SunEdison (SUNE) filed an 8-K on April 14th with a cleverly worded whitewash of management regarding alleged financial forecasting irregularities. The 8-K was filed upon the completion of an investigation by the Audit Committee and the Independent Directors. The scope of the investigation, as described in the 8-K, was limited to "inquiries into the accuracy of the Company's anticipated financial position previously disclosed to the Board based on allegations made by former executives and current and former employees."
Financial Clean Bill of Health? NO!
The findings of the Independent Directors, whose independence and judgment must be called into question with this 8-K, should not be confused with a financial clean bill of health. The core conclusion of the investigation, as stated in the 8-K, was that "there were no identified material misstatements in the Company's historical financial statements .." The last financial statement was the September 30, 2015 10Q. So they are opining that the financial statements through September 30, 2015 were not materially misstated (see further discussion below). It does not address the period subsequent to September 30th, 2015, when, as we have learned through various legal complaints filed against SUNE, the company was in dire financial straits, unable to pay the margin loan used to partially fund the acquisition of First Wind, teetering on bankruptcy, and misleading (per the lawsuit filed against it) TerraForm Global (NASDAQ:GLBL) into a misbegotten transaction whose cash proceeds appear to have been misappropriated and misused by SUNE.
The conclusion that the financial statements were not materially misstated at September 30, 2015, does not positively impact or delay SUNE's impending bankruptcy in any way, shape, or form. The utter lack of import or impact on SUNE's current situation begs the question why the Independent Directors would feel compelled to reach a conclusion regarding the investigation, particularly when SUNE is confronted by a likely far more wide-ranging criminal investigation by the DOJ and the SEC. Is it a thinly veiled attempt by the Independent Directors to protect themselves by appearing to, belatedly, exercise their fiduciary duties? I do not think that the DOJ or SEC will be impressed.
What is SUNE's Status After This 8-K?
SUNE is exactly the same company it was prior to this whitewash: woefully overlevered, in default under its LC Facility and its Second Lien Financing, in danger of default under its Senior Convertible Notes Indenture due to a failure to make a coupon payment, and with a "pipeline" of projects of questionable value and status.
Its financial woes were further exacerbated recently when Renova Energia exercised its put of 7 million shares of GLBL stock to SUNE (the put is described in this article). Renova Energia disclosed the exercise of the put to Brazilian regulators on April 4th but SUNE has so far failed to disclose this material event in an SEC filing. How could this failure in disclosure possibly be viewed as acceptable by the "Independent" Directors?
Management Has Not Been Fired? Really?
In my opinion, the disclosures that were included in the 8-K, although limited in scope and nature, were still alarming enough that, in combination with the chilling narrative of corporate malfeasance contained in the GLBL lawsuit, they warranted the wholesale dismissal of senior management. My interpretation (others may and likely will reach different conclusions) of the cleverly crafted disclosure, most likely written by the deep in trouble General Counsel Martin Truong, is that the following occurred:
- Management mislead the Board regarding its cash position and its forecasted cash position through optimism and omission.
- Management slowed or halted the payment of accounts payable at the corporate and subsidiary levels in order to forestall bankruptcy and did not disclose this to the Board.
- The failure to make equity contributions to subsidiaries (in a soon to be vain attempt to forestall bankruptcy) and the failure to make timely payments of accounts payable at the project subsidiaries has resulted in legal and financial issues at these subsidiaries (supported by the GLBL lawsuit filing and the default under the debt for equity swap with D.E. Shaw et al).
- Management did not respond or failed to respond in a fulsome manner to the questions the Board raised about various financial issues.
- Management hid the scope of SUNE's financial issues by dragging their feet when responding to queries from the Board.
Despite all of this, the Independent Directors are still hiding from their fiduciary obligations by refusing to recognize and address the management issues afflicting SUNE that resulted in the devastating collapse in both its stock price and the value of its fixed income securities during the last year. It boggles the mind. The "Independent" Directors clearly were kept in the dark by management. So were investors. Yet the "Independent" Directors still refuse to take action.
Scope of the Inquiry
The scope of the inquiry appears to have been very narrow based on the 8-K disclosure. Independent Counsel and outside auditors will only go where and as far as they are directed to go by the Audit Committee and the "Independent" Directors. When the scope is limited, the findings will be limited.
The DOJ and the SEC suffer from no such scope limitations and, in comparison with the Independent Counsel and outside auditors, have almost unlimited resources. They will investigate everything and they have the power of the subpoena. The DOJ has a tried and true playbook for these investigations. Find a small fish. Squeeze hard. Then have the small fish flip on the big fish. Ask Sepp Blatter and FIFA whether it works.
SUNE is already being accused of civil fraud by GLBL and under a plethora of shareholder lawsuits. The SEC enlisted the DOJ because it concluded that grounds existed for a criminal investigation of SUNE. Bulls on SUNE should resist the temptation to pop champagne corks until the DOJ has had its say. Then again, it is far more likely that SUNE will first file bankruptcy before the DOJ finishes raking SUNE across the coals.
Missed Coupon Payment
SUNE failed to make a coupon payment on its 2018 2% Senior Convertible Notes on April 1st. The coupon payment was for a mere $2.6 million. When you start to miss $2.6 million coupon payments, your race is run.
Like Flies to Wanton Little Boys Are We to the Gods
Do not be fooled by this sugary trifle offered up by SUNE's general counsel, who is squirming under the klieg light glare of the DOJ and SEC investigation. He is no longer the master of his own destiny no matter how desperately he thrashes about. This filing may have tasted sweet upon a first read, but it will have the half-life of cotton candy on the tongue and it signifies nothing.
The 8-K filed by SUNE was meaningless with regard to any positive impact on its imminent bankruptcy. It is not a clean bill of health and it is imperative that SA readers are not seduced into thinking otherwise. Sure shorts were crushed today, but this filing will not halt SUNE's inexorable march to the bankruptcy court's doorstep. The stock should be avoided by shorts and longs alike.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am currently long TERP, a yieldco subsidiary of SUNE.
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