A few weeks ago, Berkshire Hathaway said in a regulatory filing that federal investigators had requested information several times dating back more than a year related to dealings between General Reinsurance Corp.—a wholly owned subsidiary of General Re Corp. and an indirect wholly owned subsidiary of Berkshire—and Reciprocal of America, which was placed into receivership in January 2003.
In that filing, Berkshire—the $63.4 billion holding company run by legendary investor Warren Buffett—said that back in October 2003 the company and four of its current and former employees, including its former president, received subpoenas for documents from the U.S. Attorney for the Eastern District of Virginia, Richmond Division in connection with the U.S. Attorney's investigation of ROA.
The March 1 disclosure was the first time Berkshire announced the October 2003 subpoenas in a securities filing. Back in December 2003, the company sent out a press release stating that the SEC had requested information from the company (see box at right), but there was no mention about a U.S. Attorney request or inquiry. In addition, the earlier press releases did not disclose that four current or former employees were the subjects of the information requests.
So the obvious question making its way through the legal and compliance communities is this: Did Berkshire Hathaway violate Securities and Exchange Commission disclosure rules by waiting 17 months to report the receipt of federal subpoenas?
“Material, Big-Picture” Events
The answer, say legal experts, is simple: no.
Pierce
“There is nothing that says you must disclose the receipt of a subpoena,” asserts Morton Pierce, partner with Dewey Ballantine. “Why rush to disclose something that can be nothing?”
Dallett
“The simple fact that some regulator sent a subpoena meant nothing,” adds Matthew Dallett, partner with Boston-based Palmer & Dodge. “You’ve got to know what’s going on.”
Rather, say experts, companies must evaluate and consider the subpoena’s materiality when making a disclosure determination. But even materiality is open for debate. “There is no requirement per se to disclose something because someone [else] might think it is material,” adds Dallett.
For sure, reporting the receipt of a subpoena is also not one of the required disclosure items under the revised and expanded 8-K filing rules, which became effective in August of last year. The Berkshire subpoenas took place in October 2003, or 10 months before the expanded rules went into effect.
The same is the case with 10-Q and 10-K filings. According to Dallett, public disclosures in annual and quarterly reports are limited to reporting of what he calls “material, big-picture” events, such as a significant lawsuit.
Coffee
According to Columbia University law professor John Coffee, most companies generally won’t reveal inquiries in a regulatory filing until they receive a “target letter” from the U.S. Attorney or a Wells Notice—which he calls the civil equivalent of the Target Letter—from the Securities and Exchange Commission. Even so, says Coffee, many companies don’t disclose the receipt of Wells Notices.
Volunteering Information
But that doesn’t mean that all companies hold back on the disclosures. According to Coffee, a growing number of companies of late have chosen to announce the receipt of subpoenas from authorities in press releases or periodic filings. Such disclosures in press releases are voluntary. “It is moving to an earlier point,” acknowledges Coffee. “It’s not an SEC rule.”
Indeed, as mentioned above, Berkshire Hathaway did send out press releases regarding the SEC information request and the Spitzer subpoena.
Coffee suggest that the tougher regulatory environment—combine with New York State attorney general Eliot Spitzer’s aggressive tactics—have inspired companies to reveal earlier events that they may have waited longer to report in the past. “Anyone who is getting a subpoena from Spitzer is disclosing it,” insists Coffee.
For example, on Feb. 14, American International Group made an announcement that subsequent to its conference call on Feb. 9, the insurance giant received new subpoenas from Spitzer’s office and the SEC “relating to investigations of non-traditional insurance products and certain assumed reinsurance transactions and AIG's accounting for such transactions.” AIG has already paid $126 million to settle federal charges, and the company in also one of a number of insurance companies named in a civil lawsuit by Spitzer against Marsh & McLennan Cos. Inc.
On Feb. 8, Marsh & McLennan also volunteered that the Department of Labor had served the company a subpoena seeking documents pertaining to services provided by MMC subsidiaries to employee benefit plans. And two days later, MMC announced in a regulatory filing that its Mercer Investment Consulting business received a letter from the West Virginia Securities Commission seeking documents relating to services provided by Mercer Investment Consulting and related Mercer entities to the State of West Virginia and its Public Retirement System.
Beyond Spitzer
But targets of NY AG Spitzer are not the only companies to recently announce subpoenas or other instances where government authorities are seeking some sort of information that is not obviously material.
A good example is Citigroup. On Feb. 28, the day before Berkshire announced the 2003 subpoena, the world’s largest financial services company said in a regulatory filing that the SEC is conducting a non-public investigation. The company it believes the probe originated with the company's accounting treatment regarding its investments and business activities, and loan loss allowances related to Argentina in the fourth quarter of 2001 and first quarter of 2002.
“In connection with these matters, the SEC has subpoenaed witness testimony and certain accounting and internal controls-related information” for the years 2001 to 2004, the company added.
And last week, Ingram Micro, an information technology distributor, said in its 10-K it received an informal inquiry from the SEC during the third quarter of 2004 related to certain transactions with Network Associates—now called McAfee Inc—from 1998 through 2000. It also said it received subpoenas from the U.S. Attorney’s office for the Northern District of California in connection with its grand jury investigation of NA.
Also last week, MBIA issued a press release announcing that it had received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information related to the reinsurance agreements it entered into in connection with the loss it incurred in 1998 on bonds insured by MBIA Insurance Corp. that were issued by Allegheny Health, Education and Research Foundation. These matters are currently under investigation by the SEC and the New York State Attorney General's Office.
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