The Dig

November 14, 2024

Can SEC staff hold the line? We're not in Kansas anymore, folks.

There are no shortage of takes on what might happen in the SEC in the next administration. But given how quickly we are are hearing about other major proposed appointments, it may not be long before Gary Gensler quits or is fired and we finally know who they want for SEC Chair.

Watch, starting at the 16:40 mark or so, as Jonathan Tuttle of Debevoise & Plimpton responds to a question from moderator Jason Flemmons about the PCAOB:

Flemmons: And relatedly with regard to auditor conduct, I do wonder also, Jon, if you have any thoughts on whether that's gonna also trigger maybe more handoffs, handoffs by the SEC to the PCAOB. I don't know if you have any thoughts on that?
Jonathan Tuttle, Debevoise: Yeah. I, think you're gonna see some pushing of, I mean, just particularly what I would describe as more negligence-based cases, they're gonna get pushed down to the PCAOB and, you know, maybe that's more appropriate outcome anyway, for those, for those types of cases, to have them handled by, you know, a regulator, quasi regulator, <laughs> however you, whatever you wanna call them, that is responsible for the profession and public company accounting.
So I think that's a, that's an interesting, I do think you might see you, you could continue to see depending on where the SEC comes out on Jarkesy on the ALJ program in general, you could continue to see follow-on actions kind of in the way that used to see them in the past, like purely derivative of the, underlying judgment in a civil proceeding. Yep. And that may be the case.
Flemmons: It was interesting in this recent case that it was more preemptive to seek that district court rather than waiting for the case to play out and then doing the follow on 102(e) at the tail end.

Duh, the PCAOB is gonna be gone, girl! (I have written about Flemmons in the past.)

I am not in favor of this, obvs.

I will write more extensively on this, in particular the claim by supporters of the PCAOB that there have been no major frauds in this period since Enron. In the meantime you can read two defenses of the PCAOB, by Dan Goelzer and by the "Shadow SEC" group.

I wrote an OpEd for the FT in 2020 saying that folding the PCAOB into the SEC would be a big mistake. This was the last time the Trump team proposed this — although that was not the first time it was proposed or threatened in the last twenty years. Everything I said rings true today and is being echoed by these two advocates.

But one particular warning I gave seems to be missing from these two advocates' essays:

While the Big Four would almost certainly enjoy halting the PCAOB’s slow efforts to improve auditing standards and insist that auditors document their work, they should not start celebrating too quickly. The watchdog provides the auditing industry cover from all kinds of criticism, and allows it to blame “regulatory bureaucracy” for higher fees. Since 2002, the largest firms have invested in costly legal and compliance functions. That required infrastructure creates additional barriers to entry, making it that much harder for smaller firms to challenge the power of the Big Four.
Without a dedicated independent regulator, audit firms and the SEC will find themselves squarely in the line of fire after the next catastrophic accounting fraud. And that is not a comfortable place to be.

Weakening The Oversight Of Us Auditing Is A Very Bad Idea

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Sometimes I feel like Elsbeth, but I do not carry around all my tote bags, just cherish them. (Gift of my niece Lena.)

BDO at the Supreme Court

Attorneys from Chicago's McDermott Will & Emory LLP, led by Paul Hughes, have petitioned the U.S. Supreme Court for a Writ of Certiorari regarding a twisty-turny case of auditor liability, in this case BDO's, for its audits of AmTrust between 2012 and 2015.

A class of AmTrust investors, filed a complaint in the Southern District of New York, advancing various securities fraud claims against AmTrust, BDO, and numerous other defendants. The court initially ruled in favor of BDO. From the Petition:

The district court, Judge Lewis A. Kaplan, agreed. App., infra, 155a-156a. The court explained that “Plaintiffs fail to allege any facts relevant to the way or ways in which BDO’s failure to supervise, review, document, and perform in good faith the 2013 audit would have been significant to a reasonable investor in making investment decisions. This is so particularly because the conduct ultimately had no effect on the 2013 audit opinion.”

However...

