One of the companies that I've been following closely for the past few years, the Internet retailer Overstock.com Inc. , the other day came out with financial results for the third quarter of 2010. The numbers weren't very good, with the loss much worse than expected, and the stock fell 16 per cent. But anyone familiar with this company had a pretty good idea that the company wasn't coming out with good news by simply looking for the earnings release.
There wasn't any.
In contrast to previous quarters when the company had something positive to say, Overstock's usually hyperactive corporate PR machinery - ranging from Twitter feeds to a Facebook page to a PR website personally financed by the CEO - all were silent.
Overstock's no-release earnings announcement was the latest example of how companies nowadays manage the bad news that has been showering over corporate America in abundance. Overstock's approach was perhaps more extreme than most, but it was an example of one of the common ways company's handle bad news. They ignore it.
People who study these things - yes, there are such people - have pointed out over the years the techniques that companies use to mask unsightly blemishes. Issuing earnings releases after the close of trading, for instance, is one widely known method public companies use to hide negative news, or at least delay its impact, by dropping it into the ether when the market isn't open. That's not just common knowledge, but was scientifically proven by academic researchers 30 years ago.
It will be interesting to see what kind of studies come out concerning the latest methods the corporate spinmeisters use to mask, shred or otherwise massage the release (or non-release) of bad news. Thus, for the guidance of the next generation of researchers, I humbly submit these examples of corporate bad news management, which fall under three broad categories:
Modified, Limited Hangout.
This was a technique made famous by Richard Nixon right after Watergate. The Nixon tapes showed that Nixon and his aides John Dean and H.R. Haldeman were confronted with the unpleasant fact that, contrary to their denials, there were repeated reports of White House involvement in the Watergate burglary. The solution: a "modified, limited hangout," in which the White House would admit only to things that were known, while otherwise stonewalling as best it could.
This technique has aged like a fine wine over the years, and has been amply used in cases of corporate as well as governmental misconduct. Thus we have Lloyd Blankfein's "apology" for all the naughty things Goldman Sachs did, back in November 2009. "We participated in things that were clearly wrong and have reason to regret. We apologize" Blankfein said. That was awfully decent of the gent, you have to admit. But when the SEC settled charges with Goldman over its marketing of CDOs, the bank explicitly failed to admit (or deny) liability. Dick Nixon couldn't have put it better: "I accept the responsibility, but not the blame."
BP PLC followed in that honored tradition by its "we accept full responsibility for the Gulf spill" ad campaign, while systematically stonewalling the public in multiple ways, not the least of which was ex-CEO Tony Hayward's non-testimony before a congressional committee.
Just ignore it.
In addition to not issuing press releases when earnings are bad, corporate managers can simply take a nap when naughty stuff is happening. We're seeing that time-honored technique oozing out of the foreclosure crisis. At JP Morgan Chase, Citigroup and GMAC, army of "Burger King kids" were deployed to rubber-stamp all those foreclosure documents, falsely swearing knowledge of documents they knew as well as the patties some of them used to shovel into buns. It's becoming clear all of this was known or should have been known to the hierarchies of these banks, and they just ignored it. The horrors of the foreclosure mess is exceeded only by the banks' atrocious handling of ordinary debt.
Again, the Nixonian question arises: what did the bankers know, and when did they know it? After all, it was happening in their companies. Something tells me that another "accept the responsibility but not the blame" approach is in the works.
Stuff it into the "risk factors."
Companies are required by the securities laws to disclose everything material, and that includes lots of the bad news that they're not necessarily anxious to make public. So if a company has something that it's not all that happy to talk about, it can just be rammed into the "risk factors" section of its SEC filings.
The late Bear Stearns was famous for its enormous risk factor section, which spanned the past several decades of securities law transgressions with disclosures of everything from pay-for-play, to fallout from Enron, to government investigations of all kinds.
Over at Overstock, the "risk factor" sections of several recent SEC disclosures have revealed investigations of its pricing and advertising practices by district attorneys in California. But I can't find another word from the company on this, so this bad news hasn't received much if any attention. The latest filing, and the latest 10Q (see p. 20) describes how the company has been sued by the trustees in the bankruptcy of convicted Ponzi schemer Thomas Petters. "The complaint alleges principal causes of action against us under various Bankruptcy Code sections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to the filing of the case initially as a civil receivership in October 2008," says the 10-Q. Golly. Blogger Sam Antar has more, including a copy of the lawsuit. The company denies wrongdoing.
With all the bad news that's been gushing forth like Niagara lately, I expect to see new and unique methods of bad-news-avoidance deployed in the coming months. Stay tuned.
Gary Weiss has covered Wall Street wrongdoing for almost a quarter century. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, "The Mob on Wall Street," which exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond-trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Conde Nast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book "Born to Steal" (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. "Wall Street Versus America" (Portfolio: 2006) was an account of investor rip-offs. He blogs at garyweiss.blogspot.com.