Warren Buffett and Charlie Munger, the gurus of Berkshire Hathaway Inc., are the latest to weigh in on that puzzling concept of securities law, what is and what is not “material.”
Who can blame them from jumping in?
The decision about what’s material still winds up way too often in litigation. Sometimes the resulting court decisions are surprising to this layman.
As for the eminence grises of investing, Buffett and Munger, who have sat atop highly successful Berkshire for a long time, their take on materiality came as part of the general defense they offered this past weekend of Goldman Sachs Group Inc., in which Berkshire has a substantial investment.
Goldman, of course, has been charged by the SEC with civil fraud in an instance of selling mortgage-backed securities. Disclosure is the issue there. Goldman vehemently denies the charges.
What caught my eye is a side issue to the main Goldman drama, but important because it happens so frequently in the investing world.
That is whether Goldman had an obligation to disclose to the public when it received a Wells notice from the SEC. That essentially is notice that civil charges are likely to be brought, allowing the company receiving the notice one more attempt to change the SEC’s mind. Goldman didn’t disclose receipt of the Wells notice at the time it received it.
That’s fine with Buffett and Munger, Dow Jones Newswires reported. They said they wouldn’t consider Goldman’s receipt of the Wells notice material.
At least a few Goldman shareholders beg to differ. They have sued Goldman, alleging that the Wells notice should have been disclosed.
The SEC doesn’t like bright line definitions of what’s material. What passes as an announced standard for what’s material includes the following: if “there’s a susbtantial likelihood that a reasonable shareholder would consider it important” in making investment decisions.
I’m no lawyer, but it seems to me investors in any company receiving a Wells notice of pending charges would like to know. That’s even if the coming civil charges aren’t overwhelmingly important.
On April 15, the day before the SEC charges, Goldman’s common shares closed at $184.27. They trade now around $149.25. Yes, more has happened besides the SEC charges, including news last week that there’s also a Department of Justice probe of Goldman.
Also, share price movement observed after the fact is not in itself confirming evidence that something was material and should have been disclosed. Lots of things influence share prices and court decisions have noted this.
Still, it would make better public policy if not legal necessity if public companies uniformly told investors when they receive Wells notices.
(UPDATE: In an earlier version of this post, Buffett and Munger were incorrectly referred to an non-lawyers. Munger has a degree from Harvard Law School.)