On appeal, the Second Circuit initially affirmed the district court’s materiality analysis. Like the district court, the panel reasoned that materiality was lacking because “the Complaint fails to allege any link between BDO’s misstatements in the 2013 Audit Opinion and the material errors contained in Am-Trust’s 2013 Form 10-K.” App., infra, 75a.
Respondents petitioned for panel rehearing, and, in February 2024, the SEC filed an amicus brief in support. The SEC urged the panel to abandon its fact-specific materiality holding and adopt a per se rule in-stead: In the SEC’s view, an auditor’s certification of PCAOB compliance, in and of itself, “matters to inves-tors regardless of whether the specific deficiencies resulted in misstated financial statements.” SEC C.A. Amicus Br. 13 (Feb. 16, 2024), C.A. Dkt. No. 202.
The panel obliged. Reversing itself, it amended the opinion’s materiality analysis to conclude that re-spondents “were not required to allege a link between BDO’s false certification and specific errors in AmTrust’s financial statements to establish that BDO’s false audit certification was material.” App., in-fra, 36a (emphasis added).
The panel reasoned that “BDO’s certification that the audit was conducted in accordance with PCAOB standards succinctly conveyed to investors that AmTrust’s audited financial statements were reliable” and “[t]he absence of BDO’s certification would have been significant, for without it, BDO could not have issued an unqualified opinion, which then would have alerted investors to potential problems in the company’s financial reports.” Ibid.
That is, in the panel’s view, the statement of compliance with PCAOB standards was inherently meaningful to investors, no matter its ultimate effect on the substance of the audit report.

Here's a summary of the win on reversal.

I've written more than once about this case:

Leftovers: AmTrust and BDO, Macy's and KPMG

November 29, 2024

Leftovers: AmTrust and BDO, Macy's and KPMG

A reminder that the subscription cost for The Dig will be going up on January 1, 2025. This is the first time since I began producing paid newsletters that I am raising the price.

Fortunately, after SEC veterans and the SEC itself pleaded their case to keep giving the usefulness of the audit opinion the benefit of the doubt, on Oct. 31, the Second Circuit granted reconsideration and reversed its earlier ruling...
... now holding that audit reports are material to investors, and reinstating dismissed claims against the auditor defendant.[4] Thus, under the law, audit reports still matter to investors — for now, at least.
Jesse and Thomas give a lot of great background to the case and its implications. I am grateful that, in their conclusion, they give me, via several cites, the last word.
The capital markets are the economic lifeblood of the U.S., and — as the amici submissions in AmTrust reinforced — trust in the independent auditor is the backbone of that system.
However, that trust has increasingly frayed, and while the Second Circuit's affirmance in AmTrust that audit reports do matter is a positive development, that ruling is hardly the end of the story. That the saga occurred at all further confirms the seriousness of the ongoing crisis of confidence in the audit report. Indeed, that BDO was arguing against the materiality of its own reports to investors[22] speaks to the conflicted state of the audit profession today.
In recent years, regulators have increasingly spoken publicly about increasing their focus on addressing audit shortcomings, with former SEC Enforcement Director Gurbir Grewal acknowledging that civil penalties are "sometimes viewed as a cost of doing business" by major audit firms.[23] As AmTrust makes clear, the tough talk needs to be followed with enforcement: It is crucial that regulators continue their efforts to address the systemic issues in the auditing industry that have repeatedly harmed investors.
[23] Francine McKenna, The SEC, and PCAOB, slam Marcum LLP over SPACs, but it's too little way, way too late, The Dig, June 25, 2024, https://thedig.substack.com/p/the-sec-and-pcaob-slam-marcum-llp;
Francine McKenna, Here's a target list if SEC Enforcement really wants to "hammer" the gatekeepers, The Dig, Dec. 27, 2021, https://thedig.substack.com/p/heres-a-target-list-for-if-sec-enforcement?s=w;
see also, e.g., U.S. Securities & Exchange Commission, Responsibilities of Lead Auditors to Conduct High-Quality Audits When Involving Other Auditors [Statement], Mar. 17, 2023, https://www.sec.gov/newsroom/speeches-statements/munter-statement-responsibilities-lead-auditors-031723.
Law360 2nd Circ
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And let’s not forget that, as a result of this reversal, the audit firm that is now facing a case of auditor liability is BDO. That’s the firm that just agreed to take on the audit at Super Micro where EY left in a huff because it could not trust the executives or audit committee.

