May 10, 2023
On May 5, The Capitol Forum hosted a conference call with Michelle Leder, SEC filing expert and founder of footnoted*, to discuss risks facing regional banks and their SEC disclosures. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning. Thanks to everyone for joining today’s conference call. Sorry, we had a slight technical difficulty getting set up. I’m Teddy Downey here, Executive Editor at The Capitol Forum.
And with me today is Michelle Leder. Her video, unfortunately, is not working, but we’ve got a nice picture of her here for you. She’s the Founder of footnoted.com, a site devoted to SEC filings. And Michelle authored the book “Financial Fine Print: Uncovering a Company’s True Value”. I just can’t say enough about how great Michelle’s work is when it comes to sort of the hidden details in SEC filings. Today, she’s going to talk with us about her findings from looking into the 25 largest regional banks to see how their disclosures have changed over the past year.
Just a quick reminder, if you’ve joined the presentation using your computer speaker system by default. But if you preferred to join by telephone, just select telephone and the audio pane and the dial in information will be displayed. Also, you can either enter questions in the question bar or you can email us at firstname.lastname@example.org. That’s email@example.com. And we’ll read your questions anonymously.
So with that, Michelle, before I kind of jump into these questions, maybe you could just set the table for us about the past few months and the difficulties of being a regional bank, to set the table for our little discussion here.
MICHELLE LEDER: Sure. Well, first, I want to thank you for having me on. It’s a little early here in LA, and I’m going to blame that on the technical problems of not getting the video working. Maybe not enough coffee yet. But I appreciate you having me on to talk about this. And I think there’s a lot of interesting things going on.
Obviously, I look at things through my particular lens, which is looking at really diving into the SEC filings. And while I don’t focus specifically on banks, this is kind of interesting for me because I began my career way too long ago covering small banks for a small newspaper in Florida. So banks have always been sort of an early sort of common interest for me. In fact, I like to say that I got my start reading SEC filings and really diving into SEC filings by covering the small banks that they were covering in Florida, Key Florida Bank, which no longer exists.
And what was really interesting to me is that the annual report was talking about how great the bank was doing and everything. And there was a teeny, little footnote in there that said something to the effect, like, we’re being investigated by the SEC, the DOJ, the Resolution Trust Corporation. I think there were a couple of other alphabet regulators in there at the time. And really it was a striking moment for me because it was the first time that you saw that companies would say one thing sort of publicly. And then there was this little, teeny footnote buried. So I can’t say that that’s the exact origin for Footnoted, but it’s pretty close to it, that part of it.
TEDDY DOWNEY: I thought that was a great way to set the table with your banking expertise. And you’ve written about some of the clues in SEC filings in Silicon Valley Bank’s filings leading up to SVB’s collapse. Can you maybe talk a little bit about what you found when you were looking through Silicon Valley Bank’s SEC filings?
MICHELLE LEDER: Yeah. I mean, I think that was a really interesting situation there because Silicon Valley Bank filed their proxy statement exactly a week before they went out. They filed it on March 3rd and a week later—and I should be clear, there were a couple of interesting clues there. ‑First of all, they filed their preliminary proxy statement for those other SEC filing geeks that are out there. This is the difference between a pre 14A and a DEF 14A. the DEF is the Definitive Proxy Statement, DEF 14A is the final proxy statement. Companies can also file a pre 14A.
What’s interesting here is that Silicon Valley Bank was not in the practice of normally filing pre 14A’s. By March 3rd, they normally had filed their definitive proxy statement. So that’s sort of an interesting clue. Again, not like that clue would have told you, you know, this is really—I should step back a minute and talk about when you’re looking at clues in SEC filings, you’re trying to build a mosaic. It’s very rare, in my 20 years of reading SEC filings, that I found one thing and it’s like, oh my God. This company is about to go under. It’s all these little clues that you kind of knit together as if maybe you’re sewing a sweater or taking a much closer look. And this, of course, should be done in tandem with the financials. But these clues can often be pretty interesting and pretty important.
