen companies wait instead of, like, you know, instead of putting out an 8K that they've received a Wells sales notice, they'll say that they, you know, they'll wait until the queue to disclose that. And, you know, of course, the queue 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, you know, other tricky things that companies will do all of a sudden. I've seen this over and over again. Like instead of a subpoena, they'll say subpoenas. They'll certainly make something plural. They won't put out a press release and say, oh, hey, by the way, we got another subpoena. And, you know, companies play these kind of tricks. I mean, they do subtle changes, and it's really up to you as the investor to catch them.
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Barry Ritholtz
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.
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Michelle Leder
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. The rule is actually you have to disclose within four business days. But of course, with holidays and other things, that can often be, you know, stretched. It's not as if, like, you know, the CFO suddenly resigns and you've got to disclose at that minute. I've seen companies wait four days to disclose that, you know, and that's following the letter of the law. Now I would think that if the CFO suddenly resigns from the company as an investor, you want to know about that right away.
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Barry Ritholtz
Yes. So the Friday night data dump after 4:00 clock but before the SEC closes at 5:30 is legal, but sounds a little sketchy. How often do you find these sorts of things are disclosing information that ultimately affects the stock's price?
- [08:48]
Michelle Leder
I would say, you know, pretty often, although it's not an instantaneous thing. You know, a lot of what I do is I see an early warning sign. You know, here I'm out in LA and I often think about it as going to the dermatologist and saying, hey, I see this mole on my upper arm. Is that cancer or do I not have to worry about it? You know, that's the type of thing I think it's like it's an early warning sign that there could be a potential problem. But, you know, rarely I would say do you find like what I would call, like what someone might call a smoking gun. It's not like, you know, like, oh, the CEO embezzled, you know, $500 million, whatever, and we're filing for bankruptcy, you know, Monday morning type of thing.
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Barry Ritholtz
Tell us about the non disclosure disclosure. I love that phrase.
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Michelle Leder
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, or maybe he was chairman of the audit committee or, you know, any number of other information. And that requires you to go to another filing, the proxy statement really to figure out was he a longtime director, had he only served on the board for three months. You know, all of these things are, you know, information that companies have, but they're not providing it to their investors. So that's like, that's what I would call non disclosure disclosure. It's like they're giving you the bare minimum but not giving you anything more.
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Barry Ritholtz
So let's talk about some metadata, red flags, something else, a phrase I've picked up from you. I've read discussions about Repeated amendments of various filings or reports that are consistently late. How much of this is just, hey, the world is complex and sometimes these things don't happen on time. And how much of this is potentially predictive of real problems at the company?
- [10:49]
Michelle Leder
Well, I would say anytime a company can't get its 10k or 10q in on time, that's a potential problem. If that happens repeatedly, you know, that's pattern recognition. Right. Like if it goes on for a quarter, for, you know, several quarters or, you know, longer, that's, you know, a potential problem. Right. Companies know, you know, for the most part they have to get their cues in 40 days after the close of the quarter. And so, you know, if they don't, those companies that don't get their filings, their 10Q's in on time, if they're on a September quarter, that's an indication of a potential issue. You know, if it's the third time, they haven't been able to get their 10Q and on time, you know, and of course there's exceptions. Maybe the company's going through a big merger. Right. Like, you know, when you saw like for example, like the Albertsons Kroger thing, you know, a couple of years ago, you know, there was like problems there because like, you know, it was like they were trying to merge the company and there was all this regulatory stuff and you know, so like, if you can easily explain a late filing. Okay. You know, I wouldn't say that every single time a late filing is a problem, but I would say more often than not, it is.
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Barry Ritholtz
So your website is called Footnoted. Tell us an example of what looked like a minor footnote in a company filing or disclosure that you spotted that later turned out to be a really big story.
- [12:06]
Michelle Leder
Well, I think, you know, there's a couple of examples. One is like Zoetis, the major animal pharmaceutical company. You know, I started looking into them earlier, well, late last year, I would say the. Toward the tail end of 2024. And I put out some research to my clients back in February of this year. At the time, you know, I think they were underplaying their, the dangers associated with one of their so called blockbuster drugs. This drug called the Brella.
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Barry Ritholtz
If I recall, their drug was causing seizures and deaths in dogs that had no previous history of that they literally should not have been released to the veterinary community. Give us another example that a footnote turned out to be a big story.
