Note: This report was released to our subscribers before the market opened on 30-Aug-2016. The original report, including documents we acquired under the FOIA (which cannot be replicated here) are available for free at probesreporter.com under the BOFI ticker.
If we alert you to the existence of an undisclosed SEC probe, that means we filed a Freedom of Information Act (FOIA) request with the SEC on the company in question and have a response, in black-and-white, on government letterhead that supports our statement. Other interpretative guidance and disclosures appear below.
Analyst Summary: The shares of BofI Holding, Inc. (NASDAQ:BOFI) have risen nearly 50% since an 02-Aug-2016 conference call on which the CEO gave an impassioned assurance there was no regulatory risk (The stock was $15.34 at the time). We found the CEO's remarks heavily qualified, and in our view wholly misleading, but that's not how some on the sell-side saw it. As the unexamined "nothing to see here folks" narrative put forth by the CEO took hold, the shares took off and haven't looked back since.
The unanswered question at BOFI --
What communications has BOFI had with the SEC's Division of Enforcement in the past year?
Not only will we explain why we think the CEO's remarks were so misleading, we also present data provided to others this summer in response to their own FOIA requests.
Get ready: We learned BOFI itself was one of the FOIA requesters, as was one of the sell-side analysts who repeatedly stated there is no regulatory risk to worry about. That analyst actually made three requests, but only wrote about one. We'll tell you what people asked for, including BOFI, and what the SEC said in response. The mosaic that forms is not pretty.
Facts of Interest or Concern: As a reminder, in response to a FOIA request we filed on BOFI, in a letter dated 25-May-2016, we first received information from the SEC suggesting BofI Holding was involved in unspecified SEC investigative activity that was undisclosed at the time. In a letter dated 31-May-2016, the SEC then confirmed BOFI's involvement in on-going enforcement proceedings that remain undisclosed as of today. These latest responses represent a change from the last time we researched the company in Apr-2015 and Feb-2016, at which times we received information from the SEC to suggest the absence of recent SEC investigative activity.
The following is a timeline of FOIA requests made to the SEC and responses sent since our response of 31-May-2016.
14-Jun-2016: Mr. Coy Monk of Afton Capital Management files a FOIA request asking for "a list and description of ongoing SEC investigations of BofI Holding, Inc."
21-Jun-2016: Mr. Monk receives a response indicating no such records were found. (Note: This does not surprise us as we do not believe the form of Mr. Monk's request would exist on any company.)
21-Jun-2016: Mr. Stephen Hui, occupation and firm unknown, makes a FOIA request for documents related to investigations of BOFI.
11-Jul-2016: The SEC denies Mr. Hui's request of 21-Jun-2016, over concern their release could " reasonably be expected to interfere with enforcement activities." (The SEC cited Exemption 7A of the FOIA, which protects records related to on-going enforcment proceedings.)
This is the same response we received on 25-May-2016. His response is posted below (you have to go to our website to see the original documents, posted for free).
14-Jul-2016: Mr. Brad Berning (a senior sell-side analyst with Craig-Hallum who covers the company) makes a FOIA request for "all correspondence sent by the SEC to BofI Holding, Inc. or the following subsidiaries, BofI Trust I, BofI Federal Bank, or H&R Block and any responses by BofI Holding or its subsidiaries to you since January 1, 2015 to current."
18-Jul-2016: Mr. Bradley Greer of BofI Federal Bank files a FOIA request for "a list of all FOIA requests received by the SEC between January 1, 2015 and today with response to BofI Holding, Inc., BofI Federal Bank, Ted Allrich, Paul Grinberg, Ed Ratinoff, Uzair Dada, Gary Burke, Nick Mosich, James Court, James Argalas, Greg Garrabrants, Eshel Bar-Adon, Andy Micheletti or John Toila."
22-Jul-2016: Two events occur this date concerning Mr. Berning's FOIA activity:
The SEC provides Mr. Berning with "a comment letter dated May 13, 2015 and the company's response letter dated May 27, 2016 [sic]."
Mr. Berning makes another FOIA request this same day on BOFI. This time he asked the SEC to "please identify if there have been or are any investigations or inquiries by the SEC into BofI Holding, Inc. or any of its subsidiaries since January 1, 2015 to current."
