Will Amazon Ever Disclose its SEC Investigation?

[Pages:6]Disclosure InsightTM Report January 28, 2016

Will Amazon Ever Disclose its SEC Investigation?

Disclosure InsightTM reports provide commentary and analysis on public company interactions with investors and with the SEC. They are heavily reliant on our expertise with using the Freedom of Information Act.

disclosures of SEC investigative activity by Amazon. All we know about the SEC probe at this time is that it somehow pertains to the conduct, transactions, and/or disclosures of .

, Inc. $AMZN

Undisclosed SEC investigation again confirmed Maintained on Watch List

Analyst Summary: For the third time since summer of

2014, the SEC has confirmed on-going enforcement proceedings at that are undisclosed. This report walks you through some possible scenarios worth reflecting upon. Your best question for Amazon ?

What communications has Amazon had with the SEC's Division of Enforcement since summer 2014?

There's no such thing as "routine matters" when it comes to the SEC's Division of Enforcement. When there's communication with this SEC division, it's typically related to some kind of investigation. Until we find out what's really going on between Amazon and the SEC, we suggest you proceed with appropriate caution.

Facts of Interest or Concern: Undisclosed SEC Probe

Again Confirmed. We first learned of undisclosed SEC investigative activity at Amazon in Jun-2014. Since then, the SEC has repeatedly confirmed on-going enforcement proceedings at Amazon that were undisclosed at the time. This occurred on 16-Jul-2014, 08-Apr-2015, and now 04-Jan-2016. In repeated searches of company filings back to Jul-2012, we have consistently found no

Analysis and Opinion: So far the market's been ho-hum to our earlier warnings of undisclosed SEC investigative activity at Amazon. That could change in an instant, especially if Amazon discloses an SEC probe on a topic that bothers people. Like most companies, we expect they'd likely say very little, spin it in a way to calm the faithful, and simultaneously dodge questions. If Amazon ever does get around to disclosing an SEC probe, it would then be safe to assume management judged the exposure sufficiently material that it had to be disclosed. Your investment could then be at risk.

This report is anchored in the irrefutable fact that since summer 2014, the SEC has repeatedly confirmed ongoing enforcement proceedings at Amazon that remain undisclosed. But this is also a thought piece on Amazon. By necessity, that means we now enter somewhat into the realm of speculation. As we invite you to join in, we also ask for your indulgence. Our goal is simply to

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stimulate your thinking into trying to imagine what's going on in the now-protracted and undisclosed SEC investigation of Amazon.

Here's some things to consider as you think about Amazon's undisclosed SEC probe.

1. Commit to at least putting an undisclosed SEC probe of Amazon into your awareness when considering whether you want to buy or hold these shares in your portfolio. You can think of it as bringing along an umbrella ... you know, just in case.

2. Allow that Amazon's SEC probe could be about something investors simply would not care about. But also consider it could easily erode the company's capacity to deliver on fundamentals, and ultimately earnings. This holds true, whether disclosed or not.

3. We now categorize Amazon's SEC probe as protracted. With protracted SEC investigative activity, the risk rises that Amazon will disclose something unsettling. This usually happens when a company is failing in its efforts to put the matter to rest with regulators.

exposure. When the market got the new data, the shares tanked for an extended period. The pension exposure was greater than was discounted into the shares at the time.

6. This one's fun, but also a bit scary. Ask yourself how much information Amazon knows about you. Then wonder what would happen if that veil of privacy was penetrated. It's happened time and again among major retailers. Surely, Amazon is subjected to attacks in this realm constantly ? and probably on a scale comparable to those experienced by the Pentagon. We have to imagine (or should we say, we hope) Amazon's cyber-defenses are equally strong, perhaps even stronger than the Pentagon's. But it remains a fact these invasions do occur, and the SEC is one of the regulators first in line to open investigations when public companies experience such breaches (think Target and Home Depot in just the recent past. Then consider that Amazon probably knows far more about most of us than they ever will.). Now ask yourself, what would it do to Amazon's brand, to the trust its customers place in it, were it to become known the company experienced a data breach, they've not told you, but regulators are/have been investigating?

4. Think of all the reasons investors complain about the company. One common refrain is the lack of visibility into the underlying business units, initiatives, and/or profitability of the same. So far, the market has let Amazon get away with this version of "disclosure lite". But that doesn't mean investors like it. The SEC might not either.

Like we said earlier, these are simply speculative scenarios or things to reflect upon. We know with certainty there are recently confirmed and on-going enforcement proceedings at Amazon. At this point, we have no basis in fact to go beyond speculation as to why.

Dell once waited a year to disclose its SEC probe

5. Now, think of some of the data items you'd really like to know about Amazon, things that are not unreasonable, are not presently disclosed, and that most investors would probably like to know about too. Then imagine, what would happen to the shares if undisclosed SEC pressure forced the company to start disclosing some of them? This isn't accounting misbehavior, nor is it something nefarious. Let's use GM's experience to illustrate.

More than a decade ago investors had fears over the extent of pension exposure GM was really experiencing, versus what was discernable from SEC filings at the time. In that case, it wasn't even an SEC investigation that upset the market. It was a short and simple comment letter the SEC sent to GM telling it to disclose more about its pension

Public companies do sit on their SEC probes, even reputable ones. This section shares an example from an SEC probe into revenue recognition that Dell, Inc. kept from investors at the time it was still a public company. Though revenue recognition is the number one cause of restatement, Dell waited a full year before disclosing this investigation to investors. The graphics on the next page are taken from a presentation your editor delivered to analyst groups across the country in 2010-2011 when we were then known as Disclosure Insight. It's a bit dated, but still demonstrates the point well. The presentation was titled, "Investment Risks That Hide in Plain Sight."1

1 This presentation was widely well-received, leaving your editor happy to consider invitations to deliver updated versions to appropriate audiences. Those with an interest are kindly invited to contact us.

