In 2011, former Notre Dame football sensation Daniel “Rudy” Ruettiger and 12 others were implicated in a stock manipulation scheme that racked up $11 million in illicit profits three years prior.
The story told in the SEC’s press release is as fantastic as the 1993 movie that lionizes Ruettiger’s doggedness in obtaining a spot on the Notre Dame roster.
Months after trying and mostly failing to market a Gatorade competitor as CEO of Rudy Beverage, Inc., Ruettiger and his old college roommate moved the business to Las Vegas in October 2007. There they handed the reins to a penny stock promoter named Stephen DeCesare, who the SEC says went on to orchestrate what’s known as a “pump-and-dump” scheme.
Specifically, the SEC says DeCesare and a disbarred California lawyer named Kevin Quinn conspired to sell over one billion shares to investors at a premium the stock didn’t deserve.
The scheme began in February 2008 when DeCesare arranged a merger with a shell company, turning what had been Rudy Beverage into the publicly-traded Rudy Nutrition. A string of fake taste tests and bogus press releases followed (i.e., the “pump”), pushing the newly-minted stock from $0.25 to $1.05 a share over a two-week period. Insiders naturally sold at the top, pocketing millions (i.e., the “dump”). It’s the kind of story Hollywood loves, and it was accessible to anyone paying attention.
Think this is unusual? Think again. Similar stories are buried in regulatory filings uploaded in odd hours and in the newsfeeds of government agencies. For the enterprising freelancer with a little knowledge of how financial reports work, that’s an opportunity worth seizing. Here’s where to look:
1. The Friday night 8-K dump
Public companies count on reporters starting the weekend early. That’s why every Friday, right around 4 p.m. EST, there’s an influx of filings featuring less-than-flattering news. Finding them is as easy as tuning in to the “latest filings” link at the SEC’s EDGAR database and filtering the results to search for 8-Ks, the standard form for disclosing information deemed “material” enough to move a stock.
Michelle Leder specializes in just this sort of reporting. As the founder of footnoted*, she leads a team of sleuths who sift through documents looking for tidbits that companies would prefer went unnoticed.
“One way we like to think of Friday evenings is as a good fishing spot,” Leder said. “We’ve caught some good fish there over the years, so we keep coming back to that spot.”
Of course, you don’t have to wait till Friday night to find a great story lurking in EDGAR. In 2011, freelancer Erik Sherman dissected Groupon’s financial statements at BNET (now CBS MoneyWatch) and found that existing customers were buying less, raising serious doubts about the company’s long-term viability. This type of closer examination of the business is one way to help investors rethink a particular stock. And fittingly, Groupon’s stock is down nearly 70 percent since its public market debut.
For another example: On January 26, when the northeast was waiting for a massive snow storm and many people were leaving work early, Walgreen’s quietly announced that it had hired a new CFO—only six months after hiring their last one. Leder and her team made sure footnoted* subscribers knew what had transpired.
The best part about covering these stories is they don’t require special access. “I actually took the time to read [Groupon’s] documents,” Sherman said. “All you need is some comfort reading a financial statement. You don’t have to be a CPA, but you do have to look at the numbers.”
2. Perps on parade at the SEC Enforcement newsfeeds
As useful as financial filings can be, they’re usually boring compared to the stories you’ll find in the archives at the SEC’s Enforcement Division. Just look at the Ruettiger case.
Similar tales are buried in the division’s expansive archive, which includes 12 distinct topics to help filter your search. Litigation releases and administrative proceedings are updated most frequently, and often contain the meatiest information.
For example, on January 27, the SEC filed a cease-and-desist order against Oppenheimer, a well-known broker and supplier of mutual funds. The filing accuses the firm of helping a Bahamas-based trading firm execute billions of dollars worth of penny stock transactions on behalf of U.S. customers, illegally sheltering them from paying taxes.
And that’s just one of over two dozen administrative proceedings and 11 federal court actions the SEC has filed in January alone.
Where to find even more
For those writing short news stories, you’ll get most of what you need from the 8-K dump and the SEC’s Enforcement archives. Major features, however, are likely to require more digging. The good news is that there are plenty of web-connected databases that can help, including:
The Federal Reserve: For those covering banks, the Fed has its own news-making enforcement division. Check the press releases for story ideas.
Charity Navigator for reporting on non-profits: Signing up for a free account gets you access to detailed financial data and links to annual form 990 tax filings.
National Credit Union Association database: The NUCA covers the state of the industry and provides insight on the finances of individual credit unions.
Your state insurance division: Every state has its own insurance commissioner in charge of oversight and enforcement. Like with the SEC, actions and items of interest are generally found in the press archives.
Justia: Federal and state legal databases can be tough to navigate. Justia offers a user-friendly front-end. Tip: Start at the “Case Law” page and browse through records by court.
Additionally, I’ve found legal documents to be particularly useful. In 2006, an off-handed quote from Taser International’s president led me to investigate claims that the company wouldn’t settle lawsuits. A few interviews and legal filings proved otherwise and netted The Motley Fool an exclusive. Taser has since clarified its public stance.
Miscreants bank on reporters not having the time or the will to dig through mountains of paper. Disappoint them. You’re a freelancer, after all, and it’s your job to go where the stories are.