The Myth of Protection Through Disclosure - Why Disclosure Alone Won't Protect ...

Dear All,

An article about how the U.S. Securities and Exchange Commission is doing great work on clamping down on ill-gotten gains and related party transactions, which is wonderful to see!

Why "Disclosure" is no longer a Protection...

Many corporate executives and shareholders, especially CFOs (the SEC also fines them) operate under the mistaken assumption that simply disclosing related-party transactions safeguards them from regulatory scrutiny.

However, disclosure alone does not equate to legality or ethical propriety. The U.S. Securities and Exchange Commission (SEC) has repeatedly demonstrated that related-party transactions—where corporate insiders engage in financial dealings that benefit themselves or their affiliates—are subject to intense scrutiny, even when fully disclosed.

let me be clear as the SEC has made it clear:

Even fully disclosed insider deals—where executives or affiliates stand to benefit—face rigorous examination.

While transparency is crucial, it does not automatically shield against enforcement actions, particularly when such transactions result in harm to shareholders or financial misrepresentation. If regulators determine that a deal prioritises personal wealth creation over a company's financial health, disclosure will not be enough to prevent consequences.

The SEC's Expanding Clawback Power: No Hiding Behind Disclosure

The SEC's 2024 rules on executive compensation clawbacks and its newly strengthened stance on related-party transactions—disclosed or not—send a clear message: accountability is non-negotiable.

Companies are now required to implement policies that recover erroneously awarded incentive-based pay when financial restatements reveal material noncompliance, regardless of whether misconduct was involved.

The implications are far-reaching. Even if a related-party transaction was disclosed, executives can still be forced to return compensation if the deal contributed to misleading financials or inflated earnings or unjust gains.

The bottom line? Disclosure is no shield against regulatory action when shareholder/public/investors' interests are at risk.

Those partaking can maybe one day expect enforcement, financial penalties, and restitution orders for transactions that undermine corporate integrity.

?? Financial Transparency: Disclosure Isn't a Get-Out-Of-Jail-Free Card ??

For those who believe public debt and financial engineering can be manipulated indefinitely without scrutiny, let this serve as a reminder:

There is no time limit when it comes to investigating the misuse of public funds.

Especially when the SEC and DOJ are involved: Accountability doesn't expire.

Case Study: Super Micro Computer and Related-Party Scrutiny

Case in point: Super Micro Computer (SMCI). A recent SEC action and investigative report have raised serious concerns about their financial practices, particularly in their dealings with related party transactions.

Third-Party research exposed how "SMCI funnelled nearly $1 billion to businesses controlled by the CEO's family members".

Yes...these transactions were disclosed in financial statements, but disclosing a related party transaction does not make it legitimate.

To quote the report and third-party investigation that was submitted to SEC:

Super Micro has engaged in glaring accounting red flags... Merely disclosing a related party does not absolve a company from scrutiny or potential wrongdoing.

Source: Third Party Report presented to Authorities - Public record

While these relationships were known to investors, concerns over transparency and governance came to a head when the company’s auditor resigned, citing undisclosed governance concerns and potential financial misrepresentations related to these transactions - it still took years to unfold and research the truth.??

The lesson here is clear: disclosure is not a shield against accountability.

Whether it's a private or public company, handling public money that has been promoted and offered through investment banks/houses for growth, which in the end ends up making a few rich—for doing nothing and "defending it" by simply "admitting a conflict of interest" does not make the transaction ethical or lawful.

Recovery for Pension Funds/Investors is Possible: The Effort and Cost of Investigations

One of the biggest challenges in reversing improper related-party transactions is the sheer time, effort, and resources required to conduct full investigations.

These cases often require:

• Forensic accounting deep dives to uncover the true impact of transactions
• Battles to challenge the improper financial arrangements (e.g., hours of calls and department-to-department references).
• Coordinate with regulators and auditors to build a solid case that the shareholders and/or investors don't stand a chance of knowing where their money is REALLY going.

Despite these hurdles, successful recoveries are possible, more often than not, when there is a strong effort to pursue justice. The SEC and courts have frequently ordered executives to return ill-gotten funds, demonstrating that improper transactions—whether disclosed or not—can be undone with the right approach.

Bad deals are still bad deals—even if they're written in black and white.

Financial misconduct will always leave a trail. It might take time, but eventually, the reckoning arrives. There are great companies out there doing fantastic work to recover ill-gotten gains, just to name a few of my personal favourites: Muddywaters https://muddywatersresearch.com/ and Citron Research but there are many more.

Interestingly, the

U.S. Securities and Exchange Commission (SEC) enforcement summary for fiscal year 2024 shows 583 enforcement actions, 431 of which were standalone cases.

These actions encompassed various violations, including disclosure and reporting issues, accounting fraud, and other securities law infringements.

So you see, it doesn't matter how much the lawyers cost, how big the names are, or how much security is taken in the myth " well.. you are the idiots we disclosed it" - the reality is, if it was wrong... there is a growing appetite from the authorities to simply.. get it back!

Warmest,

John

#Finance #Accountability #CorporateGovernance #PublicDebt #Ethics #SEC #ForensicAccounting #DueDiligence