So they had filed a preliminary proxy statement, and the last time they filed the preliminary proxy statement was quite a few years ago. And then before that, they had even within a decade before—I think the last the last time they filed the preliminary was in 2018 or 2019. And then before that, they had filed a preliminary in 2009. So they were not in the habit of doing that.
But what’s really like getting into the meat of it, what they disclosed in there, was that for the very first time—and I’m guessing this had something to do with what they were trying to figure out, the lawyers and disclosure and everything like that, was that their Chief Risk Officer, someone who had been there for quite a long time, had stepped down in April of 2022.
Now, again, the company had sort of disclosed something akin to that back in January when they put out a press release on January 4th announcing a Chief Risk Officer. But before that, they had not, you know, there was the assumption that the bank was working with the Chief Risk Officer. And this is a pretty critical piece of information. Because under federal law, any bank of over $50 billion in assets is required to have a Chief Risk Officer. And if you look at the Fed report that came out last week, they talk a lot about the Chief Risk Officer and the lack of a Chief Risk Officer.
So the bank knew that they didn’t have this. Obviously, it wasn’t a secret to insiders at the bank that they didn’t have a Chief Risk Officer, that this woman had left in April. But they chose not to disclose it really to their investors in any real way until a week before the bank went under. And I think there’s probably going to be a lot of plaintiffs lawyers that are looking at that and that disclosure, but that’s not part of today’s discussion at all.
Other things that you saw in the filing were that the Risk Committee, which is the committee made up of the Board of Directors, had met 18 times in 2002 compared to seven times in 2021. Any time you see that kind of like large number of meetings, right? I mean, no one likes meetings. And certainly these board members were doing other things. This is not their full‑time job. And when you have 18 meetings of a Risk Committee in one year, that could kind of a big—I would call that a pretty strong red flag there. But again, that was not something that was disclosed. That was something that you’d find in a proxy statement.
And then the Chair of the Risk Committee was new. She had been on the committee as a regular member previously. But if you look at her profile, it showed no real background in risk management. So you have a bank that is kind of having a problem, no Chief Risk Officer. The Chairman of the Risk Committee is maybe okay. Two of the seven members of the committee were new members. And then four of the seven members, while certainly accomplished, if you look at their profiles, you know, we’re not saying that these were unaccomplished people, but they didn’t really have real risk management experience.
So this is a really important committee at banks. Less so, you know, really unimportant at many other companies, but banks in particular, the Risk Committee is where you want to really drill into the filings there and really understand what you’re looking at.
And I think also what’s really important is sometimes, you know, when I’m looking at a filing, what isn’t there and is sometimes more important than what is there. So, Silicon Valley Bank was filing quarterly filings, as they do. And they had a very nice presentation when they filed their quarterly filing. So on, 4/21, which is roughly a week before their Chief Risk Officer left, a woman by the name of Laura Izurieta, she was listed in the filing that they put out with their earnings, with their first quarter earnings, as the Chief Risk Officer. And then when they released their earnings on 7/21, a couple of months later, she was suddenly missing. There was, again, no disclosure of her departure until March 3rd of 2023. I can’t really emphasize that enough, that suddenly someone’s there, suddenly they’re not there. That’s a huge thing to be paying attention to. And again, this information is there for you to find, but it’s not necessarily so easy. Different companies present it in different ways. It really is quite a mosaic. And so, those are sort of some of the key things that I noticed in the Silicon Valley bank filings.
TEDDY DOWNEY: Perfect. And then what about Signature and First Republic?
MICHELLE LEDER: Yeah, Signature and First Republic, it was harder with them because their filings are not as accessible. I mean, no signature. And there was no proxy statement filed for First Republic for the past year. So that was a harder thing. The only proxy statement that we had was from 2021. And, of course, that was really before the big problems surfaced. And also, no significant filings for Signature. And so, I don’t know, you know, not filed with the SEC. I did see a letter or a shareholder letter from board members that I saw online for signature, but less easy with that. I would say that the Silicon Valley Bank example is really pretty key. I mean, finding some of these different signals were pretty interesting there.
