Apollo Group (APOL) Can't Find Traction After Disclosing SEC Probe

After yesterday's 18 percent sell-off on disclosure of an informal SEC revenue recognition probe, Apollo Group Inc. (Nasdaq: APOL) still can not find traction today. The stock is down another 4 percent today on heavy volume.

A number of analysts have come out to defend the stock, but investors are not buying it thus far.

So what are the alleged revenue recognition issues? No one is talking, not the company not the SEC.

Analysts at Deutsche Bank did get someone to talk, legal expert David Z. Seide. Following the call with Mr. Seide, the firm concluded "we do not believe a formal inquiry or fraud allegations are a foregone conclusion."

Here are the firm's key takeaways from Deutsche Bank call with the legal expert:

• -Disclosure of formal investigation would be the next public milestone, if the case progresses. Disclosure of the issue being investigated is highly unlikely. The advised company response to all non-SEC questions is, "the investigation is ongoing and we are cooperating."
  
• -An informal inquiry from the SEC enforcement division is worse than an SEC corp. fin division comment letter, but not as bad as news of a formal investigation, Grand Jury investigation, or FBI raid, as some cases begin.
  
• -Of approx. 800 informal investigations per year (against corporations and individuals), 450 result in formal investigations, 100 result in actions.
  
• -Initial inquiry is deliberately non-transparent as it is part of an investigation.
  
• -Issue is probably company specific, not part of an industry-wide sweep, as the SEC enforcement division focuses on potential violations, not policy. David did not rule out an industry sweep, but this seems like a lower probability event.
  
• -Inquiry is not necessarily related to the SEC's comment letter in Feb 2009; the 'tip' to the enforcement division could have come from many sources including an investor, an employee, or something written in the press.
  
• -SEC attorney handling the inquiry is likely in touch with Apollo, now potentially requesting relevant documents, emails and files. SEC may then require oral testimony from Apollo management.
  
• -Pressure on the timeliness of SEC investigations post-Madoff may result in resolution in 9 months or less.

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