Only Those With Keen Eyes Notice Public Reports Of Financial Irregularities
Inside today’s Daily Journal…
Essay: Plucking Out Reports Of Financial Irregularities
Oil production plummets
“Help with mortgage” cries for help
Debt service over bullets
Chart Of The Day… Amrize
Today’s Mailbag
Editor’s note: Today, Porter turns the Journal over to Marty Fridson, lead analyst for Porter & Co.’s Distressed Investing. Marty has seen it all – from the legendary bond-trading floor of Salomon Brothers to working with the high-yield research teams at leading Wall Street investment banks. For nine consecutive years he was ranked No. 1 in high-yield strategy in the Institutional Investor All America Research Survey. He’s also written eight books, the most recent of which is The Little Book Of Picking Top Stocks… and Marty is such a legend that there is a recently published book about corporate finance that devotes an entire chapter to him. We excerpted last year in the Daily Journal.
Today, Marty reflects on the fact that so much financial chicanery – which the mainstream press tags as a hidden secret when they eventually discover it – has often been fully revealed in financial disclosures that few bother even to look at.
Here’s Marty…
Details of many financial scandals are often hiding in plain sight.
On February 9, shareholders of IT services provider Kyndryl (KD) – a spin-off of the century-old computer-services giant IBM – received a rude shock: a one-day 55% price drop. A tidal wave of disturbing company announcements prompted the selloff:
Revenue and profits fell short of analyst expectations
Forward guidance was cut
The report for the quarter that ended December 31, 2025, would not be filed on schedule
Kyndryl’s CFO and general counsel resigned
The board’s audit committee was examining the company’s cash management practices, related disclosures (including how adjusted free cash flow is presented), and the effectiveness of internal controls over financial reporting
The Securities And Exchange Commission (“SEC”) made a document request to the company
The plunge in Kyndryl’s share price was accompanied by another standard response to those disclosures: Several law firms announced that they were investigating Kyndryl for possible violations of federal securities laws and urged shareholders who lost money in the stock to join the effort by providing information.
Kyndryl’s investor calamity had something else in common with other price collapses triggered by hints of possible financial reporting irregularities: The shock should not have been a shock at all.
More than 10 months earlier, on March 27, 2025, Gotham City Research published analysis claiming to identify improper accounting and disclosure involving Kyndryl’s payments to its former parent IBM (IBM). Gotham City, a money manager noted for its high-profile short sales, pointed out several troubling items in the company’s public financial statements. Among them:
In the 2024 SEC Form 10K, Kyndryl’s auditor cited a material reporting weakness related to revenue recognition
Kyndryl reported that its Total Signings – the aggregate, estimated value of customer contract commitments obtained – grew 21% over the past few years, yet total revenue declined
Accounting measures such as accounts receivable days sales outstanding and capitalized costs were far out of line with peer companies
These were red flags hiding in plain sight, accessible to any investor willing to dig a little deeper than most. Nevertheless, three months after Gotham City’s report came out – with all the allegations of financial chicanery – shares of Kyndryl reached a new all-time high, at around $42.63.
Kyndryl’s management responded to Gotham City’s report with the customary tone of outrage employed in such cases:
Kyndryl rejects in the strongest possible terms the conclusion reached within the report, which was clearly designed to manipulate the company’s stock for the short seller’s benefit.
With that phrasing, Kyndryl’s management was effectively accusing Gotham City Research of a felony punishable by up to 20 years in prison.
The company’s protesting of its injured innocence continued,
Had we been afforded the opportunity to speak to this firm, we would have pointed out the many inaccuracies and falsehoods contained in this so-called analysis.
That statement is hard to reconcile with Gotham Research’s own:
We attempted to contact the company. KD refused to respond to our request to discuss our questions.
Shareholders’ unfortunate experience with Kyndryl is not out of the ordinary. Ever since publishing the first edition of my book, Financial Statement Analysis: A Practitioner’s Guide (co-authored in later editions by Fernando Alvarez), I’ve documented numerous instances of this pattern. A company’s stock price craters in reaction to revelations of suspected or actual financial reporting violations, yet it turns out that evidence of accounting hanky-panky was brought to light much earlier.