And I think if you look at that Fed report from last week, we learned that, again, going back to the Silicon Valley Bank situation, they noted in their report that the Chief Risk Officer Izurieta was the only executive whose pay was reduced in 2021 for not meeting risk management expectations. So supervisors of the bank began notifying noticing problems in late 2021, in December of 2021. And she was gone in April. So whether she was gone because they realized that she wasn’t doing the job, or whether she was like I’ve had enough of this and this is more than I want to deal with, we don’t obviously know. And certainly won’t open the filings. But I think that there’s an interesting argument to be made that there’s all these like various clues. I wish there were similar clues for Signature and for First Republic. I haven’t been able to find those filings in any comprehensive way yet.
TEDDY DOWNEY: That’s okay. There are not always red flags before the things blow up, at least in their filings. And what about a few of the other banks in the news? Like PacWest and Western Alliance?
MICHELLE LEDER: Yeah, I looked at PacWest. I mean, the stock fell like 50 percent yesterday and it’s lost about 85 percent of its value since mid-March. I think it’s up this morning in pre-market trading because JPMorgan Chase put out a brief basically saying that some of these smaller banks that had really been hit hard, had taken a beating, an unnecessary beating. But you look again, I mean, it’s sort of like wash, rinse, repeat. What is the risk? The Risk Committee is a key committee of any bank. So, you ask yourself who is on the Risk Committee? Who is the Chairman of the Risk Committee? Do they have experience to be Chairman of the Risk Committee? Do they have relevant experience to be Chairman of the Risk Committee?
You look at PacWest Bancorp, and they have a new Risk Committee Chair. He’s the former Chairman of the bank. So he certainly has experience in the bank. But again, this is a very unique and specific experience. He also sits on two other company boards and two other private boards. So, Risk Committee in general, Risk Committee Chairmen are often paid extra, similar to the Audit Committee, because these are more significant board memberships. It’s not like sort of dial it in type of thing. If you’re the committee chairman, it’s a lot more work than if you’re just on the Human Resources Committee, let’s say. And so they pay extra for these and hopefully they’re getting good, talented people.
Are there enough people who’ve served? I mean, there’s quite a lot of banks out there. I mean, certainly regional banks, hundreds of them. Are there enough qualified people who know enough about bank risk to serve? If you just look at banks that are over $50 billion and are required to have an independent Risk Committee, are there enough qualified people to serve as Chair of the Risk Committee? I don’t know. Someone could probably figure that out. I haven’t taken a deep dive on that, but I think it’s an interesting question to ask.
You know, they have this regulation of requiring that all banks over $50 billion in assets have a Chief Risk Officer. And that’s a really important—not a Chief Risk Officer, I’m sorry, an independent Risk Committee. And so this is an important role. And I’m hoping that there’s enough people that are qualified to fill that or else there could be a lot more pain.
And I should also say, look, some of this is there’s certainly been stories in the news about the shorts, and there was a lot of talk yesterday, you know, a prominent law firm coming out and talking about how short selling, there should be a moratorium on bank stocks. Walker Lipton coming out and saying there should be a moratorium on short selling on banks stocks. There’s other stories about short sellers making billions of dollars on these trades in the last couple of, two months or so.
So, there’s a lot of talk about other things that can be done. Because once sort of the train starts running, it becomes sort of a confidence game. So did anyone think, I mean, Silicon Valley Bank stock was trading at, what? $100 a year? I’m sorry, over $400 a share? I mean, did anyone think that it would go to zero? That was the sort of thing. And I don’t mean to take it lightly and laugh, but that type of thing. So once they fell, then it’s like who’s next? Oh, and then Signature fell, okay. And then who’s next? First Republic. I feel like all of these banks, this was like these were the banks that advertise in many of the major magazines. Like through The New Yorker. I mean, how many times do you flip through The New Yorker and you see ads for the First Republic? I felt like it was every week. And Silicon Valley Bank also, very prominent banks. So nobody thought that this could happen.
But then it becomes a question of like, well, if it can happen to PacWest and SVB and it can happen to Signature and it can happen to First Republic, who’s next? PacWest is certainly not as well of a known bank. It’s prominent out here in in my neck of the woods in LA. And I don’t mean to imply that this is going to happen to them. But there are things that you want to look at from the filings there, signals. And I would say is the Chief, is the chair of the Risk Committee, someone that seems experienced?
