Thursday, December 28, 2006

Think Different

The stock options backdating scandal is getting monotonous, with 200 companies under some sort of option-y cloud. And now Steve Jobs is back, looking earnest in his long-sleeved black T-shirt as he tries to iExplain some other iProblems with Apple option grants. (We wondered back in October if there was more to the Apple story, so we’re feeling smug.)

After all this backdating, we all deserve a fresh and different scandal for the New Year. So I was overjoyed when I put my thumb into last Friday’s pre-Christmas pudding of SEC filings and pulled out a plum. (I hate these tired seasonal references as much as you do, but like bourbon balls on Christmas Eve, they’re irresistible. See, there I go again.)

Hawk Corporation (HWK) announced in an 8-K/press release that the SEC is raising questions about its "preparations for compliance" with Section 404 of SOX. (That’s the big nasty SOX section that says management has to make sure its internal controls over financial reporting are up to snuff.) The Commission is, it seems, curious about "transactions in Hawk’s common stock on June 30, 2006 by a stockholder that is not affiliated with the Company and the impact of those transactions as to when Hawk would be required to comply with Section 404." The Justice Department is sniffing around too.

This all sounds cryptic at first, but it’s not too hard to figure out what they’re talking about. If a company's "public float" – the market value of its common stock held by outsiders – is below $75 million, it gets to put off compliance with Section 404 for another year. The way the rules work, Hawk's public float got measured at the end of its second fiscal quarter – June 30, 2006, the date of those mysterious stock transactions. Voila. Apparently the SEC suspects Hawk of playing games to make sure its float stayed below the magic number on the magic measurement date.

Everyone's so afraid of Section 404 I don't doubt they’d go to great lengths to stave it off. If Hawk had the clever idea to monkey around with its public float number, I’ll bet you half a dozen fruitcakes some others did too.