With a lengthy formal SEC investigation in the background, and an annual filing expected next month, New Oriental Education & Technology Group (EDU) has a history worth reviewing. The risk is that at some point the company will provide a significant update that will surprise investors. We review the history as compared to our database and offer our take in support of our cautionary opinion.
- New Oriental Education & Technology Group has been involved in a formal SEC investigation since at least Jul-2012. We think it could have easily started as an informal inquiry even earlier.
- Since first disclosed in Jul-2012, company updates on the SEC probe have been infrequent. We also found them so lacking in substance as to be analytically worthless.The last update on the SEC probe was in Sep-2013 (see below). The four 6-K's filed since (in Oct-2013, twice in Jan-14, and in Apr-2014) are all silent on the SEC investigation.
- In a letter to us dated 22-May-2014 the SEC confirmed New Oriental Education & Technology Group had a recently active and ongoing investigation. It is carried on the Watch List as such.
Reviewing the 6-K filed 18-Jul-2012:
EDU: SEC Investigation - On July 13, 2012, the Company was informed that the U.S. Securities & Exchange Commission (the “SEC”) had issued a formal order of investigation captioned “In the Matter of New Oriental Education & Technology Group Inc.” The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company’s consolidated financial statements. The Company intends to fully cooperate with the SEC in its investigation.
Our Take: A formal investigation as the initial disclosure of SEC investigative activity is unusual. Almost all SEC investigations begin in the informal stage, allowing for the company to voluntarily cooperate. It is highly likely that an informal investigation has been in place prior to the formal investigation, but the company chose not to disclose such information. This raises questions as to what else that company may not be disclosing regarding this investigation as well as the overall reliability of its disclosures. Additionally, someone now deemed there was sufficient materiality to warrant disclosure of the formal investigation. At minimum, it's worth asking if 13-Jul-2012 is when the company first learned of this probe. It could have been running even longer than investors have been led to believe.
Reviewing the 20-F filed 12-Oct-2012:
EDU: For example, after we issued a press release on July 17, 2012 disclosing that we were subject to the investigation by the U.S. Securities & Exchange Commission, or the SEC, and Muddy Waters LLC, an entity unrelated to us, issued a report containing various allegations about us on July 18, 2012, the trading price of our ADSs declined sharply and we were inundated by numerous investor inquiries. The negative publicity and the resulting decline of the trading price of our ADSs also led to the filing of shareholder class action lawsuits against us and some of our senior executive officers.
Our Take: We have no comment on this filing.
Reviewing the 20-F filed 27-Sep-2013:
EDU: On July 13, 2012, we were informed that the SEC had issued a formal order of investigation captioned “In the Matter of New Oriental Education & Technology Group Inc.” In that investigation the SEC’s enforcement staff has requested documents and information concerning, among other things, the basis for the consolidation of New Oriental China, a variable interest entity of our company, and its schools and subsidiaries, into our consolidated financial statements and other issues related to certain allegations about us contained in a report issued on July 18, 2012 by Muddy Waters LLC. We are cooperating fully with the SEC in its investigation. We cannot predict the timing, outcome or consequences of the SEC investigation.
Our Take: With this filing, it was more than a year since EDU first disclosed this formal SEC probe. SEC investigations can last a long time and companies can spend a lot of money (tens of millions) dealing with them. So when we see a company that uses the same disclosure in form and substance repeatedly, we become concerned. We find it highly improbable that there is nothing to report in terms of the status of the investigation. The risk is that at some point the company will provide a significant update that will surprise investors.
From the Probes Reporter database:
- In letters dated 20-Dec-2012 and 22-Aug-2013 we received information from the SEC suggesting this company was involved in unspecified SEC investigative activity.
- In a letter dated 9-Jan-2014 we received information from the SEC suggesting this company was involved in unspecified SEC investigative activity.
- In a letter dated 22-May-2014 the SEC confirmed that this company was somehow involved in a recently active and ongoing investigation
Note: New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.
"SEC Probe Lasting a Long Time" is a report format we use to provide analysis and opinion to highlight those public companies engaged in what appear to be protracted SEC probes for which we found disclosure practices may be misleading (whether intentional or not), confusing, evasive, or otherwise lacking the degree of detail and transparency needed for investors to make well-informed investment decisions regarding a potentially material exposure.