Huntington S&L; Case Raises Questions on Disclosure to Shareholders
Huntington Savings and Loan Assn. was very thorough and provided a wealth of detail last month when it informed its minority shareholders about the events that led to a $600,000 fiscal-year loss and the firing of its controller.
But although the Huntington Beach S&L; said it followed all the disclosure rules and did everything it could to promptly inform the public of the situation, it still took six months to get the information out.
The delay was not unusual. For a variety of reasons, including fear of lawsuits and a run on deposits, restrictions imposed by other regulatory agencies, concern about loss of shareholder confidence and the universal desire to look good, many companies take full advantage of every available avenue to delay or avoid altogether disclosing unfavorable or embarrassing news.
But Huntington’s delayed revelations, coupled with recent lawsuits in which investors in two failed Orange County banks claim they were not given important financial information that would have affected their decision to buy stock, focus new attention on a much debated topic: disclosure requirements for small public companies.
In one of the numerous shareholder actions against officers and directors of defunct Anaheim-based Heritage Bank and its holding company, Heritage Bancorp, two San Diego investors claim Heritage officials withheld information about the bank’s financial problems at the time of the stock transaction. The value of the investors’ shares, which were purchased in 1982, fell steadily through 1983 as the bank’s troubles became known and, on March 16, 1984, when the Anaheim bank failed, its stock became worthless.
And in a suit involving Garden Grove Community Bank, which failed in June, 1984, a Northridge couple claim the brokerage that sold them stock just three months before the bank’s collapse should have told them that the lender was in precarious financial shape.
Ernest Leff, a Los Angeles corporate attorney whose firm prepared Huntington S&L;’s proxy statement, said that financial institutions have special disclosure problems because of the need to avoid panicking depositors.
“But in a normal situation,” Leff said, “there is not enough information given to investors, particularly in small companies, which have no formal disclosure requirements such as those imposed on public corporations listed on major stock exchanges.”
There should be more information given to stockholders,” Leff added, “but I don’t know of any organized effort to bring about more disclosure.”
As it now applies to smaller companies, said an attorney in the Securities and Exchange Commission’s Los Angeles office, “the law says you have to disclose, but it doesn’t specify the degree of disclosure. That often becomes an issue that can be resolved only in court.”
SEC disclosure requirements for large public companies are fairly strict, the attorney said, but most small companies are required only to file annual reports and inform investors of profits and losses. Unless the companies are undertaking a public stock issue or soliciting shareholders’ proxies, they generally do not have to explain reasons behind their financial performance. The SEC, which oversees most disclosure regulations, defines a small company as one with fewer than 750 shareholders and less than $1 million in assets.
Additionally, the SEC has reduced the amount of reporting required of small companies. In the past two years, the agency has streamlined reports that small companies must file, said an SEC attorney, who asked not to be identified. Now, he said, many reports have less “size and substance. Some reports have been done away with entirely and some small companies don’t have to make any reports at all.”
And, said Leff, “it always is a difficult choice for a company’s directors to determine how much information should be revealed. That is particularly true when you are dealing with a financial institution, where public confidence is so important . . . . The unvarnished truth can sometimes cause a run on a financial institution.”
Banks and savings and loan associations also face other restrictions that can limit the information a shareholder can receive. These institutions, for example, are prohibited from revealing the specific findings of examinations by regulatory agencies such as the Federal Deposit Insurance Corp. or the state Department of Banking.
Although Huntington S&L; reported the amount of its losses in a timely fashion, it didn’t tell shareholders until late December that they stemmed from unauthorized and highly risky investment activity by the S&L;’s former controller.
The S&L; also disclosed in December that the improper investments and the losses stemming from them ultimately will total at least $2.9 million and were the reason they had fired the S&L;’s controller in June and refused in October to renew the then-president’s employment contract.
James Marks, Huntington’s current president, who was not with the association when its problems occurred, said he believes Huntington officials did everything they should have and could have done.
“As a company that is required to make reports, we do issue quarterly statements that disclose our financial information,” he said. “But I don’t think there is any requirement for any kind of company to report that, ‘Oh, by the way, somebody exceeded his authority on securities and we had a loss.’ We are only required to report that kind of detail in our proxy.”
Marks said that brokerages that buy and sell Huntington’s stock knew from the S&L;’s financial statements that there had been a loss on investments and were able to get that word to potential investors.
But “if we had released news in June that the controller had been fired, he could have come in and sued us for libel,” said Marks. “By (waiting and) releasing it as part of the information required in our proxy, we have some legal protection,” Marks said.
