August 31, 2020 News

“You can’t handle the truth!”

Markets go up.  Markets go down.  Investors beware?  

An investor accepts the risks of normal business successes and failures; but investors should never accept the risk that a company is withholding adverse facts from investors

Companies submit that they do not want to overwhelm investors with ordinary business operations that could cause confusion, so they decide not to disclose the adverse facts.  Indeed, these same companies treat investors like little children and as the saying goes: 

You can’t handle the truth! 

A Few Good Men (1992).  The irony about this type of corporate excuse is that Bay Street and Wall Street, including short-sellers, have an army of research analysts to identify the important information, so investors really do not to be treated as children.  Moreover, institutional investors also have the ability to discern information, and likely better because they are not necessarily biased.

Imagine the situation where a company you own securities discloses all the facts about its operations to a third-party company (e.g., access to a data room pursuant to a non-disclosure agreement) for a possible merger acquisition deal. The M&A deal never closes because the third-party learns of all the adverse facts about the company from the “data room” documents.  This company then goes to a bank for a loan, but it is denied for all the same reasons why the third-party company walked away.  The third time will be a charm?  The company successfully raises capital from good hard-working people, who are simply trying to save for retirement, pay for their child’s education, etc.

This situation is an example of how a company can have long-term investors that were never informed of the adverse facts, so they were wrongly induced to hold their investment in the company, i.e., why sell when the company continues to report the status quo or prospects are getting better?  Further, we now have new investors who purchased securities without the knowledge of the adverse facts. These new investors believed that the investment proposition of the risks against rewards was efficiently reflected in the publicly traded share price; by omitting material adverse facts, one could argue that the purchase price was artificially inflated.  The result is the same: all investors were mislead and the initial third-party company and bank are not permitted to make disclosures to the market to warn investors because they are subject to a non-disclosure agreement.  

Weeks, months, or maybe the following year, this company discloses the adverse facts that were known earlier but the situation is far worse.  The market reassesses the investment proposition and there is an increased number of investors selling shares because the company is not the same one in which they thought they were invested, i.e., it is too risky now.  As a result, the share price drops. The long-term investors could have sold out of the position before the situation got worse, e.g., still may have lost money, but not as much.  The short-term investors could have avoided buying the security, or would have paid less for that security to properly reflect the risks.  Simple. 

The Investors’ Litigator

Morganti & Co. has a small group of highly trained lawyers from distinct backgrounds that allow us to offer unique capabilities to blend the law with economics, as well as understanding various cultures reflecting the reality that investing is international.  

Andrew Morganti, who has been representing investors since 1999, “We decided that we only want to provide our clients with realistic hopes of success; so we provide our services on a success fee basis, only.  Really, do you want to pay a lawyer to chase your ideas, or have a lawyer give you their time and money with the hope to recover that money?  Of course it is better to have your lawyers have their interests aligned with you.” 

Morganti & Co. will investigate the facts; by focusing on the public corrective statement and, almost reverse engineering it, compare it to prior statements to identify discrepancies in the disclosures.  These public corrective statements can come from third parties.  Equally as important, corporations cannot and should not piecemeal the adverse facts into several otherwise good public disclosures in hopes to avoid a material price drop of the shares.     

We look forward to hearing from you.