Superdevalued

Each of the shareholder lawsuits allege that Supervalu’s stock declined as a direct result of the company knowingly withholding information from shareholders. That is, the lawsuits allege that Supervalu management knew about the earnings restatements, but for whatever reason, they refused to release it. Such actions by management—if they occurred—would be a direct violation of federal securities law, and grounds for a judgment against the company. There’s the rub: It’s a matter of dispute whether or not Supervalu’s management knew about the inventory misstatements while they were occurring. Nevertheless it seems likes an obvious proposition that the decline in share price was related to the restatement. Yet Supervalu cannot, and will not, concede that either. To do so would establish a basis for a monetary judgment against the company.

In September, I spoke to Yolanda Scharton, Supervalu’s vice president for investor relations. When I asked her whether there was a correlation between the decline in share price and the restatement, she told me, “It’s not necessarily a direct correlation. The stock dropped during a very difficult stock market environment.” This may be true in general terms, but on the day that Supervalu’s shares declined by 22 percent, with record-high trading volumes, the Dow remained even with the year’s lowest trading volume—hardly widespread panicked buying or selling. More like the panicked buying and selling of Supervalu stockholders on that particular day. Her explanation was doubly disingenuous: Only a few minutes earlier, it had been pointed out that Supervalu’s stock had been performing very well compared to the overall markets. But either Supervalu’s stock tracks the Dow, or it doesn’t. Why correlate Supervalu’s performance to the Dow only when it declines?

Scharton’s was a valiant performance, and I almost felt bad that she had to give it. Then again, I was angry: For a moment I wished I had been given another anonymous “no comment.” At least that would have been a forthright rejection of my request for truthful information.

When I told Scharton that, as a shareholder, I did not feel Supervalu had provided much information on what, exactly, had happened in the pharmacy unit, Scharton objected, pointing out the conference call and Noddle’s KSTP interview. When I replied that the information provided in those sessions was not substantially different
from what appeared in the June 25 press release, she suggested that I spend more time looking at the Supervalu website. So I got down to specifics and asked whether Supervalu would reveal the name of the woman who misstated the inventory. Scharton answered with a blunt, “No.” As for the employee’s motive, Ms. Scharton replied, “No cash was taken, and sales were reported correctly.” I suppose one could argue that the $17.1 million never existed in the first place, but in a very real sense it did: Supervalu investors, like me, had confidence that its accounting was accurate. When we learned it wasn’t, our confidence was lost, and so was 30 percent of the stock’s value. Was the sell-off an emotional response to what really was a minor accounting restatement? Perhaps, but there was no way for the average shareholder to know, was there? Supervalu released so little information on what had happened that it was impossible to make a fair determination of how serious the problem was. All I could do—and all the average shareholder could do—was assume the worst and sell.

On the same day I spoke to Scharton, I spoke to Greg Stricharchuk, assistant managing editor for business at the Star Tribune. He was not happy to be challenged on the Star Tribune’s coverage, or lack thereof. “What’s the story?” he barked. “I don’t get the story here.” I patiently explained to him that I was concerned about the lack of information that Supervalu has provided to shareholders, and the lack of coverage that the issue had received in the local media.

Stricharchuk responded by calling the $17.1 million restatement “small potatoes,” echoing Noddle on the immateriality of the loss. “What I remember is that it’s a pretty isolated case. It didn’t seem like there was a deeper thing here.” When I pointed out that the only way to know for sure if there was a “deeper thing” was to assign a reporter, he replied, “The reporter [Ann Merrill] has been asked to a keep an eye on it. She covers a lot of companies.” When I mentioned that the stock had lost nearly $1 billion in value, Stricharchuk told me, “That’s not real uncommon these days,” apparently ignoring the fact that such losses don’t often occur as a result of corporate accounting restatements (which are common). Later, I emailed Merrill to ask why she hadn’t covered the story in more detail. I never received a reply.

Four days later, on September 17, the Star Tribune’s business section had its first Supervalu headline in weeks: “Shareholders sue Supervalu after accounting error revealed.” Unlike the other Star Tribune stories on Supervalu, this new story was not assembled from wire-service reports or company press releases. Instead, it was an original piece of reporting by Ann Merrill. Yet it was hardly breaking news. The first shareholder suit had been filed on July 12, and the majority had been filed by August 1. It was as if Merrill had waited until late November to report that the Twins had lost in the playoffs.

On the day of the Star Tribune story, September 17, Supervalu’s stock declined 5 percent against a decline in the Dow of 2 percent. Trading volume was at its highest level in six weeks. Jeff Noddle’s statement almost certainly played a role in this. In effect, he seemed to suggest that Supervalu had learned about the misstatements because an audit was scheduled for the pharmacy unit, and the auditor who had been misstating inventory got scared. Was it the pharmacy unit’s first audit in four years? Noddle’s CNBC interview seems to suggest as much, but there’s no way to know for sure.

As I leave Hopkins, I drive past the Supervalu warehouses that sprawl near Highway 169 and Excelsior Boulevard. At one end, they extend nearly a quarter of a concrete mile, lined by hundreds of trucks ready to deliver products to stores across the region. It occurs to me that in such an environment, $17.1 million really may not be very noticeable.

Of course, the earnings restatement means that the $17.1 million didn’t exist at all. So where does that missing, restated money go? Is there an accounting purgatory, a fiscal limbo where Enron’s missing $600 million circulates with Supervalu’s restated $17.1 million? Or perhaps the money slips away to the mysterious land of mismatched socks and lost pen caps—a land where $17 million is pocket change, and a billion-dollar hit isn’t news.