In making their request to the Supreme Court on behalf of their client BDO, the McDermott attorneys complain:

That is, the Second Circuit adopted an unprecedented per se rule that an auditor’s statement that it complied with professional auditing standards is always material. It is irrelevant to materiality, the Second Circuit concluded, whether the alleged regulatory noncompliance had any bearing whatsoever on the financial information provided to investors.
That holding is in direct conflict with the rule of the Sixth Circuit, as well as circuit law from around the country. It creates a dangerous precedent that provides unduly expansive liability against accounting firms in the Second Circuit, which, given the nature of the public financial markets, is generally a proper venue for any securities fraud claim involving a public company. [fm note: The Second Circuit is New York]
This decision will therefore lure all securities plaintiffs who seek to sue accountants to that circuit. It will then impose suffocating pressure on defendants to settle, since the protection provided by the materiality requirement has been eliminated. Because another vehicle is unlikely to be forthcoming, it is crucial that the Court grant review now.

Let's break this down.

The Second Circuit is admittedly the proper venue for securities fraud claims for public companies, and yet the reversal by the Second Circuit will "lure" auditor liabilities cases to that court. And that will create "suffocating pressure" to settle.

Do these guys know how many auditor liability cases, especially against the largest global audit firms settle? Almost all of them. I have written about the unusual cases when they have gone to trial. That was, in every case, a huge tactical mistake, since all the dirty laundry and idiot partners testimony is exposed.

Pwc Faces 3 Major Trials That Threaten Its Business Marketwatch

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Clearly BDO and its lawyers are not giving up, dirty laundry and idiot partner testimony notwithstanding. (BDO clearly has a short memory. Remember the last time they went to bat against formidable attorneys at trial? It did not end well.)

They go on:

Here, it is undisputed that BDO’s alleged noncompliance with PCAOB standards did not affect its audit report. As respondents’ allegations acknowledge, BDO would have provided investors exactly the same information about AmTrust’s finances had it completed the audit correctly at the time the opinion was issued.

The McDermott lawyers are missing the forest for the trees.

The importance of the audit report is not what the boilerplate language says but what it represents to investors. That's what the SEC amicus brief said so well.

Sunday gravy: Throw Lyft's typo in the pot, stir in an SEC amicus brief, Ray Ball's opinion about the accountant shortage, and some fricassee of Trump

February 19, 2024

Sunday gravy: Throw Lyft's typo in the pot, stir in an SEC amicus brief, Ray Ball's opinion about the accountant shortage, and some fricassee of Trump

“Everything you see I owe to pasta.” Sophia Loren

The SEC has now filed its amicus brief. Thanks to Professor Ed Ketz, who gave his opinion on the case at Accounting Today, for posting on LinkedIn.

Sec Audits 021624

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This is the Supreme Court rule:

There is a lot of good stuff here but I will highlight one paragraph that speaks directly to the prior claims:
"Likening the audit certification to puffery, the Court found BDO’s statements “so general” “that a reasonable investor would not depend” on them. 80 F.4th at 182.
But an auditor’s statement that it has subjected the company’s financials to scrutiny in accordance with professional standards conveys important information on which reasonable investors rely. And the absence or qualification of such a statement would be immediately noted by, and be consequential to, the issuer and the market."

The auditor's opinion tells investors that the audit was performed according to the PCAOB auditing standards and, therefore, has a fighting chance of finding fraud and illegal acts and identifying violations of GAAP.

Here it is undisputed that AmTrust violated GAAP and had to restate five years of its financials, with the resulting impact on investors and its share price.

