Monday, August 3, 2015

Drats! FOIA'ed Again: SEC Likely Closes Herbalife Inquiry

Extracting information from FOIA requests can be tough. Just ask John Gavin or Jason Leopold. They've both been leveraging the power of these requests to crack open interesting stories. I've used FOIA requests to get some very interesting documents myself, although not nearly to the extent of Gavin or Leopold. Sometimes you come across interesting situations where FOIA responses contradict one another in such a way that it helps you draw some conclusions. The case of Herbalife is one of those.

In February, ProbesReporter.com reported that information from the SEC indicated that Herbalife was the target of an investigation. Mr. Gavin submitted multiple information requests, at late as December 16th, 2014. In his December request to the SEC, Gavin asked for certain investigative records concerning Herbalife that the Commission had obtained or generated since December 5th, 2012. Gavin's request for these two years of information was denied in full citing exemptions under 7(A). That effectively means that the SEC had responsive documents that were generated or obtained during that two year window which could reasonably be expected to interfere with or harm enforcement proceedings. 

A separate FOIA request was submitted to the SEC on July 2nd, 2015 requesting "documents related to any SEC Investigations of the subject company" (the subject company was "Herbalife, LTD.") and their CIK was also provided. The date range of that request was July 1-2014 through June 30, 2015. Unlike Mr. Gavin's request, the SEC had no responsive documents related to the July 2015 FOIA. An appeal was submitted indicating the SEC's potential error and was supplemented with Herbalife's own disclosures that an inquiry was disclosed in the company's 2014 10-K. In that 10-K the company stated the following:


Since late 2012, a short seller has made and continues to make allegations regarding the Company and its network marketing program. The Company believes these allegations are without merit and is vigorously defending itself against such claims, including proactively reaching out to regulatory agencies and governmental authorities. Because of these allegations, the Company has received and may receive additional regulatory and governmental inquiries. For example, the Company has previously disclosed inquiries from the FTC, SEC and other governmental authorities. If the Company believes any governmental or regulatory inquiry or investigation is or becomes material it will be disclosed individually. Consistent with its policies, the Company has cooperated and will continue to fully cooperate with any governmental or regulatory inquiries or investigations.

Based on that appeal the SEC conducted additional searches yet there were still no responsive records. If there was an investigation, there should be responsive documents which were exempted, but that is not the case.

So why the disparity between the tale of two FOIA's? There are three distinct possibilities:
  1. the SEC made an error in their February 2015 response and there was never an open investigation 
  2. the SEC made an error in their July 2015 response and an investigation is still open
  3. the SEC made no errors in either the February 2015 response or their July 2015 response and there is still no open investigation
Because the submissions requested slightly different information from slightly different periods I think it is more likely that the SEC made no errors and that although there was an open investigation there is currently no open investigation.

Under 7(A) the SEC can exempt records if there is a pending or prospective enforcement proceeding. It is entirely possible that as of February 12th (when the SEC responded to ProbesReporter) a prospective matter was still open, but that no records had been obtained or generated after July 1st 2014(which is when the scope of the second FOIA request begins). Within the hinterlands of July 1, 2014-December 16th 2014 during which the scope of the two FOIA's overlap, both FOIA's would have had to have responsive records that are exempted under 7(A) to reasonably assume a prospective investigation was on the books at the close of business on December 16th. I specifically use prospective because if it was a pending matter, I think the second FOIA would have also generated exempted records as well.

Additionally with respect to the second FOIA, if there were "documents related to any SEC Investigations" they would have to be before July 1st, 2014, OR not at all related to an investigation for the SEC to respond as they did. Had there been documents related to any SEC investigation from July 2014-July 2015, the SEC would have sent a 7(A) exemption letter. Instead they twice affirmed they had no responsive documents.