August 30, 2006

Number of Late Form 10-Qs Sets Record

A number of major newspapers ran similar stories about how the number of late Form 10-Qs set an all-time record this quarter, the kind of thing that I am convinced would not have been deemed newsworthy “but for” the option backdating scandal. Of course, without Glass Lewis providing statistics, I doubt the media would have been able to dig out the story.

One of the interesting items in these stories is that the SEC’s Enforcement Division says 80 option backdating investigations are underway, but less than 50 companies have disclosed such investigations according to the Glass Lewis study – which begs the question: is there a duty to disclose the commencement of an SEC investigation? Learn the answer in our FAQs about Disclosure of SEC Investigations in our “SEC Enforcement” Practice Area. And we have posted a copy of the Glass Lewis study in our “Rule 12b-25/Late Filings” Practice Area.

Late Filings Lead to Bond Defaults

Yesterday, the WSJ ran this scary article outlining how some hedge funds are relying on late SEC filings as a way to accelerate repayment of outstanding bonds. Particularly scary is that acceleration of payment in one group of bonds could lead to a cross-default – and the forced acceleration of all the company’s bonds. Here is an excerpt from the WSJ article:

“Traditionally, when companies missed a deadline for filing their financial statements, bondholders would look the other way and let the company work out the kinks — even though, technically, the company was in default and bondholders could demand repayment.

But return-hungry hedge funds and other big investors have found an opportunity to profit, thanks in part to a spreading scandal over the practice at many companies of backdating stock-options that were granted to employees as a form of compensation. That practice has come under scrutiny by regulators, and dozens of companies are having to review whether their earnings statements accurately accounted for such compensation — which, in some cases, is delaying their filings.

In one of the largest recent examples, a group of UnitedHealth Group Inc. bondholders last week formally warned the Minnetonka, Minn., insurance company in a letter dated Aug. 25 that it is in default for failing to file its second-quarter report with the U.S. Securities and Exchange Commission. If it doesn’t file the paperwork within 60 days, the group says it has the right to declare the bonds due and payable immediately.

The amount UnitedHealth would have to pay: $800 million, not otherwise due until 2036. Investors would stand to make a quick profit because UnitedHealth’s bonds are trading below face value; if the company is forced to pay full value to redeem them, the bondholders who bought at below par would make a tidy return on their investment.”

Here is how UnitedHealth responded to the default letter, as described in a Form 8-K filed Monday: “On August 28, 2006, UnitedHealth Group received a purported notice of default from persons claiming to hold certain of its debt securities alleging a violation of the Company‚Äôs indenture governing its debt securities. This follows the Company’s not filing its quarterly report on Form 10-Q for the quarter ended June 30, 2006. The Company believes it is not in default and intends to defend itself vigorously. The Company’s indenture requires it to provide to the trustee copies of the reports the Company is required to file with the SEC, such as its quarterly reports, within 15 days of filing such reports with the SEC.”

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