Here it is also undisputed that BDO made huge mistakes. From Reuters Alison Frankel last year:

The SEC concluded in 2018 that BDO botched the audit underlying its 2013 certification of AmTrust’s financials. The audit team fell behind schedule in reviewing AmTrust’s financial reports, according to the SEC order sanctioning three BDO accountants for "improper professional conduct." To conceal BDO’s failure to complete the audit on time, according to the SEC, partners instructed auditors to sign off on incomplete and unverified work.
AmTrust shareholders cited those failures in an amended complaint in a sweeping class action originally filed in 2017, after the insurer restated five years’ of financial results. The class action, broadly speaking, claimed that AmTrust deceived investors by recognizing revenue from certain extended warranty contracts in the year they were signed, rather than over the years-long course of the agreements, and by treating discretionary employee bonuses as expenses in the year they were paid rather than in the years they were earned.
The amended complaint also included a separate claim arising from BDO’s allegedly false 2013 audit opinion. Shareholders asserted that AmTrust’s stock price fell by nearly 20% when The Wall Street Journal first reported on BDO’s alleged mishandling of AmTrust’s audit...
Three former SEC officials filed an amicus brief a couple of weeks later, backing Robbins Geller's arguments on the BDO claim. The panel was wrong about the significance of the audit certification, the former officials said. If BDO had told the truth about its deficient audit, they argued, it would have “raised red flags with investors, precluded AmTrust from complying with SEC audit rules and risked AmTrust’s ability to raise funds in SEC-regulated markets.”

I'd also like to highlight a weird thing that would otherwise just fly under the radar. In the Petition, a standard disclosure is included.

CORPORATE DISCLOSURE
Pursuant to Rule 29.6 petitioner BDO USA, P.C., formerly BDO USA, LLP, (“BDO”) certifies that BDO has no parent corporation, and no publicly held corporation owns 10% or more of BDO’s stock.

That is interesting given recent changes at BDO. From the FT:

Senior partners at the accounting firm BDO USA are in line for a big windfall after the arrangement of a $1.3bn debt deal with Apollo Global Management, according to people familiar with the situation. The private capital group is providing $1.3bn in debt financing to fund purchases of shares by a new employee trust, as well as to refinance some of BDO’s existing obligations.
The trust will use a portion of the funds to buy a minority stake in the firm from existing partners, the people said. The financial restructuring comes after BDO USA decided to abandon the traditional partnership model used by other large accounting firms in search of tax advantages and greater flexibility.
The firm legally became a corporation at the beginning of last month, turning its 860 partners into employee-shareholders, although they continue to use the term “partner”. The largest shareholdings went to executives at the top of the firm and those with longer tenures.

6. Every document, except a joint appendix or amicus curiae brief, filed by or on behalf of a nongovernmental corporation shall contain a corporate disclosure statement identifying the parent corporations and listing any publicly held company that owns 10% or more of the corporation’s stock. If there is no parent or publicly held company owning 10% or more of the corporation’s stock, a notation to this effect shall be included in the document.

In light of the interest that private equity firms now have in many accounting firms, maybe this statement and the underlying rule need to be considered more carefully.

Is "BDO has no parent corporation," still true? BDO is now a corporation not a partnership, with a private equity firm providing debt financing for an ESOP. Who will lose if the plaintiffs are successful in their claim against BDO, one for I would assume really big bucks?

Microsoft-Activision

Matt Stoller notes in his recent update on May 11, "FTC lost the Microsoft-Activision appeal in the Ninth Circuit." Why do we care?

JPMorgan's risky client approach: Cut them off before they cut us down

March 14, 2022

JPMorgan's risky client approach: Cut them off before they cut us down

“Once is happenstance. Twice is coincidence. Three times is enemy action.” Ian Fleming, Goldfinger

JPMorgan snitches on entertainment industry royalty
On March 8, Jeffrey Trachtenberg and Dave Michaels at the Wall Street Journal hugely scooped that the Justice Department is investigating options trades by Barry Diller, David Geffen and Alexander von Furstenburg to determine if they violated insider-trading laws. The SEC is also conducting its own investigation.

Messrs. Diller, von Furstenberg and Geffen bought options to purchase Activision shares at $40 each on Jan. 14 in privately arranged transactions through JPMorgan Chase, the people said. Activision shares were trading around $63 at the time, meaning the options were already profitable to exercise, or "in the money." Option holders could reap more if Activision's stock price rose.

