We May Have Our Answer, On The 1.2 Million Share-Day -- Of Last Friday

If, by later this evening, no SEC Form 4 has been filed to disclose trading by a 10 percent holder of Mattersight, as of last Friday, it would be a fair guess to assume that many differing index funds were the contract-buyers (or call purchasers), at last Friday's close -- in anticipation of being told that Mattersight would be added to the Russell 3000 Index.

Many exchange-traded mutual funds mimic the results of the Russell 3000 by buying a value-weighted portion of each of the 3,000 components. We shall see. But it is a plausible alternate explanation, geven that we learned this morning that the Russell 3000 has added MATR. It would ALSO certainly be permissable for underwriters or broker-dealers acting on behalf of IGC Fund IV, LLC -- under the 424(b)(3) resale prospectus -- to arrange off-exchange purchases of chunks of MATR, for each of the mutual funds that mimic the Russell 3000 holdings. We may see much more, this evening.

Will We See An SEC Form 4 From IGC Fund IV's Sales, On Tuesday?

Since IGC is north of a 10 percent holder of Mattersight, it will have to promptly file an SEC Form 4 -- if it was a net seller of shares, in the 1.2 million share volume day, on the NASDAQ-OTC on Friday. [By way of background, here is the original SEC Form 3, announcing IGC's 14 percent stake in Mattersight, in December of 2011 (when it acquired its position).]

So -- SEC Section 16 rules require reporting on Tuesday, if IGC was open-market selling on Friday, thus -- Instruction 1(a) to SEC Form 4:

. . .This Form must be filed before the end of the second business day following the day on which a transaction resulting in a change in beneficial ownership has been executed (see Rule 16a-1(a)(2) and Instruction 4 regarding the meaning of “beneficial owner,” and Rule 16a-3(g) regarding determination of the date of execution for specified transactions).

This Form and any amendment is deemed filed with the Commission or the Exchange on the date it is received by the Commission or the Exchange, respectively. See, however, Rule 16a-3(h) regarding delivery to a third party business that guarantees delivery of the filing no later than the specified due date. . . .

So -- we shall see -- after the close of the market on Monday, or certainly before market open on Tuesday. I would bet dollars to donuts that it was IGC selling on Friday.

Today's Mattersight NASDAQ-OTC Volume: 1,220,478 Shares! That HAS To Be The S-3 Blocks -- Pre-Arranged Trades

A "normal, regular way" NASDAQ trading day would see somewhere between 9,000 and 35,000 shares, recently. So this is truly a whopper.

And -- more generally, just as I said this morning, early on -- it has looked for a few days like the institutions were setting up several stabilized trades in Mattersight common stock, likely to help IGC exit at least some of its position. If this was mostly those sales, they are about half done -- needing to place about another 1.14 million shares.

Well, I will give the institutions credit -- they are figuring out how to exit the company, without unduly disrupting the market price.

It will be fascinating to see which institutions are picking up these sales -- and buying in -- we will know soon (assuming one or more of them breaches the 5 percent of Mattersight's outstandings, as a threshhold for SEC reporting) under the Section 13 rules. Prior to the latest selling, IGC held over 14 percent of all the common outstanding.

Looks Like IGC's Selling Effort Is Being Conducted Through Pre-Arranged Stabilizing Transactions. . .

There will be no way to tell for a few months, definitively, whether or when the IGC sales began -- or were halted from time to time -- as SEC reports won't be triggered until certain percentage threshholds are breached (as IGC falls below 10 percent of outstandings, then again at 5 percent of outstandings) -- but the larger volume, and orderly trading of the last few days is suggestive of transactions that are either stabilized (supported by hedged positions), or pre-arranged, in blocks -- and only reported throught the NASDAQ-OTC system, after the fact.

