Probes Reporter Perspective reports identify and summarize those SEC-related risk factors that we believe hold the potential to destabilize a company, distract its management, and/or interfere with underlying fundamentals. Our reports otherwise take no view on a public company’s fundamental outlook or whether you should buy, sell, or hold its securities. They are typically based on a combination of public company disclosures and/or documents we acquired from the SEC under the Freedom of Information Act (FOIA).
As a reminder, at present, this report is posted in real-time for free. In the future, and by necessity, we expect Probes Reporter will likely become a paid subscription service. If we move toward a paid service, you should expect both timing and access to our content that you enjoy today for free will gradually change.
Nu Skin Enterprises, Inc.(NUS)
Probes Reporter Perspective
PR’s Perspective: Nu Skin Enterprises has a recently confirmed but undisclosed SEC probe. The company could disclose this with earnings tomorrow. Or, perhaps, they will stay silent. This report will give you the information you need to press Nu Skin regarding SEC risk, whether or not they disclose an SEC probe tomorrow.
See below for the difference between a "Possible" versus "Confirmed" SEC probe.
The Facts: Confirmed Undisclosed SEC Investigation. In a letter dated 24-Sep-2014, the SEC cited the "law enforcement exemption" of the FOIA as basis to deny the public access to the detailed records we sought on this company. As a matter of law, they are acknowledging some sort of investigative activity.
This is a change from a reply we received 12-Nov-2013 at which time no signs of recent SEC investigative activity were found.
We filed an administrative appeal to challenge this denial. In our experience, about two-thirds of these SEC responses are confirmed on appeal. This is one of them.
In a letter dated 08-Oct-2014 (posted here), the SEC confirmed that this company was somehow involved in a recently active and ongoing investigation. A confirmed investigation is the highest standard we can achieve regarding undisclosed SEC activity at a public company. No disclosures of SEC investigative activity were found in the past two years of this company’s SEC filings.
Nu Skin Enterprises is now added to our Watch List of companies with undisclosed SEC probes.
Analyst Observations: First, anytime a public company discloses an SEC probe you should assume it's material, not matter what soothing words of assurance accompany the disclosure.
Next, keep in mind there is no SEC restriction to keep Nu Skin or other companies from answering questions regarding their SEC probes. Many make specious claims of "confidentiality" or more simply, they just refuse to answer the questions. Investors can and should push back.
With that in mind, here's what investors have every reason to expect from Nu Skin, or for that matter any company under the SEC microscope --
- When did the SEC probe start? The SEC did not tell us in response to our FOIA request. Yet this is perhaps one of the most important questions that goes unasked - and unanswered. Time and again we see clever word choice mislead investors into believing a festering probe is brand new. Always ask when first contact took place with the SEC's Division of Enforcement.
- What are the issues? Companies love to pretend they don't know, especially early on. That may apply if a company just heard from the SEC on the matter - for the first time - within the past 24 hours. Nu Skin management likely had plenty of time to know what this is about. The very nature of SEC investigations leaves little room for doubt. Companies that duck this simple question just don't want you to know.
- How many SEC investigations are there? Don't assume it's just one. That one you heard about may be the one they chose to tell you about.
- Are any of the SEC investigations formal? Both informal and formal SEC investigations can lead to so-called "enforcement proceedings." Both kinds of investigations can also lead to no action at all. If a company uses the expression "voluntary" to describe the SEC's request for information, that typically means it is part of an informal probe. Subpoenas are only issued as part of formal probes.
Frequently, companies engaged in these matters will tell investors they are involved in an “informal inquiry”, thus giving the impression it's not that big of a deal. Some will simply disclose receipt of a "document request" from the SEC. That too is likely an investigation in disguise. Guard against the desire to take comfort in these words.
If you hear or believe an investigation is formal, you should ask to whom the subpoenas were sent and what did they seek? The company may not know if subpoenas were sent to outside parties. But if they got them, they know what they say.
It's worth noting that the SEC's investigation of Tyco more than a decade ago, which ultimately led to prison sentences for senior executives of the company, is believed to have never gone beyond the informal stage.
- When was last contact with the SEC and what was its purpose? Where do things stand today? What updates can you offer? The "nothing to update" excuse is just that. Government investigations typically involve documents, correspondence, testimony, and ongoing negotiation between the parties. Yet it's amazing how often companies will effectively cut-and-paste SEC updates into filing after filing, thus leaving investors with no meaningful updates.
Investors should insist public companies involved in SEC probes provide more substantive updates. There is no SEC restriction to keep Nu Skin or others from doing this. Many simply choose not to.
These are all legitimate questions on something that otherwise seems so simple. But they are important as they allow investors to get beyond a headline to truly understand what's at issue for Nu Skin Enterprises and the SEC.
When we report on risk of undisclosed SEC investigative activity for a company, it is based upon a response from the United States Securities and Exchange Commission (SEC) to one of the approximately 2,500 Freedom of Information Act (FOIA) requests we file with the agency each year seek. Our requests seek information concerning the conduct, transactions, and/or disclosures of public companies.
There are many legitimate reasons for the government to deny a FOIA request. One reason often cited by the SEC is the so-called “law enforcement exemption” of the FOIA. As a matter of law, the SEC is acknowledging some sort of investigative activity when it asserts this exemption. To learn more about FOIA exemptions, go to FOIA.gov. To learn more about the law enforcement exemption specifically, see also Department of Justice Guide to the Freedom of Information Act, Exemption 7(A).
We know from experience there can be many reasons for the FOIA office of the SEC to assert the law enforcement exemption. Some would be of little to no consequence to investors. Others would be of great concern, and can have meaningful negative consequences for investors.
If the SEC cited the law enforcement exemption to deny the public access to records on a public company, and if no disclosures of SEC investigative activity were found in the past two years of this same company’s SEC filings, we then add the company to our Watch List as a company with a "Possible Undisclosed SEC Investigation".
Again, to say a company has a possible SEC probe is not the same as when we say it has a "Confirmed Undisclosed SEC Investigation". As we say in our reports, a confirmed investigation is the highest standard we can achieve regarding undisclosed SEC activity at a public company. Here's why --
When the SEC asserts a law enforcement exemption, if warranted, we then file an administrative appeal with the SEC’s Office of General Counsel. The appeal process allows a different set of eyes within the SEC to manually review our request and the initial denial. In response to our administrative appeal, the SEC typically does one of the following –
- The SEC can deny our appeal by saying, "We have confirmed with staff that the responsive matter remains open and that releasing the withheld information could reasonably be expected to interfere with the on-going enforcement proceedings."
This is why we say this is the highest standard of affirmation we can achieve regarding undisclosed SEC activity at a public company. We interpret this appeal response to mean the company is involved in an SEC investigation that somehow involves its conduct, transactions, and/or disclosures. Companies on which we receive this response are maintained on our Watch List.
- The SEC may deny our appeal on grounds there are no records responsive to our request. This may be because the Company was incidentally named or tangentially listed in an SEC investigation of some other person or entity; or, there was an investigation that concluded in the past but the SEC’s computerized records were not current at the time of our request. Companies on which we receive this appeal response are removed from our Watch List.
- We may be informed the law enforcement exemption no longer applies and our request has been remanded back to the FOIA office for further processing. We interpret this response to mean there was an investigation that is now over and records from that investigation may now be provided to us. Companies on which we receive this appeal response are removed from our Watch List.
- Finally, the SEC could inform us the law enforcement exemption was cited in error. We rarely see this but it does happen. Companies on which we receive this appeal response are removed from our Watch List.
Notes: The SEC did not disclose the details on investigations referenced above. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.