If You're an Office Depot Investor, Know This

Office Depot's (ODP) recent second-quarter loss may be the least of investors' worries.

What's potentially more troubling is that the Florida attorney general's office has opened an investigation of the office-supplies retailer for alleged overcharging of government clients, but somehow Office Depot hasn't disclosed this information to investors.

While Office Depot may not have violated any laws relating to shareholder disclosure, the Florida investigation carries important ramifications for investors, especially because it could hamper a takeover of the company.

Office Depot's stock -- which is down more than 70% over the past year -- rallied briefly last week after Goldman Sachs analysts said that a merger with Office Max (OMX) would help stem the sector's troubles.

Delray Beach, Fla.-based Office Depot reported last week that it swung to a $2 million loss in the second quarter, down from a profit of $106 million a year ago. Analysts blamed sluggish sales and high fixed costs for the poor results.

Outside of the difficult business environment, Office Depot is also facing possible legal troubles related to its business of supplying office materials to government agencies.

The Florida attorney general's investigation relates to allegations from a whistle-blowing former Office Depot employee who described a bait-and-switch-like campaign by the company to overcharge state and local agencies purchasing materials.

The Florida attorney general's office declined to comment on the matter but confirmed that its investigation began in May of this year.

"Office Depot is disguising price increases to government accounts by fraudulently increasing list pricing, not correctly applying discounts, and switching customers to a higher-cost price plan without their knowledge," David Sherwin, a former Office Depot account manager turned whistleblower, tells TheStreet.com.