24-Jul-2016: Mr. Berning files his third FOIA request on BOFI in 10 days' time. Specifically, and like a similar request made by Mr. Bradley Greer of BofI Federal Bank only six days earlier, on 18-Jul-2016, Mr. Berning asks for "a copy of all correspondence sent by anyone making a FOIA request to the SEC regarding BofI Holding, Inc. and all correspondence by the SEC to reply to those requests and any related documents."
25-Jul-2016: Mr. Brad Berning, a senior analyst with Craig-Hallum, publishes a research report with the headline, "SEC FOIA Request Reveals No SEC Investigation Into BOFI; Recent Pressure On Stock Creates Buying Opportunity"
Mr. Berning apparently based his conclusion on the SEC FOIA response of 22-Jul-2016, which was sent in answer to his FOIA request of 14-Jul-2016.
26-Jul-2016: Probes Reporter publishes a report questioning Mr. Berning's methods and conclusion. For more, see No SEC Probe Found at BofI Holding? That's Not How We See It (report is posted for free). At the time, we had no idea Mr. Berning had filed additional FOIA requests.
27-Jul-2016: The SEC denies Mr. Berning's request of 22-Jul-2016, asking the SEC to "please identify if there have been or are any investigations or inquiries by the SEC into BofI Holding, Inc. or any of its subsidiaries since January 1, 2015 to current." The SEC stated Mr. Berning's access to the records he requested was denied over concern their release could " reasonably be expected to interfere with enforcement activities." Again, this is the same response we received on 25-May-2016. His response is posted below (you have to go to our website to see the original documents, posted for free).
02-Aug-2016: BOFI reports quarterly earnings and hosts a conference call with analysts. In his opening remarks, Mr. Greg Garrabrants stated he would not be taking questions related to legal matters.
"Due to the nature of the ongoing litigation, I will not answer any questions regarding our legal matters on this call, and the question-and-answer session."
However, Mr. Garrabrants chose to answer the following question posed by Mr. Brad Berning of Craig-Hallum, regarding regulatory risk:
"But just wanted you to make sure, you had a chance to reecho a comment that I think I heard you say. But I think you did say in your prepared remarks that the regulatory exams for the year are all completed. And I just wanted to give you a chance to, given all the questions on that topic; give me a chance to kind of reecho what you said there."
In reply, Mr. Garrabrants never specifically denied the existence of that pesky SEC probe we said was confirmed as on-going as of 31-May-2016. Instead, he repeatedly assured investors regulatory risk was not a problem. But he also equivocated, repeatedly qualifying his assurances by saying there was nothing that needed to be disclosed. We explain why this matters later in this report.
Here is Mr. Garrabrants's full reply to Mr. Berning's question regarding regulatory risk:
"Oh, sure. Well, so. Yes. The regulatory exams are always completed, but as I've said on past calls, the nature of being a regulated entity is that we've constant dialogue with regulators, including the OCC, SEC, FDIC and the Fed. I know that you got involved and a little sped over what the term investigation is and how it's defined and that sort of thing. And it's interesting because the term investigation isn't defined in Securities Law and you can characterize any question or one question as investigation, and the nature of regulatory dialogue is there's constant questions in the inquiry. And so, I think the important thing to note and what's the most important is if there is any event that's occurred that would require disclosure, the answer is absolutely no.
So we've not been asked any question or received any inquiry from any agency, including the SEC that would suggest concerns regarding financial misrepresentation, financial results, estimates, or other matters that would require an 8-K. And so, we have with regard to the OCC, obviously, our primary regulator, we have 2 -- we have a full scope exam and an in-term exam. Our full scope exam for this year is complete. We know where that is. Obviously, we cannot talk about the specific results, but I was very clear that we have no constraints on our business. We have no enforcement actions and we frankly don't have any issues that would lead me to think that we have to change any single thing about what we're doing. So while the amount of noise that the short-sellers have been able to generate is impressive, the actual impact on the operations of the business is nothing. And so allow me to repeat. We have not been asked any questions that or received any inquiry that would suggest any concerns about our financials, financial misrepresentations, financial results estimates or anything else that would require the filing of an 8-K, meaning that would be material."[Emphasis added to highlight areas where we found Mr. Garrabrandts's remarks are qualified or otherwise misleading. We explain why below.]