And the other thing that I thought of with PacWest that was kind of interesting, again, kind of rinse, wash, repeat. How many times did the committee meet in the past year? We saw that at Silicon Valley Bank, the Risk Committee met 18 times in 2022. At PacWest, they only met four times. That seems to me like maybe that’s a little, you know, I don’t know what the right number is, right? Maybe it’s… ‑it’s some number. Not having sat on that board, I don’t know. But I would say probably four seems a little too few at a time when things are changing as rapidly as they are. You know, I can guarantee you that that Risk Committee has met more than probably four times in the past week lately, trying to figure things out.
I would also note that the Chief Risk Officer of PacWest is also the Chair starting last July, I’m sorry, last June, at the California Bankers Association, which is a trade lobbying group. And so, on his LinkedIn profile, that’s subscribed as a full time job. So is he full‑time jobbing as the Chief Risk Officer at PacWest and also full‑time jobbing at the California Bankers Association? That’s kind of, you know, things like that.
And LinkedIn can also be your friend. I mean, one of the interesting things that was reported after the fact was that the Chief Risk Officer of Silicon Valley Bank actually didn’t change her profile on LinkedIn until after March when they disclosed that there was this change in Chief Risk Officer. So she went almost eight or nine months, basically not disclosing that she was no longer Chief Risk Officer. Had you looked at her LinkedIn profile, you would have thought she was still the Chief Risk Officer of Silicon Valley Bank. So interesting things going on there. Sorry, I’ll take a break for a second and take a sip of water.
TEDDY DOWNEY: No, no. And then anything additional on Western Alliance?
MICHELLE LEDER: Yeah, I mean, Western Alliance, they just filed their proxy last week. That was relatively new. And what’s interesting here, you know, we’ve just come through a period where we’ve gotten through a lot of these proxy statements. For the most part, banks are on a December 31st calendar year. And the proxy statements were due on May 1st. So due earlier this week. So you have a whole bunch of first proxy statements to plow through, which is why we kind of set the timing for this webinar to talk about some of the things that I like to look at. The information is fresh. You can look at it. And it’s yours for the picking there.
So, at Western Alliance, the Risk Committee met seven times in 2022 versus eight times in 2021. Two of the four members on that committee are new to the committee and one was just added to the board. So it’s not clear if the risk committee had only three members in 2022? Because they talk about a member of the Risk Committee, but she was only appointed to the board last month. And then, three of the five members listed on the Risk Committee for 2021 have either left the company by not standing for reelection or they stepped down from the committee.
So things like that, you see this kind of turnover. I mean, what you want is you want a committee that’s meeting regularly. I don’t know, again, what is regularly? Is it four meeting? Probably not. Is it 18 meetings? Probably not. I would say either of those numbers are probably a bad sign. You would want to be reviewing this several times in a year. Maybe the right number is eight, maybe eight to ten, let’s say. And four is way too few and 18 is way too many. That really sounds like a problem. So I think you want to see like regular meetings. You want to see a good working group. You don’t want to see a lot of turnover. And these are important things to be paying attention to. And you can look at them just by spending some time on the proxies.
Again, I want to make clear that this type of thing, this is in some ways like the blind man and the elephant in a sense, that old adage. But we’re only looking…—I’m only…—my focus is on the SEC filings and what the SEC filings are going to say. There’s other people who won’t make an argument on the numbers and what the numbers are saying. In some cases, what I’m reading about, because I don’t look at the numbers as closely as some other people, is that the numbers have been fine at a lot of these banks. And it’s just been sort of this confidence game. So, you know, we’ll see.
TEDDY DOWNEY: And then I know you’ve looked at some of the larger banks. Did this sort of digging through filings for the big banks tell you anything about them?
MICHELLE LEDER: Yeah, I mean, it’s hard. Look, my general rule of thumb is the larger the company, the better the lawyers, the better the making sure every “i” is dotted and every “t” is crossed, blah, blah, blah. You know, it’s hard to find. Like using this, I looked at JP Morgan Trust, for example. Their Risk Committee met eight times in 2022 versus seven in 2021. So that seems like, what did I say before? I said eight and ten? It seems about right. You know, Bank of America, their Risk Committee, met eleven times in 2022 and twelve in 2021. Citi, they met sixteen times in 2022 versus fifteen in 2021. Bank of New York, they met five times in 2022 and six times in 2021. And then you have First Horizon, which has also been in the news because of this whole thing, they met eight times in 2022 and 2021.