The most famous case is that of the rapid fall of energy-trading company Enron from Wall Street darling to bankruptcy in 2001. The outright fraud in its accounting was well concealed. But more than a year before the company went bust, The Wall Street Journal raised concerns about the high concentration of its reported earnings in unrealized, noncash gains. Michigan State University accounting professor Tom Linsmeier opined at the time, “There could be a quality-of-earnings issue.” Later on, McCullough Research spotted a discrepancy between Enron’s reported net income minus dividends and its additions to retained earnings.
These accounting terms may sound esoteric to investors whose deepest level of financial knowledge is EBITDA. Even those who watch CNBC religiously are unlikely to hear a discussion of anything like a worrisome rise in a movie studio’s ratio of capitalized production costs to its revenue. Yet analysts who have paid attention to that sort of thing have helped investors avoid many foreseeable stock calamities over the years.
At Porter & Co. we avidly look for situations with big upside, but we take care not to overlook signs of potential downside: finding trouble in the financial statements that are visible to anyone paying close attention.
Tell us what you think: [email protected]
Good investing,
Martin Fridson
New York, New York
P.S. Since joining Porter & Co. in 2023, Marty has shown that distressed bonds – the right distressed bonds – are a fantastic place to put your money. In fact, 15 of the 17 closed-out bond positions in the Distressed Investing list of recommendations recorded an increase in value, for an average gain of 26%… He serves up a new distressed-bond or equity recommendation on the second Saturday of every month. To get in on what’s next – and the current list of recommendations – click here now.
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3 Things To Know Before We Go…
1. Historic oil-supply shock continues. With the Strait of Hormuz still (mostly) closed for business, Middle East oil-storage facilities are reaching capacity, forcing shut-ins: production cuts from Saudi Arabia, Iraq, Kuwait, and the UAE have now reached 6.7 million barrels per day (b/d). And the total loss volumes from the Strait of Hormuz closure, at 20 million b/d, represents the largest oil-supply shock in history. And despite claims from President Donald Trump that the war is nearly over, Iranian officials responded that they “have no plans for a ceasefire.”
2. The only force outpacing the U.S. military: interest on debt. As the U.S. military devastates Iran with its massive arsenal of weapons, the only federal budget line item larger than the military’s $843 billion is interest on the overall U.S. government debt… coming in at $880 billion per year. The U.S. national debt approaches $39 trillion with an average interest rate of 3.35% – more than double 2020 rates. According to the Congressional Budget Office, net interest is now the fastest-growing category in the federal budget, projected to reach $2.1 trillion by 2036. When you’re spending money you don’t have, there’s really no limit to what you can do.
3. “Help with mortgage” Google searches hit 20-year high. Mortgage delinquency rates have surged to a staggering 11.52%, their highest since 2021. This coincides with a housing market where homeowners are unwilling to trade low, pandemic-era rates for today’s 6% average. For many, the American dream is stuck in a search bar, as rising costs of living outpace paychecks.
Chart Of The Day… Insider High Conviction At Amrize (AMRZ)
CEO Jan Jenisch of building-solutions leader Amrize (AMRZ) – whose shares have increased 13% since our December Complete Investor recommendation – purchased $3.5 million in shares on March 6… adding to the $99 million in direct purchases he’s already made.
Mailbag
“Iran – The Problem Will Only Get Worse”
David L. writes:
The problem will only get worse. I am not certain Porter is correct in the latter part of his analysis concerning Muslims and our sketchy history in terms of converting them to democracy and Christianity. I believe the majority of Iranians are Persians, and if anything, follow Zoroastrianism. Most of the Persians want nothing to do with these autocratic Muslim fanatics who rule their country. Their only problem is that, unlike in the U.S., where every citizen has a gun and can at least start a revolutionary movement, they do not have such a path to resistance. So while most of them would welcome regime change, they do not have the wherewithal to achieve it.