- [12:53]
Michelle Leder
Yeah, well, back in 2022, Nicola had like a what I would call a seemingly minor disclosure. It was about a sudden resignation, you know, by an executive, not the CEO or cfo, just another, you know, like another person who was a named executive. That's a formal term which is usually the five top executives of the company. Suddenly, you know, and it seemed kind of unimportant, but then it turned out to be an early sign of like basically rats abandoning the ship. And of course, we all know Nicola wanted filing for bankruptcy. And so it's kind of like following those breadcrumbs and trying to figure out what's really going on at the company. You know, what are they disclosing? What are they trying to tell investors? How can I try to figure out what's going on?
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Barry Ritholtz
How do you separate what's really a material red flag and something that might actually be tradable to just the normal CYA language that's in every legal document a corporation produces?
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Michelle Leder
I think that's a great question. And quite frankly, Barry, it's kind of tricky, right? Like it's, it's. There is a lot of CYA language in the filings and it can be problematic. I mean, I'd like to think that, you know, after 20 years of reading SEC filings pretty, you know, intensely or intensively, that I'm pretty good. My BS meter is pretty well defined and I can kind of tell when something is CYA versus something is, you know, more serious. But yeah, I mean, of course there is a lot of that language. You know, the filings are ultimately written by lawyers. Now maybe they're written by lawyers. I've seen a lot more these days. Maybe they're written by, you know, ChatGPT or whatever AI, whatever AI platform they want to use to write these filings. But ultimately it's the lawyers that are signing up. And lawyers are obviously tend to be.
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Barry Ritholtz
Risk averse, given the ubiquity of, of AI these days. How significant is AI in things like corporate filings? And how do you use AI to kind of figure out what's going on with all these different things?
- [14:59]
Michelle Leder
Well, I think AI is pretty significant in corporate filings. You're seeing it more and more. And I've certainly, I think I read a journal story like two or three weeks ago that talked about filings and quarterly reports and even conference call, trans conference call. You know, scripts are being written by AI and you know, being used to kind of train executives on how to answer questions, you know, whereas before it used to be sort of in person and, you know, kind of that thing. So I think like AI is of course, you know, becoming much more common in this type of thing. What I think is, you know, interesting. And then of course there's the tools that are being used to uncover what's going on in the filings. I do use AI. There's a tool that I been using a lot lately. It's called Fin Tool. And it's interesting because it's really AI definitely designed around SEC filings as opposed to a more generic AI like a chat or like, you know, Claude, or you know, pick your AI tool of choice. This one's strictly focused on SEC filings and financial disclosures and I find it to be pretty good. Of course, AI is not perfect and so you have to kind of, you know, figure things out. It's not going to get everything, but I think, you know, increasingly it's becoming, it can be a helpful tool in trying to detect patterns. So like, for example, if I wanted to know, like how many CFOs, let's just say Company X has had in the past 10 years, you know, in the past I would have had to dug through different filings. You know, I mean, you know, Bloomberg would of course have that information on the terminal, but you know, that's the type of thing that I can really help you with. Things like that, like, is kind of going through and putting the pieces together.
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Barry Ritholtz
Really, really interesting. So to wrap up, if you're an active trader or if you buy speculative stocks, or even if you have questions about the management of some of the companies you own, it might be useful to pay attention to their SEC filings, especially the things they may not want you to see, items they're dumping on a Friday evening or barely meeting the minimum disclosure requirements. There's a. There's gold in them. There are hills, if you know where to look and if you know how to interpret it. I'm Barry Ritholtz. You're listening to Bloomberg's at the Money.
- [17:27]
Amazon Customer Reviewer
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- [18:08]
Hannah Fry
Get ready for your next TV obsession. All's Fair Starring Kim Kardashian, Naomi Watts, Niecy Nash, Betts Teyana Taylor with Sarah Paulson and Glenn Close, a team of fierce female divorce attorneys leave a male dominated firm to start their own. Filled with scandalous secrets and shifting allegiances both in the courtroom and within their own ranks, these ladies know that lawyers are a girl's best friend. Don't miss the two part season finale of All's Fair on December 9th on Hulu and Hulu on Disney for bundle subscribers. Terms apply.
- [18:39]
Odoo Advertiser
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