And I think, you know, I want to stress like finding these things for each bank is incredibly time consuming. Look, I spent a good amount of time trying to find filings for Signature and for First Republic, and I came up empty. I looked on the New York State banking site and I was looking on the FDIC site. Signature Bank’s website no longer really exists. So there was no link in the SEC filings. First Republic’s SEC filings were limited on that part of that site.
So finding this, and it’s not always at the SEC. And then once you actually get your hands on the document, these documents are not carbon copies of one another. Whereas, like a 10-K, for example, is pretty similar from company to company to company. The proxy statement has a fair amount of variety in them in the sense that they can look very different. They can be organized very differently. The Risk Committee could be called something different from bank to bank to bank. I mean, in general, the word risk is usually in the name. But sometimes, for example, it’s called the Enterprise Risk Committee or sometimes it’s called something else. So finding all of this, you have to figure out the correct name of the committee before you can start searching through the proxy and figuring that all out.
Also, some banks show this graphically. They’ll show how many meetings each committee had and break that down in the proxy. The Audit Committee met this number of times. This is the key functions of the Audit Committee. Same thing for the Risk Committee. And sometimes you have to look—like in one of the filings that we look at, First Horizon, they actually, instead of presenting it in a way that you can easily find it, they actually spelled out the number. They met eight times and they spelled out the number eight in there. And just like, come on, guys. This just seems like, you know. So it can be really frustrating trying to pull this apart. It’s kind of like a dental cleaning in some way. But the bottom line is that the information is there and it’s worth going hunting for.
And I think I want to make a couple of points and I want to leave some time for questions when we have a couple of questions there, Teddy. But traditional risk scores, I mean, like this product [28:02] traditional risk scores, artificial intelligence and this and that. This is not the type of thing that they’re factoring in there. You know, if you looked at Silicon Valley Bank’s risk score on several different platforms, it was high before the bank failed.
So, it’s not always—I wish maybe there is some way to do it—apply AI to this. But this is the type of thing I think where the human brain still has an advantage over what AI can offer. Because you’re having to know what you’re looking for. It’s different when you’re programing for something and say, finally this. But things are in different places. And I think that this is still a place where your time and the human brain can provide some kind of advantage.
And I think you need to know. I mean, obviously, you can apply some of these other companies. We’re talking about today because of the banking issues. But you need to know what’s important in particular companies, right? I wouldn’t look at Apple filings—they filed a 10-Q yesterday—and look for the Risk Committee. It’s not as significant for Apple. Certainly there’s risk. There’s climate risk, some other risks like that. But for banks in particular, you really want to be focusing in on this Risk Committee and the Chief Risk Officer. And what he or she, what their background is, whether they’re actually there is kind of a key point. And you need to know what you’re looking for. You know, if you see a Risk Committee that looks like it’s a rubber stamp committee that doesn’t have a lot of experience, I would certainly be paying pretty close attention to that, especially in this kind of environment, because, yeah, it’s a little dicey out there.
TEDDY DOWNEY: Before we get to audience questions, we have a few. If you have a question for us, please email firstname.lastname@example.org or you can shoot us a question in the chat app. You mentioned when you were doing this years ago, you would look for signs of government investigations and other things like that in addition to these Risk Committees. What other red flags do you look for? And I’m also kind of curious like when it comes to SEC filings, when it comes to these government investigations in particular, if you notice a change in sort of the significance of those—because I would say when I was doing this 20 years ago, if a company announced that there was a major government investigation into them, that would be big news. Like investors didn’t want to invest in a company that had an FTC investigation or SEC investigation. But I’m wondering if that has changed sort of over the course of your career. So, it’s a two‑part question, but I wanted to get your thoughts on that.