Apparently, the three amigos — actually, von Furstenburg is Diller’s stepson with Diane von Furstenburg — purchased the options just days before the merger between Microsoft and Activision was announced.
The Wall Street Journal says Diller and Geffen are longtime friends, having worked together in the mail room at the William Morris agency back in the day. Diller has served on the board of directors of Coca-Cola Co. with besieged Activision Chief Executive Bobby Kotick. Kotick has now stepped down from the Coca-Cola board amidst multiple federal and state regulatory investigations into how he handled workplace misconduct claims. The Activision acquisition may help to bury those allegations and the impact of any settlements in the belly of a beast as big as Microsoft.
Diller described Kotick, according to the WSJ, as "a long-time friend,” but said that that their perfect timing was, “simply a lucky bet. We acted on no information of any kind from anyone. It is one of those coincidences."
The options were not purchased on an exchange but were bespoke, arranged privately by JPMorgan. The WSJ says that after the deal between Microsoft and Activision became public, JPMorgan reported the trades to law enforcement.

Follow-up:

SEC Ends Probe of Barry Diller, David Geffen Trades Before Activision-Microsoft Deal
SEC, Justice Department looked into options purchases of the videogame maker in 2022
By Katherine Sayre, Jeffrey A. Trachtenberg, Dave Michaels May 2, 2024
Securities regulators have ended an investigation into large bets that Barry Diller, Alexander von Furstenberg and David Geffen made on Activision Blizzard days before the videogame company agreed to be acquired by Microsoft in 2022.
The Securities and Exchange Commission this week sent letters to Diller, von Furstenberg and Geffen saying it doesn’t plan to accuse them of insider trading tied to their purchase of Activision options.
The Justice Department also investigated whether the men’s trades violated insider-trading laws, the Journal reported at the time. A lawyer for Diller said he hadn’t received follow-up inquiries from the Justice Department since 2022.

Private equity, Form AP, and regulatory capture

Mar 15

Private equity, Form AP, and regulatory capture

If I speak in the tongues of men and of angels, but have not love, I am only a resounding gong or a clanging cymbal. 1 Corinthians 13 1

SolarWinds is going to be acquired by a private equity firm. This one is called Turn/River Capital. The merger is expected to be completed in the second quarter of 2025. Again, the best way to hide shenanigans is to take them private or get them acquired by a gigantic company.
See Activision and Microsoft.

Another blood testing start-up

New York Times Reporter Rob Copeland scoops:

I commented:

Here's the NYT article.

Here's my original article on MarketWatch.

The Last Days Of Theranos — The Financials Were As Overhyped As The Blood Tests Marketwatch

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Ripple and the SEC's Crypto Forgiveness Tour

SEC, Ripple Ink $50M Settlement Agreement, Ask NY Judge for Green Light
District Judge Analisa Torres ordered Ripple to pay the SEC a $125 million fine last year. Under the new settlement agreement, Ripple will get the majority of that money back.
]By Cheyenne Ligon|Edited by Nikhilesh De
Updated May 9, 2025, 9:55 a.m. Published May 8, 2025, 5:26 p.m.

Which super attorneys made this happen? Mary Jo White, former SEC Chair and her lieutenant Andrew Ceresney, both of Debevois.

I wrote about that here.

The SEC rattled sabres again, this time at Ripple's XRP, but was anyone else scared off?

February 3, 2021

The SEC rattled sabres again, this time at Ripple's XRP, but was anyone else scared off?

I was assisted with the data journalism side of this piece by Dan Hoicowitz. Dan is founder and CEO of Tax Llama Advisory. He specializes in combining knowledge of GAAP, the IRS code, digital assets, and data science to glean hidden value for Tax Llama’s clients. He is a CPA candidate who holds a Masters in Mathematics and Statistics from Georgetown Un…

Bondholder Plaintiffs filed suit in Delaware:

This is a trend. Put Ripple over on the winning side. Via Securities Enforcement Docket.

