Reading The Fine Print: What's Hiding In the Financial Footnotes?
By Eben Esterhuizen, CFA: For those of you who've seen a financial filing up close, you know that it's a pretty intimidating-looking document. If the numbers don't put you to sleep, the hundreds of pages of legal jargon and disclosures surely will. No wonder that most investors don't take the time to actually read its contents before investing.But it's critical that you do your homework before you sign on the dotted line--because corporations usually dig the bad news deep, buried inside the footnotes.
Fortunately for all of us lazy investors, that's where Footnoted.comcomes in. Launched in August 2003, the site reads the financial fine print so you don't have to. They make it their mission to find the intel that companies don't want you to know, hidden in routine SEC filings.
Here's a selection of Footnoted.com's most recent finds.
Kraft's Coffee Price Fixing Woes
In early June, a story broke that Germany’s Federal Cartel Office fined several companies, including Kraft, 30 million Euros (about $35 million USD) for fixing coffee prices. According to reports, the companies allegedly met between 1997 and 2008 to coordinate their increases and cuts with the wholesale price of coffee.
This isn't the first time that Kraft has been involved in a price-fixing scandal. Last winter, Kraft’s German Jacobs coffee unit just barely escaped paying a fine in a similar case, only because it reportedly self-disclosed its illegal activities to German regulators.
"But it appears that other price-fixing investigations are underway," writes Footnoted.com. Kraft's latest filing states on p. 52:
"Our wholly owned subsidiary, Kraft Foods Deutschland GmbH, is also cooperating and in contact with the [Federal Cartel Office] in the context of possible anticompetitive activity in the German [Fast Moving Consumer Goods] sector, involving a number of companies including Kraft Foods Deutschland. At this time, we cannot predict with certainty the course or the outcome of these investigations."How long will Kraft's price fixing woes continue? Even if the damages are insignificant, if you're invested in the company it's worth keeping this story on your radar.
Metlife: Trouble In Italy?
"In the 8-K that MetLife filed August 2, Exhibit 99.2, page F-34 includes an update on the Italian branch of Alico Life International Ltd.’s (ALIL) fund suspensions in Italy, which relate to allegations that – among other things – employees made misrepresentations and improper disclosures about their policies," writes Footnoted.com.
Noting that in March 2010 ALIL learned that Milan’s public prosecutor had launched an investigation into some of the company's employees (as well as employees of one of its major distributors), Metlife's filing adds:
“ALIL is cooperating with the Italian and Irish regulatory authorities, which have jurisdiction… and is in discussions to address their concerns as well as those of the affected policyholders. The ultimate resolution of this matter could have a material adverse effect on the Company’s combined and consolidated results of operations or cash flows for an individual reporting period.”Considering the regulatory risk, it's probably a good idea to be careful with Metlife over the coming weeks. If the outcome of the investigation could have a material impact on the firm, why leave it in the footnotes?
Is Aetna Worried About Their Derivative Exposure?
Footnoted.com was surprised to find a new risk factor listed on page 42 of the quarterly report that Aetna (AET) filed last week. In it, the health-insurance giant worries that it could be hit hard by the financial reform legislation signed into law on July 21.
“We believe that we fall within the Financial Reform Act’s definition of ‘nonbank financial company,’ but we cannot predict whether the Council will designate us a ‘systemically important’ company, which the Financial Reform Act identifies as those that could pose a threat to financial stability either due to the potential of material financial distress at the company or due to the company’s ongoing activities.”
"There’s no question that Aetna is pretty important to the country’s health-care system," writes Theo Francis. "But a systemically important nonbank financial company? It’s conceivable: Aetna clearly concluded it qualifies as a nonbank financial company under the new law, so it probably wouldn’t hurt to know why it came to that conclusion.""But if the company has reason to think its forays into the derivatives market — or some other facets of its financial life — may be significant enough to catch the eye of regulators, it should be more specific."
Is Aetna trying to hide a massive exposure to derivatives? Be sure to keep an eye on this story...
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