Wednesday, May 30, 2007

Know Nothings

When last we met, the SEC gave a noogie to Hewlett Packard (HPQ) for not revealing that a director who resigned last year had done so to protest a company action.

The rule here is simple: When a director leaves because he thinks something dumb is going on and wants no part of it, the company is supposed to say so and briefly explain the cause of the tiff. But like many simple rules, this one is clumsily drafted and loaded with the kind of ambiguities some enterprising litigator will one day exploit all the way to the Supreme Court, which by then will be composed of nine clones – the Petri dish kind – all blonde and looking suspiciously like Monica Goodling.

For one thing, the rule kicks in only if the director’s dissatisfaction is “known” to an executive officer. You probably think that you know what it means to “know” something, but judges, lawyers, and regulators love to argue about this. In today's SEC filings alone, we found two 8-Ks that show how this happens.

DataMetrics Corporation (OTC:DMCP) filed an 8-K announcing that director, CEO and President Daniel Bertram had resigned but “did not advise” the company of any policy disagreements. So now we're wondering: Is the standard for knowledge of a disagreement "don’t ask, don’t tell,” or should someone ask a departing bigshot if he has anything nasty to say before his limo drives off? Probably that's more than the rule asks for, but what if he looks really mad when he's leaving? And if he hurls a doughnut at the CFO but offers no explanation, do you have to file the smashed doughnut with the 8-K? We thank DataMetrics for giving us so much to think about in the shower.

Then there’s Consumer Portfolio Services, Inc. (CPSS), which suffered the resignation of two directors in one day. The 8-K says the company “believes that the resignations were prompted by the decision of the board's nominating committee not to nominate the two individuals for re-election.” "Believes"? Are they saying these two directors read the draft proxy, found their names missing and resigned with no comment? Another case of silent doughnut-hurling, perhaps?

When it comes to knowing things, it all comes down to how ignorant the law will let you be. On which point we shall gladly defer to Monica.