What happened?
New York City's Public Advocate Letitia James is keeping up her campaign against Smith & Wesson Holding (SWBI 0.71%), this time calling for the Securities & Exchange Commission to launch an investigation of the gunmaker over its failure to make material disclosures. The New York Times reported that James contends Smith & Wesson's failure to inform investors of the "grave reputational risk" of its guns being used in various mass shootings like that which occurred in San Bernardino, CA is a violation of disclosure laws.
Does it matter?
This year, the Public Advocate convinced the city's employee retirement system to divest its holdings in retailers like Wal-Mart and Dick's Sporting Goods, because they sell guns. Earlier this month, she also browbeat Toronto-Dominion Bank's (TD 1.47%) TD Bank and TD Securities USA to terminate some $280 million in financing they extended to the gunmaker and intimated that valuable city contracts that are currently invested in TD Bank could be put at risk.
Anti-gun activists have tried numerous tactics over the years to pass new laws that would hurt gun manufacturers by holding them responsible for the actions of individuals who use their products. However, lawsuits against Smith & Wesson and industry peer Sturm Ruger (RGR 1.37%) that alleged they were negligent in their sales of firearms or ammunition have largely failed. Just to be sure, Congress passed in 2005 the Protection of Lawful Commerce in Arms Act that provides broad immunity to gun manufacturers and dealers in federal and state court. More recently, attempts to ban certain types of ammunition have been made but similarly failed.
The Public Advocate is taking a new path in this war against the gunsmiths, attempting to make access to capital more difficult, as well as having SEC lawyers hound them. While the parry of using the banks could be effective if TD Bank sees New York's investments as more valuable than its loans to Smith & Wesson, the pitch to federal regulators is not as clear.
While the SEC could determine that more disclosure is necessary, that's an unlikely outcome. The agency is trying to find ways to reduce clutter in company disclosure statements, not add to it, and there's no proof that Smith & Wesson or Ruger are at risk of having their reputation impugned by shootings. In fact, as gun sales often spike after such incidents as individuals seek out protection for themselves, their families, and their property, an argument can be made that their reputations are actually burnished.
Smith & Wesson reported a 32% jump in sales in the third quarter with net income more than doubling year-over-year, while Sturm Ruger said sales jumped 23% and net profits were 76% higher.
In the end, New York City's Public Advocate siccing the SEC on Smith & Wesson likely isn't going to be more than a public nuisance.
