When "information" equals garbage

It is a fundamental tenet of capitalism that an investor should be fully informed of all matters relating to his investment. Over the years, regulatory authorities have been increasing disclosure requirements so that there is as much transparency as possible. But has this gone too far ? And has the overreaching legal recourses, especially in the US, led to the purpose being defeated ? No this is not a boring, dry post. Read on.

Take the case of Manchester United's IPO filing (if you ask what Manchester United is, I'll clobber you). IPO filers are required to disclose the risks associated with their business. Fair enough. But look at Man U's risks disclosed. They have listed 51 risks. Amongst them are such gems as

• There could be a decline in the popularity of football (beggars belief)
•  To service our indebtedness, we require cash, and our ability to generate cash is subject to many factors beyond our control. ( Ha Ha)
• We are dependent upon the performance and popularity of our first team. (Really ?? - this is like a company saying that we are dependent on the popularity of our products)
• If we fail to properly manage our anticipated growth, our business could suffer. (this is supposed to be an earth shattering revelation)
• Our international expansion and operations in foreign markets expose us to risks associated with international sales and operations (brilliant insight which we otherwise did not have).

There are 51 such gems and monuments to inanity. Obviously lawyers have written this piece of garbage, including everything they can possibly think of. I am surprised that they did not add the following, which I will freely offer for inclusion in the filing

•  Wayne Rooney (Man U's star striker) might develop a pimple on his ass that might prevent him from scoring goals
•  An asteroid might hit the earth tomorrow
• All other teams in the league might gang up and refuse to play Man U saying that they are fed up of getting thumped.
• The queen might die and Prince Charles might succeed her (Prince Charles is a known Burnley supporter)
• China may pass a law banning the Chinese from wearing Man U T shirts on the grounds that the Dalai Lama visited Old Trafford for a game.

This disclosure business has gone too much. To cover their asses, lawyers disclose a mountain of irrelevant stuff. Any sane follower is buried under a ton of garbage. Take Annual Reports of companies. They have become so bulky and big, that nobody reads them anymore. They are also written in such complex legalese that they are largely unintelligible to anybody. The only thing that anybody even sees , if they ever open one of them, is the constipated faces of the pompous Board. So much for the riveting reading annual reports make.

The purpose of full disclosure has been completely thwarted. Only three classes of people read these things these days. Lawyers who wrote the gibberish in the first place (I am not entirely convinced that they read it, but we shall give them the benefit of doubt). Lawyers looking for ways to sue. And finally a few unemployed  bloggers like yours truly.

Sox and smelly feet

Remember the Sarbanes Oxley Act ? The one that was promulgated in the aftermath of Enron. This was supposed to ensure that accounting scandals are greatly minimised. The Act that had every business chief howling that it was draconian , that compliance was putting a huge cost on business, etc etc. Well, it turns out that investors, whom the Act was supposed to protect, actually don't care all that much about accounting scandals.

Take the case of the "success" of many of the Chinese IPOs in the US market. In the fine print , most of them have disclosed accounting deficiencies. But does the market care ?? Not one bit. Take Renren which IPOed yesterday. The stock rose some 50% above the issue price. Never mind that the Chair of the Audit Committee resigned on Tuesday, they changed a key growth figure, they disclosed a "material weakness" that they did not have enough people in their accounts department and a "significant deficiency" that they had no policy on the treasury function and investment of cash.

Material weakness and accounting deficiency are Ramamritham speak. The former means the accounts are definitely wrong. The latter means that it is most probably wrong.

And yet investors seem to care two hoots. These days anything with a China name will sell like crazy. Even if they presented their accounts in Chinese and qualified it by saying that they just made it up to satisfy a legal formality.

Even the famed General Motors IPO showed a material weakness in the accounts. Didn't come in the way of its much touted success.

I am sure that the Public Companies Accounting Oversight Board ( what other name can you expect Ramamritham to dream of), that was supposed to regulate auditors under the Sarbanes Oxley Act has done enough research to prove that disclosures of accounting weaknesses have had a positive correlation to the share price and therefore they should be considered as having done great benevolence to the human race. It is probably true - the research finding that is. But as long as cases like Renren exist, its hard to take Sarbanes Oxley seriously.

Sure Sox, does reveal smelly feet. But if gorgeous blondes find smelly feet sexy, there's not much that can be done about it.

Disclosure : This blogger has made merry with the aforesaid Act; making a fair bit of money for his company from it. His opinions are therefore completely biased.

Material Weakness : This post is utterly without research, written on a whim and totally opinionated.

I cannot predict the future accurately !

The United States is well known for the excesses of its lawyers. Citizens of other nations, while marveling at the upholding of the law in the US, are left scratching their heads in bewilderment at the famous McDonald’s case or the Washington DC laundry case. Cases like this have resulted in some labeling gems such as “Contents Hot” on a cup of coffee or “Remove the baby before folding the pram”. This post covers such an impact on the glamorous world of accounting.

When lawsuits against companies began mounting in the late eighties and early nineties, companies started to become extremely careful in disclosing any information at all, other than the statutory minimum, for fear of being sued. Best to say nothing ; say your name ( presumably safe) and say nothing more. The powers that be, in the US, realized that disclosure of more information , especially plans and strategies would be good for investors . In order to encourage companies to do so, some protection against being sued had to be given. The Private Securities Litigation Reform Act was thus passed in 1995.

This Act offered protection from being sued for companies making “forward looking statements”. The framers of the Act were oblivious to grammar - statements can neither look forward nor backward, not possessing any eyes, but we shall pass lightly over. If they had left it at that, we would have had some very interesting company announcements on the following lines – this is a forward looking statement ; my name is Ramesh. This is a forward looking statement; I may or may not post on my blog tomorrow. This is a forward looking statement. The blog may or may not be up tomorrow …..

So they very kindly stated that you do not have to preface every statement with a declaration that it is a forward looking statement and instead statements that contain words like “expect,” “anticipate,” “intend,” “plan,” believe,” “seek,” , “will”, etc may be deemed to be forward looking and that the company cannot get sued if such statements ultimately don’t turn out to be right. So if you say we expect to grow our market share and one year later it has fallen, you cannot be sued for having made a false statement.

This has hence resulted in the famous disclaimer that now precedes every company’s accounts, every earnings call, every filing, every anything. Its called by various names – simply disclaimer, or safe harbor statement, or whatever. It says that the company may be making some statements about the future, can’t guarantee that they will come true, and isn’t endowed with godlike powers to predict the future accurately. Of course, not in those words, but to that effect. If you are seriously interested in exactly what is said in wonderful legal language, click here for an example.

This is one of those useless statements nobody reads or pays the slightest attention to. As if anybody needs to be told that you can’t predict the future. But the absence of this statement would be fatal for a company, as some lawyer will then sue the pants off it. So they dutifully make it – page 1 of any filing, slide 1 of any presentation, first words (after Good Morning) of any speech.

What a waste.

Disclaimer – This post may contain certain forward looking statements, blah blah ..