MICHELLE LEDER: Yeah, I think that any time there’s an investigation, you run that and it’s certainly an issue, right? Nobody wants to, I mean, think about your own. If you find out that you’re being audited from the IRS, is it ever a good thing? Oh, this is no big deal. Or is it a stressful situation? Hopefully. I’ve been lucky so far. So hopefully, my luck continuous.
But it’s that type of thing. I mean, if you suddenly got a notice from the DOJ that showed up at your door. I mean, think about how you would react. So, of course, it’s something that, whether it’s a banking regulator, the SEC, the DOJ, the state banking regulator, any of those things could sort of spark a problem. How companies excludes them though, I mean, it’s really up to is this a material issue? Oftentimes, just getting a letter—it’s interesting how you see, having read SEC filings for as long as I have, and it sounds like as long as you have, Teddy—what’s interesting is how different companies treat things like this.
Like I’ve seen companies talk about how disclose in any case that they’ve received a comment letter from the SEC. And a comment letter is just basically, hey, we have some questions—I wouldn’t say casual, but it’s not sort of pants on fire sort of situation. The SEC sends probably thousands of comment letters a year. And it’s just basically like we have some questions about the way you did this or the way you did that. Can you explain more information? And in general, it’s usually resolved and it doesn’t become, you know, it doesn’t escalate into a big thing. And then you have a situation where you have companies that basically go out of their way to basically hide their disclosures.
One of my favorite moments in SEC filings, and this is probably from a decade ago now, was a filing made by Goldman Sachs. And they actually use the language, we have received an invitation to respond to the Department of Justice. And I’m like, hmm, invitation to respond. That sounds like a subpoena, right? Like the Department of Justice doesn’t like send you out an invitation and say, hey, come to my 40th birthday party. It’s going to be a blast, right? Like, if you get a letter from the Department of Justice, to the best of my knowledge—and again, I would like to say I’m not an attorney—it’s not usually a voluntary thing. It’s not like, you know, if you happen to get the time to respond to this, can you give me an answer?
So, I think it’s interesting how companies use language sometimes to disclose things and how they choose to disclose things. I would argue, especially going back to the Silicon Valley Bank case, there was a very deliberate decision not to disclose that the Chief Risk Officer left. They knew that she had left. They knew that, you know, they were going out of their way not to disclose that to investors. And I would argue that she was a named executive and that they should have disclosed that in the 8-K. It could have been a simple 8‑K. Our Chief Risk Officer left. You know, every day of the week, there are like literally hundreds of these 8‑Ks, so-and-so has left the company. You know, the company’s looking to replace them. This is the person who’s filling in the job in the interim. It could have been like a two sentence 8-K and that would have been done with. But they made a deliberate decision, it seems, to hide this information. I think you know, why they made that decision would come out in some plaintiff’s lawsuit. But yeah, that was a long winded answer, sorry.
TEDDY DOWNEY: No, no. Were there any other—just given what we’ve learned in the fallout from these banks, any other things besides that departure that you think should have been disclosed? And you mentioned there’s legal risks to sort of hiding or shareholder lawsuits and things like that to sort of hiding this stuff. I’m just curious if you think there are other examples of stuff you think that probably should have been disclosed, just given what we’ve learned?
MICHELLE LEDER: I’m sure there are. I haven’t—part of the problem with this is if it’s not disclosed, you don’t know about it. Like sometimes it comes out after the fact and it could be like months or even years after the fact. You read about it in the lawsuit. You know, disclosure is a fine line, right? Some of us might choose to disclose a lot more often. And some of us choose like, you know, the version between the TikToker and a person who has like a locked VPN. Disclosure is a very distinct thing. And I guess different people do it in different ways. And that applies in different companies too. Like I said, some companies will disclose a comment letter. And other companies will go out of their way not to disclose a DOJ subpoena or will disclose it in some footnote to a footnote to a footnote. So, there’s a wide range out there and it’s challenging. So, yeah.
TEDDY DOWNEY: And we’ve got a few audience questions here I want to get to. The first one here is are there too many filings? If everything is an 8‑K, then how do we differentiate something meaningful from something routine?
