Sunday, March 23, 2014

Corporate Lies, Shareholder Recourse: Carlyle's SemGroup Implosion:

NYT reported:

Companies do not have a right to lie to their shareholders, a German judge ruled this week. But sometimes, she added, lies are necessary.

And with that Carola Wittig, a judge in the state court in Stuttgart, dismissed a suit filed by a group of hedge funds that lost a lot of money when Porsche Holding, the owner of the Porsche automaker at the time, lied about its intentions regarding Volkswagen. 

The article went on to describe a looming U.S. court case that could eliminate erode shareholder recourse.

The United States Supreme Court is considering whether to reverse a decision it made a quarter-century ago and in effect make it impossible for most investors to ever recover if they fall victim to corporate lies. A decision is expected by June.
There often can be layers of lies.  Take The Carlyle Group's defense of a SemGroup investor lawsuit.  SemGroup declared bankruptcy from billions in energy trading losses, something not referenced in the company's SEC filings.   Carlyle's lawyers used a "puffery" defense.  The judge didn't take Carlyle's bait:

Vague statements of corporate optimism or "puffery" cannot be materially misleading because "generalized statements of optimism are not capable of objective verification and reasonable investors do not rely on them in making investment decisions."
Carlyle and company settled the case in 2011 for $28 million in cash and stock.  Don't cry for Carlyle as they'd already pulled $106.9 million in partner distributions from SemGroup.  That's $2 million more than their initial investment.

The looming question involves PriceWaterhouse-Coopers (PwC), SemGroup's accounting firm.  SemGroup's bankruptcy trustee is suing PwC for accounting failures, which resulted in larger financial losses for the company's creditors.  The court filing states:

Remarkably, in July 2008, just four months after PwC's last clean audit opinion - and during an oil boom - SemGroup collapsed and filed for bankruptcy protection. After SemGroup filed for bankruptcy, PwC withdrew the audit opinion it had issued in March 2008, saying that it was no longer reliable.

The Trust contends that PwC failed to exercise due professional care in performing its role as an auditor for its client, SemGroup. PwC knew or should have known that that certain transactions were improperly reported in SemGroup's financial statements. PwC knew, for example, that SemGroup's CEO was using company money to fund over $300 million of his own personal financial losses and that this was not reported properly and completely in the financial statements. By March 2008, when PwC issued its audit report, PwC also knew or should have known about SemGroup's precarious financial condition. But rather than conduct any extended "going concern" procedures or issue any "going concern" warnings in its audit report, PwC gave SemGroup a clean bill of health, and SemGroup collapsed just four months later.

A jury trial is set for August 11, 2014.  Companies lying to shareholders is concerning enough.  What happens when auditors, the arbiters of truth, do likewise?