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).
At present, this report is posted in real-time for free. In the future, and by necessity, 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.
See below for the difference between a "Possible" versus "Confirmed" SEC probe.
PR’s Perspective: If you ask anyone why the SEC is investigating Target, most would say it's because of the widely publicized credit card breach from last year. The company even said as much. But why would the SEC even care and how might it matter for you?
The Facts: In a letter dated 12-Aug-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. 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 10-Sep-2014, 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. This is no surprise as the following is from the Target 10-Q filed on 8/27/2014:
In addition, more than 100 actions have been filed in courts in many states, along with one action in Canada, and other claims have been or may be asserted against us on behalf of guests, payment card issuing banks, shareholders or others seeking damages or other related relief allegedly arising out of the Data Breach. State and federal agencies, including the State Attorneys General, the Federal Trade Commission and the SEC, are investigating events related to the Data Breach, including how it occurred, its consequences and our responses. Our accruals for estimated probable loss discussed below include what we believe to be the vast majority of both actual and potential claims from these matters.
Analyst Observations: A primary focus of the SEC concerns public company disclosures and accounting practices. How does a credit card breach relate? Seriously. It doesn't, at least not on the surface.
While the SEC response affirming on-going enforcement proceedings does not surprise us for Target, it does not specifically say what those enforcement proceedings are. Nor does the company.
Does the SEC suspect Target's disclosure practices are/were weak? If so, there could be bigger problems. Or, did the credit card breach result in losses far greater than have been let on? Again, that could suggest bigger problems.
It is possible the SEC is investigating because it felt like it had to "do something". If so, SEC involvement will likely pass both quickly and without incident. So far we see no reason to expect otherwise.
If the SEC investigation lingers on, then you should become concerned. There is no reason it should linger. Lots of other exposures will linger, and likely for years. That's just the game. But the SEC should not be one of them.
Here's what investors have every reason to expect from Target, or for that matter any company under the SEC microscope --
- When did the SEC probe start? This is perhaps one of the most important questions that goes unasked. 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 even apply if they literally just heard from the SEC on the matter - for the first time - within the past 24 hours. But the very nature of SEC requests leave 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? If so, to whom were the subpoenas sent and what did they seek?
- 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 Target 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 Target regarding it 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 (link is external). To learn more about the law enforcement exemption specifically, see also Department of Justice Guide to the Freedom of Information Act, Exemption 7(A) (link is external).
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.