DERELICTION OF DUTY By CHRISTOPHER BYRON
Ed Lampert: K-mart Investor
May 27, 2003 -- HERE'S what I don't get: What's the point in requiring public companies to file timely and accurate financial reports with the Securities and Exchange Commission if they aren't punished for filing nothing at all?
Case in point: A Nyack, N.Y., shoe company called Footstar Inc., is nearly a full year delinquent in filing financial reports with the SEC, yet it continues to trade every day, just as pretty as you please, on the New York Stock Exchange.
Stranger still, this 21,000-employee company is up to its nostrils in controversy, conflicts and fishy-sounding press releases about why its auditors have been unable to make sense of the company's books and records.
Yet in spite of all that, the company trades daily on the Big Board, with no one in a position of oversight or responsibility at the exchange seeming to show the slightest concern that public investors in the stock cannot possibly know what they are buying and selling — because all information about the company is nearly a year out of date.
The timely filing of so-called 10K, 10Q and shareholder proxy reports by publicly traded stock corporations is the absolute bedrock foundation of America's entire equity market system. It is upon these documents that the whole edifice of public confidence in the markets has been built over the last seven decades.
When public confidence in the market begins to waver, as it has done lately, the SEC often tries to revive it by requiring that companies provide yet more information in their filings, not less.
As a result of the latest round of scandals, CEOs are thus now required by law to attest, under the penalty of perjury, that the information submitted in their SEC filings is accurate and complete.
BUT what good is any of that if a company can avoid the whole problem by simply not filing the required forms in the first place?
Incredibly, the SEC has no regulatory power to punish delinquent filers. That task is left to the exchanges as part of the markets' "self-regulatory" apparatus.
The only cudgel the exchanges can wield in such situations is to prevent the shares of the delinquent filers from being publicly traded by the exchanges' brokers and floor traders.
But the whole self-regulatory system becomes a joke if the exchanges simply don't act — and, generally speaking, they don't.
So far this month, 22 NYSE-listed companies have gone delinquent in the filing of required quarterly or annual financial reports, yet the shares of all but one continue to trade on the Big Board.
The situation is even worse on the American Stock Exchange, where 50 companies have gone delinquent in their filings since the start of the month. On Nasdaq: 87 more.
ONE of the most egregious cases involves Footstar Inc., which hasn't filed either a proxy statement or an audited financial report in more than a year, and hasn't filed even an unaudited set of financials since last summer.
Footstar's troubles began after it paid $64.2 million, in cash, in March 2000 to acquire various assets of a fraud-drenched shoe retailer called Just for Feet Inc. that had gone bankrupt the year before. The Just for Feet operation was combined by Footstar with another sports shoe operation Footstar already owned, to create the company's "athletic segment."
Two years later, in November 2002, the company announced that it had uncovered some $35 million worth of "discrepancies" in Footstar's "accounts payable" records, most of which involved the athletic segment.
In a press release, the company said it thus wouldn't be able to get its quarterly financial report for the July-September period issued on time, because of all the work it now had to do. This included having to issue restated financial reports for not just the previous nine months of 2002, but for the whole of 2001 and, vaguely, for "prior periods" as well.
Meanwhile, the company said its financial filings for years on end "should not be relied upon."
Four months later, in March 2003, the company announced that it had completed its review and prepared restated financial statements; that everything was now being reviewed by the auditors; and that it expected to file an audited full-year financial report for the 2002 calendar year by April 30.
But April 30 came and went, without the promised filing, and only a vague explanation by the company — that its financials "continue to be under review by the company's auditors." This was followed, just two weeks ago, by a company statement that it would miss the due-date for its January-March 10Q quarterly filing as well — again because its financial statements were, vaguely, "under review."
On top of all this, the company is critically dependent for its survival on deeply troubled Kmart Corp., which only this month emerged from bankruptcy, and with a third fewer stores.
According to Footstar's last audited full-year financial report, which covers the 2001 calendar year and does not reflect the impact of the subsequent Kmart bankruptcy, the Nyack shoe company derives half its revenues and 81 percent of operating income from sales through Kmart stores.
Kmart itself did not begin closing stores until the second quarter of 2002. And since Footstar has filed no financials of any sort since its own second quarter, there's no easy way to tell just how much the company's business has been hit by the downsizing of Kmart.
FOR clues, about the best one can do is poke through the bankruptcy filings of Kmart itself. Thus, in the August-October 2002 quarter, it turns out revenues for Footstar sales through Kmart were down 11 percent, while the bottom line shrank by 27 percent, suggesting that fierce price-cutting had kept sales from plunging even more.
Finally, for investors, there's the baffling question of who is actually calling the shots at Footstar, and what his game is — yet another question for which there is no answer, thanks to the lack of SEC filings.
The company hasn't filed a proxy statement since March 2002, at which time the largest single shareholder was listed as ESL Partners L.P. of Greenwich, Conn., with 3 million shares, or a controlling 14.75 percent of all common stock.
Since then, ESL, headed by one Edward Lampert, has surfaced as the largest (and controlling) investor of Kmart as well, meaning Lampert now appears to be potentially conflicted in every business transaction the two companies conduct with each other.
The more Footstar benefits in any given deal, the more Kmart suffers, and vice versa — and ESL is on both sides each time. Though Lampert has no management role in either company, it is preposterous to contend that he has no influence.
Throughout this entire situation, the NYSE has done nothing except allow the stock to continue to trade, with its price actually creeping upward, from $5 at the time of the November announcement to $8.88 at the close of business last Friday.
Since none of this rise reflects any public information whatsoever about the company's financial condition, the possibility exists that the stock could quickly collapse when Footstar's audited financials are finally released.
But when I asked the NYSE why it hadn't taken action to suspend trading in the shares until the situation was resolved, I got back an 83-word kiss-off e-mail that said, in effect, Footstar has issued a press release acknowledging that it is delinquent, and that's all we require.
Footstar didn't even return a phone call at all, but deflected the inquiry to an outside p.r. firm, which responded to relevant questions with a predictable "No comment."
Is it any wonder, then, that people don't trust the stock market? How can they when the place is run like this? It's a disgrace.
* Please send e-mail to:
cbyron@nypost.com |
