The United States has the world's most vibrant financial markets because of our fair disclosure and rule of law. Yes, public companies always try to put their best foot forward, but you can usually discern the full story from their independent audits and Securities and Exchange Commission filings.
Sadly, this is no longer true. As evidence, I submit what we just learned about Yahoo! (YHOO).
Last week the Foreign Intelligence Surveillance Act (FISA) court declassified documents about a previously undisclosed 2007-08 court battle between Yahoo and the National Security Agency (NSA).
The NSA secretly demanded that Yahoo, and apparently other companies, hand over confidential "metadata" about some of its users. Yahoo fought the request in classified court proceedings. At one point during the battle, the government threatened to impose a $250,000 per day fine on Yahoo if it failed to comply.
You might say that $250,000 is nothing to a tech giant like Yahoo. NSA obviously knows this as well. They asked the judge to double the fine each week Yahoo failed to comply.
Do the math. You'll see that resisting for 13 weeks — just one calendar quarter — would have cost Yahoo a total of $14.3 billion.
Since Yahoo's quarterly revenues were running less than $2 billion at the time, the fight didn't last long. The company lost in the secret FISA court and again in a secret appellate proceeding.
We are learning about this now only because Yahoo — which like the rest of its industry is rapidly losing business to foreign competitors
— petitioned the FISA court to release the information. Many of the details are still classified.
Here is my question: How many other companies has the NSA likewise intimidated in secret court proceedings? Did they threaten any others with multi-billion fines? Did any companies actually pay the secret fines?
I wrote last year
that these events are clearly "material risks" investors should be able to consider. Furthermore, compliance with U.S. law very likely forced Yahoo to violate the law in other countries. Yet the federal government, instead of helping investors stay informed, actively hid the full story.
We don't even know how many people within Yahoo were aware of the case. How is a company's board of directors, which has fiduciary obligations to shareholders, supposed to function when the government tells management to keep major decisions secret?
Our government is ordering (and/or allowing) well-known companies to hide material facts from their own shareholders and customers. If they did it to Yahoo, you can bet they did it to many others.
Note also that the Yahoo incident happened during the supposedly business-friendly Bush administration. Imagine how much worse it must be under President Obama.
Whichever party does it, this Orwellian behavior is a real problem for investors and money managers. We certainly have no business owning a company's stock if we can't trust its books and records.
Yahoo isn't blameless, either. They claim to have acted on principle in resisting the NSA orders. If they really believed in that principle, they could have stood firm and maybe made the government back down.
Instead, given a choice between protecting customer privacy and losing money, Yahoo chose the money. Remember that next time they ask you to trust them with your private information.
Remember, too, that the quarterly reports companies will issue next month might well hide secret fines and hidden betrayals. The executives who certify them as true might even know the reports are false, but forbidden to say so.
We already knew not to trust the government, but investors thought we could trust private businesses. We can't — not in this new and twisted world.
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