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Below are excerpts from slides your editor used in his presentation. This first slide highlights language from the press release Dell issued when it first disclosed that the SEC was investigating its revenue recognition and other accounting practices. Take note of the dates we highlighted. The press release was dated in Aug-2006. The company said it first learned of the probe a year earlier, in Aug-2005. Dell chose not to disclose it for that full year.

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waited all the way until Aug-2006 to finally disclose it. These things do happen.

Finally, take a look this next slide showing the price action in Dell, Inc. after disclosure on the SEC investigation. Do allow that the price action includes impact of the financial crisis of 2008. The real purpose of this slide is to illustrate how long some of these SEC probes can last and how involved they can become.

From the time Dell claims it first heard from the SEC in 2005 to settlement talks in 2010 was about five years.

The day this news came out, your editor happened to be interviewed live on CNBC immediately after the thenCEO of Dell. Where the CEO of Dell offered soothing assurances, promises of transparency, and a commitment to full cooperation with the SEC (of course), we immediately pointed out that the company sat on this for a year during which it did not judge the matter sufficiently material to warrant disclosure. We then warned that something must have changed that perception enough to trigger the disclosure. We did not know what the company knew at the time. But we learned a year later, and illustrated it in this next slide.

This next slide shows a more disturbing excerpt. It is drawn from a 10-K filing made more than a year after Dell's initial disclosure of the SEC probe. It shows that Dell knew the SEC had expanded its inquiry of Dell in Jun2006. They never let on at the time of initial disclosure.

Before we end this section, let us reiterate that the mere existence of an investigation should not be construed as an indication that any violations of the law have occurred at Dell back then or at Amazon today. But people experienced with SEC investigations tell us that the SEC generally will not commence an investigation without having a real concern that someone has engaged in wrongdoing. The SEC has limited resources and does not initiate investigations lightly.

Notable Disclosures: In repeated searches of company

filings back to Jul-2012, we have consistently found no disclosures of SEC investigative activity by Amazon. Going further back in time, we found the following ?

From the 10-Q filed on 27-Apr-2011:

Again, Dell knew the probe started in Aug-2005. The company knew it expanded by Jun-2006. But Dell still

In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties through the date of the assessment. The State of Texas is alleging that we should have collected sales

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taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter. In March 2011, the SEC staff notified us of an inquiry concerning this assessment, and we are cooperating with the staff's inquiry.

From the 10-K filed on 1-Feb-2012:

In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties through the date of the assessment. The State of Texas is alleging that we should have collected sales taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter. In March 2011, the SEC staff notified us of an inquiry concerning this assessment. We cooperated with the staff's inquiry, and in November 2011 the staff notified us that it had completed its inquiry.

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Documents Acquired Under the Freedom of Information Act: The only document we have on

Amazon is a one-page letter sent to the company's counsel on 08-Nov-2011, informing it that an investigation into , Inc. had ended with no enforcement action recommended. While consistent with a company disclosure cited just above, this document is of little analytical value. It was sent to us in May-2013.

As usual, the SEC is doing its part to protect public companies and their auditors (and the SEC Staff itself) by refusing to release the Case Closing Recommendation related to the SEC investigation referenced above. A Case Closing Recommendation tells you why an investigation was opened, what took place, and what conclusions were reached. The SEC refuses to let investors see even one word from its Case Closing Recommendations. This is one more way for those public companies so inclined to hide things from investors. We remain sharply critical of the SEC for this practice.

Probes Reporter?

Notable Freedom of Information Act History/Data on Amazon from the Probes Reporter Database

15-May-2013

9-Jun-2014 9-Jul-2014 16-Jul-2014 24-Mar-2015 8-Apr-2015 21-Apr-2015 14-May-2015 10-Dec-2015 4-Jan-2016 27-Jan-2016

FOIA Response Documents

FOIA Response PR Research FOIA Response FOIA Response FOIA Response PR Research PR Research FOIA Response FOIA Response PR Research

A one-page letter sent to the company's counsel on 08-Nov-2011, informing it that an investigation into , Inc. had ended with no enforcement action recommended. Possible SEC investigation; access to records blocked. No disclosure of SEC investigative activity found in past two years. On-going enforcement proceedings confirmed; access to records blocked. Possible SEC investigation; access to records blocked. On-going enforcement proceedings confirmed; access to records blocked. No disclosure of SEC investigative activity found in past two years. No disclosure of SEC investigative activity found in past two years. Possible SEC investigation; access to records blocked. On-going enforcement proceedings confirmed; access to records blocked. No disclosure of SEC investigative activity found in past two years.

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Confirmed Undisclosed SEC Investigation ? On Watch List: This indicator is assigned when the SEC confirmed this company's involvement in on-going enforcement proceedings as basis to deny our Freedom of Information Act (FOIA) request and subsequent appeal. A confirmed investigation is the highest standard we can achieve regarding undisclosed SEC activity at a public company. While an SEC investigation may go nowhere, the potential harm from an undisclosed SEC probe can also be quite serious. This company will be tracked on our Watch List of companies with undisclosed SEC probes until such time it is either disclosed or new data from the SEC causes us to revise the indicator.

"Disclosure Games" is a term we use to highlight those public companies engaging in disclosure practices we find as misleading, confusing, evasive, or otherwise lacking the transparency needed for investors to make well-informed investment decisions regarding a potentially material exposure.

Notes: All companies with undisclosed SEC investigations are maintained on our Watch List of companies with undisclosed SEC probes. The SEC did not disclose the details on investigations referenced herein. All we know is that they somehow pertain to the conduct, transactions, and/or disclosures of the companies referenced. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.

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