TRANSPARENCY TUESDAY: Can't beat the SEC -- on the football field or in the public records field



The SEC is once again the champion. And we're not talking about Alabama's Monday night BCS victory.

We're talking about the U.S. Securities and Exchange Commission, which -- when it comes to archiving incredibly useful and revealing documents -- may be the best friend a business reporter has.

If you are reporting on the activities of any private company, it's essential to know your way around the federal regulatory agencies -- and the courts -- with which those businesses interact. Because even though freedom-of-information laws do not apply to private companies, they work just fine on the government agencies that are privy to those companies' secrets.

You'd be hard-pressed to find a better road map for business reporting than the work of Kent State University graduate student Doug Brown. Brown's digging into publicly available documents for The Daily Kent Stater and its website, kentwired, revealed that the Ohio university came thisclose to naming its basketball court after a $1 million donor who'd been successfully sued by the SEC for involvement in securities fraud scheme.

According to the SEC -- whose documents Brown helpfully linked as part of his coverage -- Kent State benefactor Jason M. Cope was one of four co-defendants found liable for selling nonexistent shares of stock by a U.S. district court in August 2001. The defendants were ordered jointly to pay $19.4 million in restitution, interest and penalties.

As a result of the judgment, Cope was disqualified from working in the brokerage field by FINRA, the Financial Industry Regulatory Authority, and in 2003 his brokerage licenses were suspended after he failed to appear for an interview with industry regulators, according to FINRA records that accompanied Brown's report.

Apparently in response to the Kent Stater's digging, the university announced Jan. 6 that Cope was withdrawing his donation, and canceled a ceremony to unveil "Cope Court."

The SEC and FINRA are separate entities with distinct roles, and it's helpful to understand a bit about how they operate.

The SEC is a federal government agency, while FINRA is a nonprofit entity set up by the financial services industry (the National Association of Securities Dealers) to police itself, comparable to the way a state Bar Association polices the legal profession.

FINRA regulates the conduct of securities brokers and the firms that employ them, and it processes complaints by investors through panels of private arbitrators. The SEC enforces federal laws against securities fraud, and it can pursue civil remedies (by suing in federal court, as happened in the Cope case) or by working with the Justice Department to bring criminal charges (or sometimes both at once).

FINRA operates a website, BrokerCheck, that is a must-visit for anyone writing about a person in the securities field (or thinking about doing business with one). It will disclose, among other facts, where a broker is and has been employed, what licenses he holds, and whether his record contains any "events" -- which include license suspensions or revocations.

The SEC website includes a searchable "Investment Adviser Public Disclosure" section with some of the same information that FINRA keeps -- but that is just the beginning. Because in addition to regulating the financial services representatives who buy and sell stock, the SEC also regulates the companies that issue the stock -- everyone from Microsoft to Wal-Mart to Starbucks.

The reports that these "publicly traded" companies must file with the SEC are exhaustive. And they are all available online through the Commission's "EDGAR" database. Weeding out irrelevant search results takes some skill, and the reading can be tedious -- but for a journalist, it can also be exceedingly rewarding.

In addition to yearly and quarterly filings that provide a snapshot of their finances and management, companies must also disclose any significant changes in their operations that might cause investors to run for the exit door. It was through SEC filings that Kent State reporters learned of Cope's role in brokering investments for a New York-based medical device firm in 2003, a time when he was supposed to be banned from involvement in the securities industry.

The EDGAR database should be an early-and-often visit for anyone who is backgrounding a business executive, because a simple name search can reveal the boards on which the executive sits, the compensation received, any major legal or regulatory actions in which he is involved -- and much more.

Reporters accustomed to the (relative) openness of public agencies may at first be frustrated at the opaqueness of private businesses -- but with a little persistence, government databases can answer essential questions and lead to the discovery of game-changing news.

 

 

Tagged: public records, Transparency Tuesday