Academic

So, here in Illinois a publicly-traded insurance company, Horace Mann Educators Corp., announced after trading closed on Monday, September 13 that its CEO was serving 60 days in jail in Florida for DWI.  Louis Lower had been arrested in May for causing an accident while having a blood alcohol level of .21, almost three times the legal limit.  On September 8, he pled guilty and received a 60-day sentence, which he seems to have begun serving immediately.  On Thursday, September 9, the board of Horace Mann was notified.  Lower seems to have told some executives at the company about the arrest, but the board maintains it was first notified on September 9.

So, a reporter contacted me asking if this information was material and whether it should have been disclosed before September 13.  By the time I responded, the reporter must have not needed me anymore, so I might as well salvage the time with a blog post!  Here's what I would have said:

I think jail could be material; arrest maybe not.  The reporter's email asked if the CEO was like Martha Stewart.  Due to the fact that Google doesn't recognize Louis Lower's name when I type it, I'm going to say the answer is no.  Martha Stewart is MSLO.  No doubt about it.  Steve Jobs may be Apple.  Louis Lower does not appear to be Horace Mann.  So, the fact that he was arrested for misdemeanor DWI (no injuries in the accident), might not be material.  Item 401(f)(2) would require in any mandatory filing that the company diclose if an executive officer "is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses."  Man, I wish that this were a little more specific.  Is DWI a traffic violation?  I don't think running down your cheating spouse with the car is, but DWI might be.  And, Horace Mann filed no mandatory filings during this time.  Is it material enough that it would have to be disclosed otherwise, perhaps on Form 8-K?  The form does not list this as an area for disclosure.  However, is there a substantial likelihood that a reasonable investor in Horace Mann would think this important in the total mix of information?  I just don't see it.  Courts have held that when the CEO is the alter ego and the pending proceeding, even if not criminal, points to integrity and capability (fraud, breach of duty, etc.), then it is material.  Yes, DWI has a moral turpitude angle to it, but I'm going to say no because no injuries, etc.

But yet he was sentenced to 60 days.  Thankfully, I have no priors about length of sentence for first-time (as has been claimed) DWI, so I'm wondering if the sentence tells us that there are more facts here that would make the arrest material.  Was there anything else egregious that made jail time a probability or near certainty?  If so, then I'm closer to materiality there.

But once your CEO is in jail, that seems like its material to me.  What has caught the media's attention is that he did not resign at first.  He was an incarcerated sitting CEO.  Since then, he has retired as CEO.  The resignation, termination or retirement of the CEO is per se material and would have to be reported within four business days on Form 8-K.  Here, the board disclosed the fact that the non-terminated CEO was in jail within four business days.  So, the board seems to have thought it was material and so properly disclosed.  Looking to the market, the stock closed on the 13th at $17.78, then after the announcement closed on the 14th at $17.63, then was flat on the 15th, then closed at $17.34 on the 16th, then back to $17.64 on the 17th.  So, it might be that the market didn't react at all, not taking into consideration what the market was doing otherwise on those days.  Here is the chart of HMN the past month, as compared to the Nasdaq Insurance Index:

Given the fact that the market didn't make that much of the announcement the CEO was IN JAIL, I'm not sure if the market would have thought it material in the summer that the CEO had been arrested and might go to jail for a "traffic violation."  It would make a fun case, though, or a fun exam problem! 

I know that stock stability here is good news for Lower from a securities fraud standpoint, but if I were a CEO, and I went to jail, I would want the stock to PLUMMET just as a point of pride.