All of this is perfectly appropriate, and specificly authorized under the prospectus that Mattersight filed (and paid for), on behlaf of IGC Fund VI, L.P., last month. See the definitive Rule 424(b)(3) prospectus, at page 6:

PLAN OF DISTRIBUTION

. . .[IGC Fund VI, L.P.,] and any of its pledgees, assignees and successors-in-interest may, from time to time in one or more transactions on the NASDAQ Global Market or any other organized market where our shares of common stock may be traded, sell any or all of its shares of our common stock through underwriters, dealers or agents, directly to one or more purchasers or through a combination of any such methods of sale. The selling stockholder may distribute the shares of our common stock from time to time in one or more transactions:

• at a fixed price or prices, which may be changed;
• at market prices prevailing at the time of sale;
• at prices related to such prevailing market prices; or
• at negotiated prices.

The selling stockholder may use any one or more of the following methods when selling shares:

• ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
• one or more block trades in which the broker-dealer will attempt to sell the shares as agent or principal of all of the shares held by the selling stockholder;
• purchases by a broker-dealer as principal and resale by such broker-dealer for its account;
• an exchange distribution in accordance with the rules of the applicable exchange;
• privately negotiated transactions;
• short sales;
• agreements between broker-dealers and the selling stockholder to sell a specified number of such shares at a stipulated price per share; and
• any other method permitted pursuant to applicable law.

If the selling stockholder effects such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholder or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholder may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholder may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholder may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares. . . .

Even so, as the graphic at upper right makes plain, it will be several quarters before the overhang is cleared, in all likelihood.

UPDATE: Additional evidence for this theory is provided by the fact that "ordinary bid/ask" quotes on the NASDAQ show a spread of over a dollar: bidders to buy are willing to buy at $7.65, while sellers are willing to sell (the "ask") stands at $8.63 -- with 100 shares indicated on each. That means the normal NASDAQ OTC trading is all but frozen, as buyers and sellers (regular way) are over a dollar apart on the haggling gap. That is huge, on an $8 stock, that usually only trades 10,000 shares a day.

So it goes -- be careful out there.

Yet Another "Shiny Object" Press Release -- On a Lazy June Afternoon

An organization called PCI provides, for a fee, certification that a given vendor's data handling -- for payment information, among other things -- is up to snuff, from a security standpoint.

For the last three years, apparently, Mattersight has met those standards. That's good -- insofar as it goes. It is surprising to me that a public company would take the time to press release such an event -- unless, of course, it had no new customer signings, or other revenue-producing events to discuss.

That must be what is going on here (MATR presser link):

. . ."We continue to invest in policies, procedures, and controls necessary to ensure the safekeeping of our clients' data. Achieving PCI-DSS Level 1 Certification demonstrates Mattersight's commitment to providing our clients with the highest standards for data security and privacy," said Kelly Conway, Mattersight's President and CEO. . . .

I should also note that Mattersight rose almost a buck on Monday -- on large volumes -- only to fall back yesterday afternoon. My guess is that a series of pre-arranged trades were pushed through, in blocks, by the S-3 selling stockholders -- placing some of their shares with other institutional holders, on Monday. Be careful out thre.

Just To Reset/Clarify: Why This Blog Exists

An anonymous former Mattersight employee offered a comment a few posts back -- and it made some very solid points. I do hope this site brings a smile to the faces of the "regular" line and staff employees of Mattersight -- undoubtedly hard-working, decent, honest, thoughtful folks -- to a person.

But I do not write the site simply to poke fun at breathless claims of "millions of algorithms" -- as many software vendors make similarly-silly claims. No -- to reset this -- I write because I am concerned about material mis-statements (over several SEC reporting periods) that vastly increased GAAP losses per share, from continuing operations. See chart at right.

I do think something important needs overhauling, at Mattersight.

For a company led by a CPA, it strains belief to imagine that Mr. Conway, and his executive team booked preferred dividend accruals accurately for perhaps eight-plus years, or 32 straight quarters -- and then suddenly "forgot them" -- when it was time to pull the three year financials, as restated for discontinued operations, during the divestiture of the ICS businesses. Mr. Conway "forgot" them?! Really?! Did the dog eat his homework, in grade school (for three straight years) too?! C'mon man.

No -- Mr. Conway proceeded next to file three additional SEC reports, re-asserting the "error". Grant Thorton has labeled this a material weakness in Mattersights financial controls -- and cannot give an opinion that Mr. Conway's measures to "correct" it are adequate. Why? Because Conway and Co. could always "forget" something else.

