Another Hole in Krispy Kreme

Krispy Kreme (NYSE: KKD  ) was the subject of more bad news today, sending shares in the doughnut purveyor down more than 10%, to a three-year low, in fact. The freefall was sparked by the company's disclosure that the Securities & Exchange Commission is performing an informal, nonpublic investigation, eyeing Krispy Kreme's repurchases of franchises, as well as its well-known earnings warning that occurred several months ago.

Among other negative thoughts, in some circles, the Krispy Kreme controversy that has been building over recent months has stirred up some legitimate concern about management's honesty -- and trustworthy management is one thing Fools insist on when choosing investments.

For example, in May TheWall Street Journal uncovered a previously undisclosed tidbit that shareholders definitely would have liked to have known: specifically, that one of the sellers in one of the franchise repurchases was CEO Scott Livengood's ex-wife, whose stake was valued at $1.5 million.

Ouch. That doesn't exactly sound like livin' good, if you mean compared with naughty. And surely they knew better than that. These days -- to the benefit of shareholders everywhere -- corporate governance and full disclosure are in, and everybody's on the lookout to end conflict-of-interest scenarios where insiders prosper behind the scenes. While shareholders have certainly been gazing at Krispy Kreme with an uncertain eye for months, information like that means it's getting hard to maintain a sweet disposition toward the stock.

Here at the Fool, following the initial earnings warning fuss, my colleague Bill Mann penned a commentary where he kept the urge to say "I told you so" in check, though he did raise questions about whether the whole fuss was really over a temporary craze such as low-carb dieting or other aspects more damaging. (Meanwhile, recent news of a so-sweet line of frozen drinks might have backed up some conspiracy theories that the "me-too" carbohydrate complaint contained some smoke-and-mirrors tactics, especially considering that for some time, Krispy Kreme seemed insulated against the trend.) Today's news from the SEC implies there is something rotten in Winston-Salem.

For now, it's no wonder that Krispy Kreme might leave a bad taste. Though some might argue that now's the time to buy, the question is increasingly raised that the "Hot" light might really translate into "too hot to handle."

Fools recently dueled over the outlook for Krispy Kreme, one of the few blotches in the portfolio of Motley Fool Stock Advisor picks. Check out the arguments, pro and con:

What do you think of today's news of the SEC probe? Do you trust Krispy Kreme's management now? Talk it over with other Fools on the Krispy Kreme discussion board.

Alyce Lomax does not own shares of any of the companies mentioned.

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