Ruger CEO Christopher Killoy; Image via nratv.com.
By Jonathan Larsen and Andrew Lapp, with additional research by Dylan Digel
One of the nation’s largest gunmakers—Sturm, Ruger & Co. (RGR)—told its biggest investors last week that it discloses in its federal filings every risk the company faces, but at least two possible investment risks are not mentioned in its most recent filing.
Failure to disclose material information about investor risk in annual reports to the Securities and Exchange Commission, known as 10-Ks, can bring serious legal consequences. “Intentional failure to disclose known significant risks in a 10-K may constitute securities fraud resulting in damages and penalties,” former SEC Enforcement Division Senior Counsel Allison Herren Lee told TYT.
Based in Connecticut, Ruger is a strong backer of the National Rifle Association, and produces firearms including revolvers, handguns, and rifles such as the AR-556 rifle, which was used in the Texas church shooting last year to kill 26 people.
Ruger’s biggest investor—the BlackRock hedge fund—holds a 17 percent stake in Ruger. On March 2, BlackRock announced that it had asked gunmakers in which it owns stock a series of questions, including some about the “financial, reputational, and litigation risk” of making and distributing guns. One question asked, “How do you assess the financial, reputational, and litigation risk of the various aspects of your product lines . . .?”
BlackRock’s inquires came on the heels of last month’s school shooting that killed 17 students and staff in Parkland, Florida. BlackRock has declined to comment on the matter since its March 2 announcement.
According to the SEC, 10-K filings must include “the most significant risks that apply to the company or to its securities.” Ruger’s response to BlackRock and other investor inquiries—filed with the SEC on March 12—goes further than the SEC requirements, claiming there are not “any” risks Ruger has not already identified.
In the letter, Ruger CEO Christopher Killoy and Chairman Michael Jacobi say they “do not believe that our lawful manufacture, distribution, and sale of firearms carries any financial or reputational risks outside those set forth in our Annual Report on Form 10-K.”
However, Ruger’s Form 10-K, filed on February 23, 2018, does not include at least two risk factors that already appear to have affected sales and stock performance. One of those factors is politics.
In each of its Form 10-K reports since 2005, the risk factor Ruger listed first—typically the most significant—was the possibility of new firearm regulations. The company has warned investors it cannot guarantee that “any such restriction would not have a material adverse effect on the business.”
The warning implies that the election of politicians favorable to gun control would hurt the company’s stock price. Internally, however, according to one source, Ruger was expecting exactly the opposite.
The source, an insider at an institutional investor in gunmakers, told TYT that Ruger and other firearms companies “ramped up production with the anticipation that Hillary [Clinton] was going to win.”
In its disclosure forms at the time, Ruger did not tell investors about its gamble on a Clinton victory. Instead, the election of Donald Trump lowered public expectations of meaningful gun control, easing the urgency for enthusiasts to purchase before certain types of guns become unavailable. Gun sales plummeted, and share prices followed.
In its Form 10-K afterward, Ruger acknowledges that politics drove sales higher during 2016, but attributes it only to “the political campaigns for the elections in November.” The only reference to political risk factors in its 2017 annual report is, again, to hypothetical regulations. The list of investor risks doesn’t mention the possibility that electoral victories by pro-gun politicians might hurt gun sales again in the future.
And in discussions about sales, Ruger officials blame politics in the same manner that the 10-K filing does. On a February 22, 2018, earnings call Killoy explained 2017’s downturn by citing “decreased overall consumer demand in 2017 due to stronger than normal demand during most of 2016, likely bolstered by the political campaigns for the November 2016 election.”
The company paid a steep price for its bet on Clinton. Between January 1, 2017, and January 31, 2018, Killoy said, the company had reduced its headcount by 28 percent, eliminating 700 positions. (Killoy appears to remain confident in the company’s future. On February 28, 2018, an SEC filing shows, he apparently exercised company options, acquiring 10,846 shares of Ruger at no cost.)
Other gunmakers do warn investors that sales can suffer in the aftermath of politically inspired buying surges. American Outdoor Brands (AOBC), in its most recent Form 10-K, says that concerns about “elections . . . and policy shifts . . . and heightened fears of terrorism and crime can . . . result in an increase in near-term consumer demand and subsequent softening of demand.”
The other factor Ruger does not warn investors about is high-profile shootings. Until recently, such crimes—especially involving multiple fatalities—have sent consumers running to buy guns, pushing gunmaker stocks higher.
Lately, however, that pattern appears to be less reliable. Stock prices for both Ruger and American Outdoor Brands, which made the Smith & Wesson rifle used at Parkland, foundered in the days following that shooting.
After Parkland, several retailers said they will scale back gun sales. Dick’s Sporting Goods, Walmart, and other stores say they will no longer sell guns to customers under 21 years of age. Kroger, America’s largest supermarket chain, said on Monday it will no longer sell magazines featuring assault rifles.
Other companies have acknowledged at least the indirect effects of high-profile shootings. American Outdoor Brands CEO James Debney said on March 1 that the decision of Dick’s Sporting Goods to stop selling what the industry calls “modern sporting rifles” would have an “extremely small” impact on sales. Neither American Outdoor Brands nor Ruger discloses possible retailer reaction to mass shootings as a risk factor in its SEC filings.
Ruger’s annual report does identify possible risks to its reputation arising from some criminal behavior. However, it does not address criminal behavior by its customers, saying instead that, “Misconduct of our employees or contractors could cause us to lose customers and could have a significant adverse impact on our business and reputation.”
Ruger’s failure to disclose investor risks was first reported Monday by The Young Turks program, “The News with Dan Rather.”
Former counsel to SEC Commissioner Kara Stein, Andy Green, told TYT, “This case, like the New York attorney general’s case against the big oil companies over climate change, highlights how major companies are facing significant risks from failing to fully incorporate environmental, social, and governance factors into their decision-making and disclosure. Investors simply aren’t putting up with it anymore, and corporate management needs to catch up—or else they may well see those investors or the SEC in court.”
In its letter to shareholders last week, Ruger did raise one risk that politics poses for the company, the same one it flags in its Form 10-Ks: The prospect of new laws or regulations. “One way we could unnecessarily create such a risk,” the letter said, “is by succumbing to political pressure to do what is expedient.”
The investment insider told TYT, “Ultimately, it seems like Sturm Ruger and Smith & Wesson are choosing to do nothing. They don’t necessarily feel the need to do anything. That’s a choice . . . We need to assess all of these choices in terms of: Are you trying to maximize the business? That’s where we are.”
Ruger did not return a message left by TYT requesting comment.
Jonathan Larsen is managing editor of The Young Turks.
Andrew Lapp is a researcher for The Young Turks.
Dylan Digel is an intern for TYT Investigates.
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