The lapse of memory vastly inflated the GAAP loss from continuing operations per share in 2011.

That's a very, very suspicious fact pattern -- all the more so, when coupled to the regular selling by executive officers.

That is why this blog exists. Be very careful out there.

Another Dubious Marketing Claim, Courtesy Of Erstwhile Commenter "Bob"

While we were yammering on about minor, meaningless press-release claims, faithful commenter "Bob" (likely not his real government name!) has pointed us to a much more important piece of longer-term Mattersight puffery:

". . .Of note, a Mattersight claim that I’ve found interesting, yet unchallenged, is the assertion they employ millions of unique algorithms. While they may have a number of algorithms that can be combined in various ways as to constitute millions of possible combinations, this would not change the fact that the core unique set of algorithms is much smaller. Think about the lottery, there are only like 55 unique numbers but there are 417 million combinations of 5 numbers. If MATR wants to suggest they have millions of unique algorithms, then I would question if they have ever had enough dollars in their bank account to have properly tested each one, let alone design and code. Nor, should they happen to have a computational and storage system of over a million physical or logical nodes (which I doubt), would the same algorithm running on multiple notes be considered separate or unique algorithms. . . ."

I quite agree. If Mr. Conway considers every addition, subtraction, multiplication, division or limiting variable to be a "unique algorithm" -- then he is essentially claiming he invented math. And we all know that is preposterous. Even "Cookie Monster KNOW this!!"

But when it is dressed up in pseudo-scientific jargon -- it sounds impressive, on first blush. So it goes, in Mr. Conway's little fiefdom (covered in the Emperor's New Robes), natch.

Instantly Analyze "Known Fraudsters' Voiceprints"? Seriously!? C' Mon, Man...

Okay -- so I've been harping on the pattern of executive-selling Mattersight's common stock, without the company ever having generated any GAAP Earnings Per Share -- for 13 years. As it is wont to do, when in such straights, Mattersight today put out a pufferey press release.

Mattersight proposes to sell a phone-call/live-voice fraud analytics tool, using the same data-sets it uses for all customer interactions. While I might be inclined to agree that live voice attempts at impersonating people for the purpose of committing fraud are on the rise, I am not sure that the business world is ready to pay high margins for the rather ordinary insights Mr. Conway's data might offer. Especially suspect is the claim that he can match a caller against a database of known fraudsters, by "voiceprint" -- in any significantly close to real time way. It seems unlikely that his systems could do so in real time -- in other words, quickly enough to actually prevent a fraud, while it was underway.

I could be wrong, but I don't think even Langley (the CIA) or Quantico (the FBI) would make such a claim -- and if the CIA/FBI doesn't have the raw computing power to do so -- how can Mr. Conway claim to possess enough processing power to analyze, with instant accuracy, and meaningful insight -- all those tera-bytes of data, in real time?

Okay -- enough of my skepticism -- let's hear from Mr. Conway, shall we?

Yes, let's. From Mr. Conway's latest press release, then:

. . . .Voice-facilitated fraud is a rapidly growing problem in a number of industries. Financial Services companies and Property Casualty Insurers have realized their call centers are a vulnerable and lucrative point of attack for fraudsters. Sophisticated fraudsters and fraud rings are able to gather enough customer information from publicly available sources to exploit the authentication procedures in call centers and gain access to customer accounts. The complexity of capturing and analyzing call center interactions to identify fraudsters has heretofore made it nearly impossible for companies to measure the frequency of these types of attacks, let alone proactively identify this activity and take preventive action.

Mattersight's Fraud Analytics solution solves these problems by capturing customer interactions and automatically analyzing every second of every captured interaction in the cloud, using millions of proprietary algorithms and unique behavioral models. The output of this analysis is hundreds of contextually accurate data attributes on every captured interaction. . . . Mattersight also leverages a consortium database of known fraudster's voiceprints that every caller is compared against to identify repeat fraudster activity. . . .