MICHELLE LEDER: You know, I don’t think everything is an 8‑K. I think there are a lot of 8‑Ks, I guess. It really depends again on a company-‑by-‑company basis. I don’t think everything is an 8‑K. Nor should everything be an 8-K. And I guess it just means like what do we mean by everything? I mean, if it’s a pretty clear rule and someone is the executive officer and they step down, that should be an 8-K. That’s an important piece of information for investors to know. I mean, basically, you know, 8-Ks sort of—a lot of people feel that 8‑Ks are like, oh, it’s only material events. That’s actually not the definition of an 8-K. It’s really like news, not in the sense of like a press release. But it’s meant to be anything that the average investor might want to know about the company. And so I would always err, you know. Look, I went to Brandeis. And the model is like [inaudible] most parts. I would always err on the side of more disclosure than less. But I’m not running a public company. Maybe if I was running a public company, I would feel different. I don’t know.
TEDDY DOWNEY: Yeah, I tend to think there are too many. You know, you can always just not pay attention to the ones that aren’t a big deal.
MICHELLE LEDER: I mean, I don’t see a lot of BS in 8‑Ks, to be honest. I look at a lot of 8‑Ks, especially like on Friday night. We have a product called the Friday Night Dump that just focuses on those filings that are made after 4 p.m. on Friday, which is when companies tend to take out the trash. There’s a window from 4 p.m. to 5:30 when the markets are closed, but the SEC remains open. And that’s when you see companies dumping all sorts of stuff. And I’ve got to tell you, I mean, I look at a lot of these things. And I’m like, oh, probably they don’t really need to disclose this. You know, that’s my perspective, right? I mean, like maybe a securities lawyer would have a different take on it, you know.
TEDDY DOWNEY: Yeah. And another question here, sort of similar to the one I asked earlier. But do you think any of these regional banks committed securities fraud? And if so, why? You know, it kind of gets back to the question I asked earlier, but it’s another way to ask it.
MICHELLE LEDER: Yeah. You know, I am not a lawyer. Securities fraud is a legal question. I think that will be decided in the courts. I think we need to talk about the insider transactions. There’s been a lot written on that. There was a lot of selling going on leading up to this. And that’s another key component. I’m sure, I know the SEC is looking into this. And FDIC is looking into this. I know the DOJ is looking into this. Based on what I’m reading, I’m sure that if there was security—and I know that there’s already been lawsuits against Silicon Valley Bank. So, if there was securities fraud, it will be found. Not by me, but it will be found.
TEDDY DOWNEY: Yeah, it’s totally fair. You know, I think just having looked through some of the stuff that I’ve seen of yours in the past, and I think you’ve written a little bit about Trupanion. That’s a company that we’ve in the past covered very closely, questionable sort of referral programs. Just the some accounting issues. Anything about Trupanion that you’ve been following that might be interesting for our audience to look into, pay attention to? I know it’s not part of our theme here on the banks. But if there is some overlap on that one, I wanted to ask about what you’re thinking there.
MICHELLE LEDER: I haven’t looked at them recently. I tend—I’ve looked at them before, not recently. I got to tell you, like they’re very heavily marketed in vet offices. I have a dog. I took them to the vet the other day. There were a lot of Trupanion signs all over the vet’s. So they’re doing their marketing job. I haven’t looked into their filings recently. So I’m not fresh on those. So I’m going to punt on that one, Teddy.
TEDDY DOWNEY: Got it. Got it. And then lastly, maybe you could just tell us a little bit more about the Friday night dump and anything from last week or anything that’s top of mind from the recent Friday night dump that kind of gives another example of the types of insights that you provide with your newsletter.
MICHELLE LEDER: Yeah, I mean, I think just in general, looking at primarily 8‑Ks that were filed after 4:00 p.m., late on a Friday. You know, companies in general, you know, the number of filings that are made during that 90 minute period far exceeds the number of 8‑Ks that are made during the other ten hours of the day. So, the SEC, I’ll just back up for a second and explain a little bit more.