Citigroup, Oceanografia, and Pemex

Citigroup must face $1 billion lawsuit claiming it aided Mexican oil company fraud
By Jonathan Stempel, Reuters
May 8 (Reuters) - Citigroup (C.N), opens new tab must face a revived lawsuit claiming it caused more than $1 billion of losses by orchestrating and concealing a vast fraud at the now-bankrupt Mexican oil and gas services company Oceanografia, a U.S. appeals court ruled on Thursday.
A three-judge panel of the 11th U.S. Circuit Court of Appeals in Miami said 30 Oceanografia vendors, creditors and bondholders adequately alleged that Citigroup substantially aided the fraud, and a lower court judge erred in dismissing the nine-year-old case.
Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment. Juan Morillo, one of the plaintiffs' lawyers, said his clients were gratified by the decision.
Citigroup's Banamex unit had provided cash advances to Oceanografia, which provided drilling services to Mexico's state-owned oil company Petroleos Mexicanos (Pemex) (PEMX.UL), and collected interest payments on the advances.
The plaintiffs, including shipping and leasing companies, investment funds and Netherlands-based Rabobank, said Citigroup advanced $3.3 billion to Oceanografia between 2008 and 2014 despite knowing the company had too much debt and had been forging Pemex signatures on authorization forms.

This one is a doozy!

Why do I care? Because KPMG Cárdenas Dosal, the Mexican KPMG member firm, audits all three firms, Citibank (KPMG Mexico audits the Mexican side of the bank and its subsidiary Banamex on behalf of KPMG US), Oceanografia, and Pemex.

This is the same firm that was named by the PCAOB in a recent KPMG foreign firm pile-up. It was a PCAOB enforcement action PCAOB Board member Christina Ho thought was too tough on the poor partners.

I know this firm and client triad very well. I worked extensively with the Mexican firm from 1997-2001.

So what is this all about?

In 2018 the SEC brought an enforcement action against Citigroup, the U.S. parent, for its role in the fraud, fining the bank $4.75 million.

These proceedings involve Citigroup Inc.’s (“Citigroup”) failure to devise and maintain a sufficient system of internal accounting controls concerning a wholly-owned subsidiary, the Mexican bank Grupo Financiero Banamex, S.A. de C.V. (“Banamex”), sufficient to provide reasonable assurances that Banamex’s transactions were recorded as necessary to permit the preparation of Citigroup’s financial statements in accordance with generally accepted accounting principles (“GAAP”) and to maintain accountability for assets.

Would KPMG be held accountable for its triple-play role in this fraud? Believe me the plaintiffs tried!

Delaware determined it had no jurisdiction over KPMG International and KPMG Cárdenas Dosal. Despite the direct connection to the U.S., in 2020, KPMG's U.S. firm also escaped liability for its role in the Citigroup audit as it relates to missing this fraud in Mexico.

Global auditing firm KPMG's U.S. arm has won the dismissal of a $1.1 billion Delaware lawsuit accusing it of negligence in audits of Citigroup and now-bankrupt Mexican oil drilling company Oceanografia SA.
Vice Chancellor Morgan Zurn, of the Delaware Chancery Court, ruled Friday that the plaintiffs - a group of creditors, bondholders and business partners of Oceanografia - had failed to allege facts that would make New York-based KPMG US liable for the actions of Mexico-based KPMG Cardenas Dosal, also called KPMG Mexico.

From the Delaware opinion:

Plaintiffs do not allege that KPMG US was directly involved in KPMG Mexico’s audits of OSA.
Plaintiffs do not allege a written agreement establishing a direct agency relationship between KPMG US and KPMG Mexico. Nor do Plaintiffs allege any written agreements between, first, KPMG US and KPMG International, and second, KPMG International and KPMG Mexico. Plaintiffs’ direct agency theory and subagency theory both fail under Mexico law as pled.
In this case, Plaintiffs’ direct agency theory fails because Plaintiffs do not plead that KPMG US wielded control over the OSA Audit Opinions as KPMG Mexico’s principal. Plaintiffs’ allegations that the PCAOB lists KPMG Mexico “as an affiliated entity of KPMG US, and vice versa” and that KPMG Mexico worked on audits of U.S. companies, including Citigroup, are unrelated to the OSA Audit Opinions.116 Plaintiffs also allege that KPMG US is a principal to KPMG Mexico “directly through the Citigroup audit” and “culpable for the knowledge and conduct of [KPMGM] . . . in their audits of Oceanografía . . . given the audit clients’ extensive business dealings and overlapping audit issues between the two engagements.”117 The allegations that the Citigroup and OSA audits overlap are conclusory.
Even if the two audits presented overlapping business dealings and issues, that overlap alone does not adequately establish that KPMG US, which was only directly involved in the Citigroup audit, wielded the necessary control over the content of the OSA Audit Opinions.118 Plaintiffs in no way allege KPMG US directly had authority or control over the OSA Audit Opinions.119 Their allegations fall short of adequately pleading agency liability under Delaware law.