This looks to me to be more of a product "by accident," than "by design." That is, it seems someone at Mattersight just realized that this was another (albeit non-real-time) use for all that stored voice data: create some metrics to try to identify fraudsters. Great. But that is only truly useful, if the filter(s) can be made to work in near real time, not some post-hoc analysis. But maybe I'm wrong, and the Fortune 500 will pay high prices for this analytical tool. I doubt it, but it could happen.

Executive VP Of Client Management Sold Stock Into Open Market, On June 8, 2012

They say timing is everything, when one sells a long-held common stock position. This is doubtlessly doubly true when a company insider and executive officer, to boot, sells stock in his or her own company, on the open market. So, listen up!

Mattersight takes great pains (including offering one-sided FAQ answers, on the topic) to make it seem as though its executive team almost never sells stock into the open market. Yesterday, on the other hand it reported an executive officer's series of open market stock sales which occured last week (the reporting is all as required by law). Feel free to take a look, but it was very near the recent highs for Mattersight, post the "GAAP errors disclosures".

Be very careful out there in the next few days.

A Materially-Incomplete Investor FAQ Answer, On Mattersight's Website?

First -- note that mattersight.com contains this "Investor FAQ" page. Here is the pertinent part:

. . .11. I saw on a third-party website that a Mattersight executive officer engaged in a non-open market disposition of his shares – what does this mean?

Links and downloads of all of our SEC filings are available on the Mattersight website’s Investor Relations page under “SEC Filings.” We encourage you to review these filings. In some cases, third-party financial websites may report information regarding our SEC filings that incompletely describes the contents of such filings. For example, when an executive officer files a Form 4 to report the shares of our common stock withheld by the company to satisfy mandatory tax withholding requirements upon vesting of a restricted stock award, certain websites simply summarize the content of the Form 4 filing and report this as a “Disposition (Non Open Market) at $X per share.” In this case, referring to the actual Form 4 report will allow you to see that such disposition was made solely to satisfy the executive’s tax withholding obligation in accordance with the terms of the stock award. . . .

What is the implication of the bolded portions? To my eye, it implies that the executive is paying these taxes in the only way he or she is legally allowed to do so.

That is simply not true. Mr. Conway or Mr. Noon or Ms. Carsen could (perhaps should, given the vast, and growing accumulated stockholders' deficits) pay these tax obligations with their own cash. That would be no cash drain on the company, since the company has run 13 years straight of GAAP losses per share, from its continuing operations.

No the way that Mattersight does it, the company is effectively drained of cash (in a truly Transylvanian fashion!), in order to pay the tax obligaitons of its top executives. Yes, the transaction is off market -- but this form of compensation is also dilutive to common shareholders, under GAAP accounting -- and drains precious cash from the company, when it pays the tax and cancels the shares -- all without ever being paid cash for the shares in the first place.

This method of paying taxes for executives is in no manner required by any law or regulaiton. Here endeth the lesson.

Be careful out there.

Having "Monopoly Money" -- To Pay Mattersight Executives' Taxes -- Is Sweet!

Let's be clear here -- when a public company grants restricted stock, the executives pay for it with (only) their services over time. When the restrict stock vests, the executive has been enriched by the full value of the stock (as he or she paid no cash whatsoever for any of it). Thus, the IRS is owed taxes on the vesting -- at ordinary income rates.

Yesterday, the top executives of Mattersight reported "paying" that tax, by selling some of the same vested stock, as of May 31, 2012, back to Mattersight, in an off-market transaction, at $7.01 a share. Again, no cash from the executives -- and now they hold the shares free and clear. This is true of CEO Kelly Conway, CFO Bill Noon, EVP Chris Danson, and GC Christine Carsen, among others. Of course, this is a cash obligation then paid by the company to the IRS. [A more-jaundiced view would hold that the original grant size was effectively adjusted upward, so that the full intended value would be transferred to the executive, net of all tax obligations.]

This is a common practice at public companies, but when a company is underperforming, it sure looks like an overreaching use of the company (and its assets) -- solely for the benefit of the executive crew.

Finally, of course, allowing the restricted stock to vest, immediately after management committed a material accounting "error" -- and that error has (at least temporarily) enhanced the price, but not the long-term value, of that same stock -- strikes me as odd, indeed.