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.