03-Aug-2016: At least two sell-side analysts issue reports in which they cited Mr. Garrabrandts's "nothing to see here folks'" message regarding regulatory risk at BOFI. One of those analysts was Mr. Berning of Craig-Hallum.
12-Aug-2016: The SEC provides Mr. Bradley Greer of BofI Federal Bank 120 pages of records in response to his request of 18-Jul-2016. On this same day, the SEC provides Mr. Berning with 128 pages of records in response to his 24-Jul-2016 request for records similar to those requested by Mr. Greer (the difference in number of pages provided to each requester is a function of when they made their requests.)
Our Take: As of 31-May-2016, BofI Holding, Inc. had a confirmed, but undisclosed SEC probe. In letters dated 11-Jul-2016, and again on 27-Jul-2016, two others unrelated to our firm received similar responses from the SEC. They are in black-and-white on government letterhead, as is always the case whenever we share this information with you.
As if to remove all doubt about the company being aware, on 12-Aug-2016, both BOFI and a sell-side analyst were provided with all the FOIA requests and responses from recent periods.
We have no idea what prompted Mr. Berning of Craig-Hallum to make the FOIA requests he did. We further have no idea why he chose to publish the results of one of them, but not the others, especially the one that acknowledges an ongoing investigation. You'll have to ask him.
Similarly, we have no idea why the company itself is so interested in chasing down all the FOIA requesters out there. Mr. Berning may be able to shed some light on this too, as he made a similar request only days after the company did. Both were sent their responses on the same day, on 12-Aug-2016.
Remarks made by Mr. Garrabrandts on his recent conference call regarding regulatory risk.
Mr. Garrabrandts is too smart to have technically lied outright on his conference call. But as a trained attorney, he also knows how to use his words to give himself wiggle room and we think he did that here, repeatedly. For example, when Mr. Garrabrandts touted the fact there are "no enforcement actions", he cleverly left out the fact that enforcement actions only come after investigations are complete. You can't bring an enforcement action without basis. Basis only comes through an investigation.
Further, Mr. Garrabrandts exploited the fact that most people don't know that, in general, public companies are only required to disclose SEC probes when management judges investors would consider the matter material. Unfortunately, management really is the judge, and often is conflicted and/or has standards of materiality incompatible with investors.
With a demonstrated campaign against short sellers, a CEO may even view disclosing an SEC probe as handing a victory of sorts to a company's critics. To the extent you'd subscribe to that sort of thinking, the hurdle for disclosure is likely even higher for Mr. Garrabrandts.
Surely there is more joy in watching the shorts squirm with the stock up 50% than having to explain an SEC probe to people you resent and who might take glee in the announcement. If true, this particular CEO may simply not have it in him to ever disclose an SEC probe.
Before we turn to examples of what can happen when a probe is not disclosed, let us first remind investors it is possible the SEC is investigating BOFI for something truly inconsequential. The company's word games suggest otherwise to us, but if you are negative on this company, you should at least allow that the mere presence of an SEC probe may not help your negative thesis.
Having said that, we also note we've seen many examples through the years of SEC probes investors would surely have considered as material that went undisclosed. Two examples of probes we thought were massive but went undisclosed involved Intuitive Surgical (NASDAQ:ISRG) and K12 (NYSE:LRN).
Again, on BOFI's 02-Aug-2016 earnings call, the CEO was adamant there was nothing material to disclose. But for all the thunder and stage-craft of the call, it remains that BOFI still haven't answered this very simple question:
What communications has BOFI had with the SEC's Division of Enforcement in the past year?
Important: The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security.
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Our Disclosure Insight® reports, like those coming from other financial news and data providers, provide the investing public with commentary and analysis on public company interactions between investors and/or with the SEC and other agencies. They are journalistically based in large part on our expertise with federal filings using the Freedom of Information Act.
" Disclosure Games®" is a trademarked term we use to highlight those public companies engaging in disclosure practices that in our opinion may be misleading, confusing, evasive, or otherwise lacking the transparency needed for investors to make well-informed investment decisions regarding a potentially material exposure.
Notes: The SEC did not disclose the details on investigations referenced herein. All we know is that they somehow pertain to the conduct, transactions, and/or disclosures of the companies referenced. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.
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