Nobody Can Read the Prospectus

“Everything is securities fraud,” I often say around here: If a bad thing happens at a company, and its stock drops, it will be sued for securities fraud, because the shareholders didn’t know about the bad thing. Occasionally, though, the company will have a defense: “You did know about the bad thing,” it might say; “it was right there on page 73 of our annual report.”

This doesn’t work that often. Page 73 of the annual report might say something like “we depend on the services of our chief executive officer, and if he were to do anything stupid that would be bad,” but it usually won’t say “our chief executive officer is currently sexually harassing several employees, and they’re going to go public with their complaints next week and we’ll have to fire him.” The bad thing will rarely be disclosed in explicit detail, because, you know, annual reports don’t work that way. Companies that are doing bad stuff don’t want everyone to know about it. They want to be able to sell stock at high prices, and disclosing the bad stuff would prevent that.