Porter Comment: Appreciate your note, but you’re absolutely wrong about the population. It’s 100% a Muslim nation.
“Thank You For Your Journal Articles”
Robert H. writes:
I am in awe that in this age where eight billionaires own and control all the print media, the broadcast news, and even the social media, that you are able to expose the inconvenient truths of the world as it is, not as our government leadership wishes it to be. In the February 27 Journal “Beware the True Believers,” you show the reader that the government has met the enemy and he is their constituency. If you can’t control your protesting-for-regime-change public with 40 million troops, you keep a few, or 77,000, nuclear-tipped bombs on hand to keep them in line. Yesterday’s article, “The Worst Is Yet To Come” – where you attempt to show the deaf, dumb, and blind American public that the U.S. can’t give a country, whose inhabitants have centuries-old entrenched beliefs, a Coke, a Big Mac, and a Walmart on every corner and expect them to abandon the beliefs that they have held dear for centuries. How it ends reminds me of the old Arabic joke:
Two Muslim friends meet and Abdul tells Ismael: “Remember that infidel that insulted my family 20 years ago? I killed him today.” To which Ismael replies, “What was your hurry?”
Thank you for attempting to educate your readership, and keep shining the light of truth through your Daily Journal: not only in how to make money from those who will not see, but also to show your reader the world as it truly is, not how their country’s propagandic press wishes them to believe.
“Your Comments On The Gulf War”
Ed A. writes:
Hi Porter,
Your observations and comments are all valid, but perhaps myopic. This war is definitely one of choice and opportunity. Iran was arguably at a relative weak point as far as their ability to resist a degradation of their ability to wage war. The question is not whether their threat was imminent. The question is: was the conflict inevitable? If inevitable, then the war should commence at the opportunity of greatest potential success, defined as the most to gain for the least cost. Waiting until Iran had more firepower, including Chinese hypersonic cruise missiles, which recent reports were that they had contracted to buy, in addition to nuclear weapons, only raises the potential cost of the inevitable conflict to unacceptable levels.
The mullahs and Islamic Revolutionary Guard have made it clear that they have been at war against the U.S. for the last 47 years. We are the Great Satan, to be destroyed along with Israel. The fact that we don’t believe this about ourselves means nothing to the religious fanatics ruling Iran. The American public and elected leaders have been playing the ostrich about Iran’s intentions for most of my lifetime. I am no fan of Mr. Trump. And I doubt he’ll have the patience to succeed with what he has started. But wiser men than him could make this a strategic victory.
Here is what I would do:
The U.S. needs to take advantage of the hatred and fear of the predominantly Sunni Gulf Arab States toward Iran. We must be their allies and protectors in their conflict with Iran. The Gulf States should pay for this protection.
We, with our Gulf allies, should take the southeast corner of Iran to permanently open the Strait of Hormuz, allowing commercial traffic that is amenable to U.S. strategic objectives. No dark fleet oil from Iran to China. Government of the conquered space would be the responsibility of a coalition of the Gulf allies. Military matters directed by the USA.
The U.S. should resist every temptation to conquer the rest of Iran by land invasion. Only the southeast corner. Let the Iranians come to us and have a “no go” zone in front of us that will be suicidal to cross.
Embargo Iranian exports/imports and wait for the resultant stress to degrade the mullahs / Islamic Guard to the point that the balance of the population will be willing to overthrow them.
Porter Comment: My comments are myopic?
Interesting.
There are 500 million (!) legally owned firearms in the United States. There is zero probability that any nation on Earth could possibly invade our country and conquer us. Zero. Military doctrine says even trying it would require 50 million or more ground troops and that’s more troops than exist in every army (including ours) in the world.
There is no war against us. Forty-seven years ago, we started a war against them – for absolutely no reason.
If we had any sense at all, we’d sell arms to both sides – the Israelis and the Iranians. We’d keep them fighting each other for decades and make trillions in profit.
They have been fighting each other for almost 2,000 years.
They aren’t going to stop.
And it’s not our problem.
– Porter
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