Fearing unfounded rumors: Jefferies isn’t alone…

January 31, 2012

Are unfounded rumors getting worse, or are companies just more inclined to blame them for their woes?

We began to wonder about this after reading a new risk-factor disclosure from Jefferies Group (JEF), included in the 10-K the company filed on Friday. Here’s the relevant excerpt (emphasis in the original):

Unfounded allegations about us could result in extreme price volatility and price declines in our securities and loss of revenue, clients, and employees.

In November 2011, we became the subject of unfounded allegations and false rumors, including among others those relating to our exposure to European sovereign debt. Despite the fact that we were able to dispel such rumors, both our stock and bond prices were significantly impacted. Our common stock suffered a 20% sell-off in minutes and, consequently, its trading was temporarily suspended, and our debt-securities prices suffered not only extreme volatility but also record high yields. In addition, our operations were impacted as some clients either ceased doing business or temporarily slowed down the level of business they do, thereby decreasing our revenue stream. Although we were able to reverse the negative impact of such unfounded allegations and false rumors, there is no assurance that we will be able to do so successfully in the future and our potential failure to do so could have a material adverse effect on our business, financial condition and liquidity.”

Now, in the case of Jefferies, to judge from reports from DealBook, Bloomberg News and elsewhere, it looks like the November sell-off was a mini panic, soon after MF Global succumbed to fears about its European debt exposure. We can’t help but notice that the plunge referred to in DealBook was nearly a month before the end-of-November period at which Jefferies now says it had a net short position in European sovereign debt. Nonetheless, it’s clear there was a real flurry of concern, however poorly founded.

The new disclosure got us wondering how many other companies were warning of similar problems, regardless of the evidence to support it. As we suspected, rumors seem to be on the rise — at least as a feature of corporate disclosures — but they’ve come and gone in waves over the years.

Drawing on the search capabilities of Morningstar Document Research (the service formerly known as 10-K Wizard, a sister-unit within Morningstar Inc. that we use to search, parse, slice and dice filings), we counted up the number of times “unfounded allegations,” “unfounded rumors” and related phrases showed up in 10-K, 10-Q and 8-K filings in recent years. Although there are plenty of other ways to say the same thing (always a problem in this line of work), and similar disclosures could turn up in other filings, we figured it’s a decent proxy for measuring the relative frequency of such disclosures, if not an absolute measure. (For one thing, it doesn’t capture this disclosure from Google, which Sonya footnoted last year.)

Jefferies is the first to use those terms this year, but last year, five companies used the term in 11 filings. By contrast, in 2010, just three companies used it, in six filings total. In 2009, three companies, once each. There was just one use in 2008, when you’d think rumors would have been most rampant in the run-up to the financial crisis. That was the most recent trough, though — from 2004 through 2007, the terms were used between five and seven times a year (and by five different companies most years). Here’s a rough graph of the results:

 

It’s pretty clear that last year marked a high-water mark for companies invoking unfounded rumors and allegations, and tied with several other years in terms of the number of companies invoking those terms. For what it’s worth, 2011 also recorded a high-water mark for the number of times companies used the terms (ie, counting multiple references in a single filing): 38 times, or more than double 2010, which came in second with 18 mentions.

What’s less clear is just how substantive these fears really are. Few of the filings offer even the specifics that Jefferies does. Some of them are fairly routine, and for the most part, the companies that use these phrases most frequently aren’t exactly household names. But in looking over the companies, at least a couple jump out as familiar, and those aren’t very reassuring.

Companies using the terms in 2005, for example, included American International Group (AIG), which filed a letter from an affiliate attempting to reassure key employees that they can count on their incentive pay (largely in company stock).

One of the other companies that year was Calpine (CPN), which filed an earnings presentation on May 6, 2005, that included a slide titled “Addressing Recent Market Issues” with bullet points “Unfounded Rumors” and “False Claims of a Calpine Bankruptcy.” In a blue box at the bottom of the slide, the company said boldly: “Recent Market Pressure Has Not Had An Impact on Calpine’s Ability to Manage its Power and Gas Assets.”

Not quite eight months later, on December 20, 2005, Calpine filed for bankruptcy, and didn’t emerge until early 2008.

Image source: whisper photo via Shutterstock.com

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