But the SEC is basically open from 6:00 a.m. Eastern Time until 5:30 Eastern time. And there’s been some calls to change that. Open, I mean, to accept 8-Ks and do proxy statements. Form fours, like three, four and fives, they can file, I believe, up until 10:00 p.m. every day of the week. So I’m just really like the things that I’m paying attention to are really the 8Ks. And you just see things like sudden resignations all of a sudden being disclosed on a Friday night. Like, here’s a company [inaudible]. You know, this was actually an interesting one. Last week, the Metropolitan Bank, whose ticker is MCB. You know, it was a really unusual filing and it came after 5:00 p.m. last Friday night.
The company submitted a loan to its CEO for $780,000 in August, 2016. That was extended into August 2021, right? And the company, their CEO in March, 2023 for $7.46 million, which the CEO used to cover the cost of exercising stock options. And then they went onto say that in evaluating these loans in preparation for its proxy statement, the company determined that both the 2021 and 2023 loans were likely impermissible under applicable law.
So, what’s really interesting here is that the company had previously disclosed the $750,000 loan. It never mentioned that it had given it to the CEO. It said that it made the loan to an executive officer of the company. And that’s kind of a key factor. I mean, if you think back to the Enron days, they talked about they never mentioned that, you know, who these limited partnerships were being run by. But, in the end, it turned out to be the top executive.
So I think when companies kind of leak out their disclosure like that, that’s something that ought to be paid attention to that. I don’t not know much about this particular bank. I definitely think that this was probably part of some of the banking disclosures that you see. You know, banks are being a little bit more careful in the wake of Silicon Valley Bank, obviously, and the whole banking crisis. I think these are, you know, you see sudden director resignations. You see other sorts of unusual option grants.
Another director, I mean, here’s a company Sentinel One, a guy saying he wouldn’t stand for reelection. Okay. Well, that’s not a big deal. That happens all the time. But then the filing also noted that he had resigned from the board immediately. Usually, a director will say they’re not going to stand for reelection. Or they will resign immediately. But not both.
So, you see sort of weird things in the filings. And I think that some of it really is only from knowing my experience and reading between the lines of the filing. The filing is really only telling you the bare minimum of what they have to tell you. And so, it’s important to sort of understand the context and read between the lines in the filings.
TEDDY DOWNEY: I guess you mentioned these, like improper loans. You know, that’s been a story that’s come up in the Journal about these problematic banks is all of a sudden right before they went under, they made big loans to their executives or more insiders at the bank. Like from what you’ve seen, were those like properly disclosed? Or were they disclosed in a timely way, but it just didn’t matter because the bank was already—it was too late for anyone to find out? What’s your take on that?
MICHELLE LEDER: I think it’s definitely like the latter there. I mean, banks will often disclose—it’s kind of like I lived in New York, in Manhattan, right? Like you’d wake up in the morning and you turn on the lights and the cockroaches come running out of everywhere, right? All of a sudden, someone’s flicking on the light and paying a lot closer attention to banks. And so, it’s like the cockroaches are going running. This has happened in other industries before, of course. And right now, it’s the spotlight on banks. And I think that you’re probably going to have a spotlight on banks for a little while longer.
But reading, really digging into the filings, I think that you can get a greater level of comfort with what’s going on. And at least, hopefully, today I’ve given a few tools that’ll help you understand looking at some of these things across the banking companies. You know, the Chief Risk Officer, the Risk Committee, how experienced they are, how often they meet. You can just kind of, you know, if there’s a bank that you care about, this is the type of thing you can just kind of do it over and over again. I mean, it’s not going to be quick because of the way that it’s presented in different filings, but it’s something that you can kind of build out and get a level of comfort with.
TEDDY DOWNEY: Well, Michelle, it’s been so great having you talk with us today. I’ve learned a ton about these. I mean, this is definitely, I’ve read a lot of filings, but I have not done it the way that you do. And I’m always impressed with the work that you do and all the insights that you come up with, and the Friday dump product. And I hope everyone who joined us today has an opportunity to check out Michelle’s work. And I’m sure they enjoyed the conversation today. So thank you so much for doing this, Michelle.
MICHELLE LEDER: Great. Thanks so much for having me on. And sorry again about the video and late start that.
TEDDY DOWNEY: No problem. And thanks, everyone, for joining the call today. And this concludes the call. Have a good day. Bye.