It's too bad Plaintiffs did not allege that KPMG US was directly involved in KPMG Mexico’s audits of OSA. Given the trifecta of KPMG auditing Citigroup/Citibank/Banamex, Pemex, and Oceanografia, even if Oceanografia was never listed in the US or an ADR, KPMG U.S. was certainly involved in the audits of Pemex and Citigroup.

I have told you how!

It's also too bad Plaintiffs did not allege a written agreement establishing a direct agency relationship between KPMG US and KPMG Mexico or allege any written agreements between, first, KPMG US and KPMG International, and second, KPMG International and KPMG Mexico. They exist. Ask Edmund Tadros!

More Berkshire Hathaway Annual Meeting

Kingswell's Berkshire Beats May 13 newsletter has quite a few more comments about the Berkshire Hathaway Annual meeting and its 2024 and Q1 2025 results.

On repurchases:

The complete lack of share repurchases further fueled this cash build-up. Berkshire’s Class A equivalents remain at 1,438,223 shares — with no buyback activity during the first few weeks of April, either. Buffett noted that the 1% excise tax on share repurchases (which went into effect in 2023) made this capital allocation strategy less attractive than it once was.

That is hilarious! Repurchases as a capital allocation strategy! Allergic to taxes!

I have written about repurchases as a "capital allocation strategy" before, coincidentally in 2013 for Chicago Booth Review in reference to Buffett's most successful investment, Apple. (Berkshire doesn't need to borrow to do repurchases, but unlike Apple it doesn't pay a dividend.)

Uncertainty, according to the researchers, should lead to higher cash holdings rather than cash payouts–and, to some extent, it has. A recent report in Treasury and Risk Magazine says companies were holding $1.79 trillion at the end of last year. But they’re not investing that cash in the new products or services or workers. Instead, Standard & Poor’s says companies bought back $99.15 billion of their stock during the fourth quarter and paid shareholders $79.83 billion in dividends. Banks, in particular, have been anxious to reinstitute payouts after the crisis at the expense of building a capital cushion.
Why, then, is Apple planning to return $60 billion in cash to shareholders by the end 2015? It’s the largest single share repurchase authorization in history and Apple is already among the largest dividend payers in the world, with annual payments of about $11 billion.
In a press release about the program, Tim Cook, Apple’s CEO, said, “We so believe that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases.”
Apple doesn’t need to use dividends to signal financial strength or repurchases to prop up an undervalued stock price. Instead, the company’s strategy of high dividends and huge share repurchases is consistent with the response of large, mature firms in low-growth industries to the “agency cost of free cash flow” problem. When executives may be tempted to use large, free, consistently generated cash flows to finance initiatives that will earn low returns, it’s better to return the cash to investors. That way you can't be accused of wasting it on a vanity project.

See that Greg Abel?

On investment portfolio activity:

Berkshire kept us all guessing about its Q1 2025 investment activity — breaking tradition by omitting the end-of-quarter values for its top five equity holdings. The five stocks in question did not change — still Apple, American Express, Bank of America, Coca-Cola, and Chevron — but we’ll have to wait for the 13F on Thursday to see if Buffett tinkered with any of them.
For the tenth quarter in a row, Berkshire was a net seller of stocks — with $4.7 billion in sales and $3.2 billion in purchases.

Net seller of stocks? Check, aligns with my theory of shrinking the portfolio, adding to cash, getting ready for a big distribution to shareholders.

Omitting the end-of-quarter values for its top five equity holdings? That is really odd!

Warren Buffett says he's stepping down, but I wouldn't count him out of the limelight yet

May 8

Warren Buffett says he's stepping down, but I wouldn't count him out of the limelight yet

The Berkshire Hathaway Annual Meeting was held last Saturday, May 3 in Omaha. It was the first without Charlie Munger.