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Ferrara Explains Disclosure
And as soon as he found out,
The amendment is incorporated by reference into the current Amazys Holding AG offering documents. The 10-K/A added four amendments, including the following in regard to
“Prior to his employment with the company, Mr. Ferrara was president of Marine Optical Group from March 1990 to June 2001. Following Mr. Ferrara’s service as president of Marine Optical Group, Marine Optical Group commenced bankruptcy proceedings in October 2001 under Chapter 7 of the Bankruptcy Code.”
That seems at odds with
According to bankruptcy court documents, Marine Optical had commenced liquidation of its assets in June 200l. In October, three creditors of Marine Optical filed an involuntary petition for relief against the company under Chapter 7 in the U.S. Bankruptcy Court, District of Massachusetts. The bankruptcy petition stated that Marine Optical had experienced steady growth from its founding in 1925 until 1997 when it acquired the assets of Wilshire Designs Inc., a firm that licensed, manufactured and distributed high-quality branded and private label optical frames and sunglasses.
The petitioners stated that the acquisition of the Wilshire assets increased Marine Optical’s gross sales initially from $40 million to $60 million annually. However, in their application for compensation and reimbursement, the creditors stated: “Notwithstanding the increased sales, in the four-year period following the Wilshire acquisition, several negative factors, including integration problems, inappropriate overhead levels, and a deterioration of the retail optical chain market, resulted in accumulated losses by the debtor of more than $36 million.” At the time, 90 percent of the company’s stock was owned by Citicorp Venture Capital.
Under SEC Regulation S-K, executive officers and directors of public companies must denote their “involvement in certain legal proceedings.” A person who has served as an executive officer of a public or private company at or within two years before the time the company filed a federal bankruptcy petition is required to reveal that information in SEC filings.
Why did the Marine Optical bankruptcy information surface just recently in X-Rite’s 10-K/A filing rather than in earlier filings for the fiscal years 2001, 2002, 2003, 2004 and 2005?
“A couple of years prior to that, we were actively selling the company through Ernst & Young, who were our investment bankers. So there was a process going on before that to sell the company,”
“When it was called to my attention, I validated it,”
“The only way you can get on the court’s matrix is by being an owner or a creditor, or by asking to be put on it as an interested party somehow,” Wardrop explained. “A creditor will receive notice of most things, but not all. The only time creditors don’t get notice is if it’s a specialized motion that only goes to, say, the creditors committee and few other people.”
When a company is involved in something like an acquisition, which requires an SEC registration statement, there’s typically a lot more of an effort to dot all the i’s and cross all the t’s, observed Joe Godwin, an accounting professor at Grand Valley State University. Godwin served an academic fellowship in the SEC Office of the Chief Accountant from August 1998 to August 1999.
“One reason for that is that it’s much more likely that (SEC) commission staff will be looking at things a little closer. For the previous years, if it seems fairly apparent that something was going on there that the CEO knew about that didn’t make it into these filings — if it was a ‘don’t ask, don’t tell’ sort of thing — then that’s one thing. But given the company’s own code of ethics, it seems to me to put a higher duty on officers to reveal events that could be value relevant. Certainly, now that they are acquiring this other company and one of the issues raised in that previous bankruptcy is integration of an acquired company, that would seem to compel that question even more so.”
Generally, Godwin said, if the SEC gets wind of something, it might start asking a company for more information. Whether the SEC decides to bring a lawsuit against a company to compel discovery or whether it might seek penalties depends on how cooperative and forthcoming company officials are with the answers.
“How much this might irritate the SEC, we don’t know. On the face of it, the company has corrected a misstatement in the filings that had not appeared on earlier 10-K filings regarding the Regulation S-K requirement that officers and directors reveal their involvement in certain legal proceedings.”
Michael Molitor, assistant law professor at
“If the legal counsel that the company had all of those years between 2001 and 2005 was doing things properly, the CEO probably did get a questionnaire that asked whether he was associated with any business that went bankrupt,” Molitor said. “Theoretically, there are several provisions in the Securities and Exchange Act that would allow the SEC to go about assessing some penalties. I believe that most of those provisions require that the company knowingly and willfully omitted this information about its CEO. If some of this did rise to the level of a willful and knowing non-disclosure, then the SEC could get very interested in it.”
Molitor said there could also be some civil actions brought by people who bought or sold the company’s stock, alleging that they bought or sold stock on the basis of 10-K/A’s that did not include this bankruptcy-related information.
“But that would be a really tough road for those folks to take, because they would have to show that the price at which they bought the stock was affected by the absence of this information, among other things,” he added. “I would suspect that probably the most the SEC would do is require a detailed disclosure about the bankruptcy in the current filing. The theory with all of these SEC disclosure requirements is that shareholders and prospective investors read the filings. Knowing information like that, they might ask themselves if they really want to invest in a company that’s run by somebody that bankrupted another company.”
Most shareholders don’t read the SEC filings graph by graph, page by page, Molitor acknowledged. The people who do read those documents are the analysts on Wall Street who issue the buy or sell recommendations, he said.
“Lots and lots of acquisitions don’t work out, and you don’t know what problems there will be in putting the pieces together until you start actually trying to do it,” said University of Michigan law professor Adam Pritchard. Pritchard teaches corporate and securities law and is co-author of “Securities Regulation: Cases and Analysis.” SEC and business regulations are major components of his expertise.
Pritchard suggested that the Marine Optical bankruptcy information may have surfaced during the due diligence process relating to the pending acquisition, and the company then realized that it had been misreporting the CEO’s experience.
“The only way it could be material is if the company were offering stock in the tender offer. If they are offering part stock and part cash, which is not unusual, then it would be material to that determination, but now it has been disclosed,” Pritchard said. “Is this information that would be relevant to a reasonable shareholder in making a decision? Yes, it is. But I think the company has satisfied the materiality standard with the (10-K/A) amendment.”
Given the volume of SEC regulations, Pritchard said, the Marine Optical bankruptcy could have been a detail that the company missed.
“The SEC could bring an enforcement action against the company or against the officer as a cause of a reporting violation by the company, but my guess is that they have more important things to do,” Pritchard said. “The (10-K/A) amendment doesn’t cure it in the sense that they did violate the rules, and the SEC could bring an enforcement action against them, but it just doesn’t seem like that big of a deal to me.”