By Gabriel Friedman
Columbia Journalism School C’13
Breaking open a corporate scandal does not always require a shadowy, deep-throat source. More often than not, reporters can find the most damning evidence for such stories readily available on the Internet.
That’s because publically traded companies that are trying to hide something – an extra jet, a plan to cut jobs or an unusually generous compensation package – tend to leave clues in their regulatory filings with the Securities and Exchange Commission. These documents contain information that can impact the company and its investors. Enterprising reporters looking for scoops can find plenty of stories in these filings, which are all free and easily accessible.
Some journalists have made entire careers out of what they uncover in SEC filings. In 2003, Michelle Leder founded footnoted.com (then, footnoted.org), a blog about unusual or improper corporate activities unearthed using mainly these filings. Since then, Ms. Leder has written for BusinessWeek, The New York Times and Slate.
Although Ms. Leder was an economics major in college, a business background is not prerequisite to decoding SEC filings – just curiosity, attention to detail and patience (though a friend with accounting experience never hurts).
A company’s regulatory documents can be found on the SEC’s searchable web site, EDGAR [[[LINK: http://www.sec.gov/edgar/searchedgar/webusers.htm]]] (the Electronic Data-Gathering, Analysis, and Retrieval system). There, users can sift through filings by company.
Here are a few kinds of stories that can be written using regulatory documents.
A Closer Look at Earnings
It’s generally more informative to use a regulatory filing to report a quarterly earnings story than to use a company’s press release. The filings are far more detailed. They include prior quarters’ results and occasionally break down revenue streams, even when they don’t tell a favorable story.
There are two important types of earnings filings. The annual financial report, better known as the 10-K, contains a financial overview of the past year. The quarterly report, the 10-Q, is typically less detailed.
Both the 10-K and the 10-Q include income statements that show how much the company made in revenue and net income over the given period. Some companies offer more details than others, but in many cases, reporters can assess which revenue streams are growing and which are shrinking. Was a quarterly revenue gain driven largely by one product? Is that gain sustainable?
The 10-Q and 10-K also include balance sheets listing the firm’s assets and liabilities. Did the company incur any one-time charges that weighed on its bottom line?
The quarterly and annual reports also include information about executive compensation and significant litigation that could weigh on future results (e.g. patent disputes, shareholder class actions or federal criminal investigations).
Other Corporate News
Publically traded companies must notify investors of all material events, such as an executive resignation, an earnings restatement or a bankruptcy. The filing for such one-time events is called an 8-K.
Companies will also use an 8-K to announce they are being investigated by the SEC and may include relevant, less flattering details that do not appear in a press release.
For example, in 2006, Apple was among a group of tech companies that used 8-Ks to disclose the details of their own options backdating scandals, and in some of those cases, the findings of internal investigations that were conducted.
Telling Stock Sales
When a corporate officer, director or shareholder owning more than 10 percent of the company decides to sell a significant amount of company stock, they must disclose such a sale in a regulatory filing (“Form 4”).
These stock sales, which are expressed by the number of shares sold, are often newsworthy because they can suggest insiders have lost faith in the company.
A Portfolio Reshuffled
Each quarter, institutional investors must report their holdings to the SEC using Form 13-F. Like the filings that disclose large stock sales, these documents can reveal a lot about a fund’s confidence in a company or the broader sector.
For example, if several 13-Fs filed by top-performing funds showed a trend away from financial stocks, a reporter might pitch a story as to why those fund managers are heading for the exits. And if one bank appeared to be insulated from that trend, it’s worth a few calls to find out why.
Gabriel Friedman is a Knight-Bagehot fellow. Before arriving at Columbia, he reported on the subprime mortgage crisis, the stock-option backdating scandal and criminal and civil federal litigation. His work has appeared in the Los Angeles Daily Journal, California Lawyer, The Los Angeles Times and Wired News.