Are Taleo's Insider Sales Suspicious in Light of Auditors Questioning Revenue Recognition Policies?
Since going public in 2005, insiders have unloaded Taleo Corporation (NASDAQ: TLEO) stock with sales in excess of $120,558,011. Within the last six months alone, insiders sold $10,782,049 and purchased no other shares on the open market. CEO, Michael Gregoire, sold $2,500,000 on Aug. 11, 2008. Director Jeffery Schwartz sold $7,829,280 on May 22, 2008, leaving him with no shares.
On Nov. 6, 2008, Taleo's auditor, Deloitte & Touche LLP, requested that the Company review its revenue recognition policy. It was then Taleo notified the Securities and Exchange Commission (SEC) that it could not meet the Nov.10, 2008 due date for quarterly earnings reports. NASDAQ then notified Taleo that it did not meet its listing requirements.
Taleo shares hit a 52-week low on Nov. 11, 2008, after the Company announced it would delay third-quarter earning reports to review accounting practices. After the announcement, Taleo's stock fell 28 percent to $7.99 per share from its annual high of $34.20.
Analysts have expressed concern that the inevitable result will be a restatement. Other than saying that the revenue is there, it's just a matter of when the revenue should be reported. Meanwhile, the Company has remained quiet.
Just last year, Forbes, in conjunction with Audit Integrity, rated Taleo as having Aggressive Accounting & Governance Risk (AGR), receiving an AGR Score of 59 out of a possible 100. In August, Audit Integrity upgraded the rating to Average Accounting & Governance Risk (AGR), receiving an AGR Score of 71 out of a possible 100. This places them in the 64th percentile among all companies, indicating higher accounting and governance risk than 36 percent of companies.
The following forensic risk summary from Audit Integrity in August 2008 highlights the most material business issue for each risk. AGR Impact shows the deductions from a perfect 100 AGR score due to flagged metrics.
Clearly, Audit Integrity spotted some issues in revenue recognition. Usually this is the result of a lack of transparency.
Getting back to the question at hand, does the possibility of a restatement call into question the insider sales? Was there a motive to get out? While Schwarz was not on the Audit Committee, he did sell all his shares within the last six months. What did he know? There is no news indicating that, as is the usual story, that he was leaving the company, or needed the cash for a new Aspen mansion. As for Gregoire, we can see that he traded in regular bouts. Many of his sales were "automatic," meaning that they might have been part of a pre-set plan. But, even academics, the Court and SEC recognize trading plans can be an abuse. See Kevin LaCroix article, Rule 10b5-1 Plans Drawing Scrutiny.
More analysis is needed to make sense of this all. Of course, we're all waiting to see the results of the policy review. If you have information, please help us out and drop me an email at reed@hbsslaw.com. Or comment below.