Friday Night Filings: FBI Raids and Corporate Hide-and-Seek
Capitalism’s little trick for burying bad news.
There is a special, cursed genre of public company communication known as continuous disclosure.
Companies are supposed to tell investors when something important happens: big mergers, big financial events, big “our office got raided by the FBI” type things.
The law says: “Please announce the big thing immediately so the market can do market things.”
So, companies nod and say “yes, of course, absolutely,” the way you nod at your dentist when she asks if you floss.
The Bad-News Dilemma
Imagine you are a public company.
You have bad news.
Not world-ending bad, but definitely “our CEO is with the lawyers right now, and no one is making eye contact” bad.
Something you absolutely, definitely, totally have to disclose.
You now face three classic options:
Option 1: Don’t disclose it.
Congratulations, you have chosen crime.
Not like fun stealing a yacht crime. The crime where your lawyer begins drafting memos titled Potential Exposure.
You choose a different path.
Option 2: Disclose it.
In daylight.
Like an adult.
This is the responsible option.
You file at 10:03 a.m. on a Wednesday. By lunch, your stock is down 16%, and CNBC’s headline says:
“COMPANY REVEALS BAD THING; INVESTORS SAD.”
Accurate, yes.
Pleasant? No.
You have fulfilled your obligations.
You have also ruined the day of every person who owns your stock.
Mixed results.
Option 3: Friday Night File It
Ah yes.
The third way.
There’s a delightful quirk available to public companies:
The stock market closes at 4:00 p.m. on Friday.
Most humans also emotionally close at 4:00 p.m. on Friday.
But the SEC accepts filings until 5:30 p.m.
And thus emerges a beautifully terrible 90-minute window where:
You can disclose something extremely embarrassing, extremely inconvenient, or extremely “Our CFO is doing improv with federal agents,” and the market will not react because the market is already at a bar ordering small plates.
Why the Friday Night Filing Exists
A Friday night filing is the black hole of disclosure.
A black hole where:
The information is public
Nobody is looking
The few people who are looking are already dead inside
The law requires you to disclose.
But it does not require anyone to notice.
And if you’re a company choosing between:
a brutal mid-week stock drop, and
a quiet little confession released into the void,
well… welcome to the 5:12 p.m. Friday club.
Case Study: RICK’s Friday Night Surprise
Which brings us to RCI Hospitality Holdings Inc. Its ticker is RICK 0.00%↑ and its business is adult entertainment facilities in Vegas and Miami. Yes: those ones.
RICK recently executed a textbook Friday night filing.
Here’s the sequence:
Last year, the feds raided them.
Always an encouraging start.
The company said everything was fine.
Last week, RICK bought back 10% of its shares from a U.S. Senator’s son.
At a 50% premium.
Totally normal if your business model includes paying extra so people stop asking questions.Then, on Friday night, their CEO and CFO resigned using a Friday night filing.
RICK couldn’t not disclose it (see Option 1: crime).
They didn’t want to disclose it in broad daylight.
So they chose the black hole.
Drop the release on a Friday night.
Hope investors are already two Negronis in.
Let the weekend absorb some of the panic.
Maybe by Monday, people will forget it all happened.
The Moral (There Isn’t One)
In the grand tradition of stock market laws, Friday night filings achieve something remarkable: they allow everyone to tell themselves a soothing little lie.
Executives tell themselves: “We were transparent.”
Lawyers tell themselves: “We met the legal requirements.”
Regulators tell themselves: “The system works.”
Investors tell themselves: “I will read that release first thing Monday.” (They will not.)
Alas, if you build a disclosure system with a 90-minute loophole on a Friday, people will absolutely use it to do weird things.
And as long as the system keeps this twilight zone open, companies will keep doing what companies do:
Tell the truth…
just not when anyone is looking.