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BearingPoint and the Risk of Late SEC Filings

By Joshua P. Agrons, Richad P. Bourgeois and Natasha S. Chowdhury
December 26, 2006

Companies that are late in filing their financial statements with the SEC may simultaneously trigger default provisions under their credit agreements and indentures. Accounting problems from practices such as the backdating of stock options make it difficult for companies to get auditors to sign off on their financial statements, resulting not only in a failure to meet SEC reporting deadlines but also a default under their loan agreements and cross-defaults under other agreements. This problem is widespread, with over 150 companies affected by the options backdating scandals and over 1300 companies in 2005 alone filing restatements of their financial statements with the SEC (see Securities Law Daily, Oct. 30, 2006). Failure to file periodic reports with the indenture trustee within a short time of the SEC filing date creates a default under many indentures and leads to a cascading series of adverse consequences for the issuer.

BearingPoint

Credit agreements and indentures typically include a reporting requirement covenant that obligates the company to file SEC reports with the creditors or indenture trustees. By delaying a required SEC filing, a company is likely to be unable to file its financials with its creditors or trustees on time. As a result, it would breach the reporting covenant and be in default under the agreement, giving its lenders the opportunity to accelerate payment of the entire debt or negotiate more onerous terms. BearingPoint, Inc., a NYSE-traded global management and technical consulting firm, experienced this problem first hand. Due to various accounting concerns, BearingPoint failed to timely file its Annual Report on Form 10-K with the SEC, as well as certain quarterly reports on Form 10-Q. Consequently, it also failed to file these periodic reports with the indenture trustee. However, BearingPoint's only duty under its indenture was to file a copy of the annual and quarterly reports with the indenture trustee within 15 days after filing the same with the SEC. [Section 5.02. SEC and Other Reports. The Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The company shall comply with the other provisions of TIA Section 314(a)'.]

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