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XM Satellite Radio Holdings (XMSR) filed an 8-K disclosing the SEC has opened an informal inquiry into their “subscriber targets, costs associated with attempting to reach those targets, and related matters during the third and fourth quarters of 2005.” According to the 8-K, those issues are similar to ones underlying securities litigation disclosed earlier.

The interesting thing about the investigation: it doesn’t have to do with accounting and accounting principles per se - the usual domain of the SEC. It sounds more like an investigation of the “soft” information or key performance indicators that investors fall in love with from time to time, when earnings are minimal to non-existent. Remember such metrics as “eyeballs” and “clicks” during the internet boom? The beauty of baiting your investors with “targets” such as these is that there are no consistent standards for preparing such information. You can put your best face on the data with impunity - although that might not always be the case.

Unfortunately for curious investors, we’ll have to wait to see if anything interesting develops in this case. Because it involves non-GAAP issues in corporate communications, XM’s case is a bit reminiscent of the whole “pro forma earnings” issue. That issue brings to mind the time Trump Hotels omitted mentioning the gain from the termination of a lease in discussing operating results, leading investors to believe improvement had occurred where none existed. The Trump case influenced the SEC in its development of Regulation G, governing the use of non-GAAP measures in corporate communications. This SEC probe may find more under the surface than XM has discussed, just as it did with Trump - or it may find nothing at all. Think back to the much-considered investigation of pension assumptions of Boeing, Delphi, Ford, General Motors, Navistar, and Northwest Airlines back in the fall of 2004. We’re still waiting to hear of the outcome of that investigation.

Source: SEC Investigates XM Satellite's Soft Stats