If You're an Office Depot Investor, Know This

Sherwin estimates these policies resulted in a 5% to 10% overcharge annually on the $700 million agreement with government contracts, or about $35 million to $70 million annually. Many of these charges were in Florida, California and Georgia, but also took place in 43 other states, he says.

Curiously, Office Depot has still not disclosed the investigation to investors in its filings with the Securities and Exchange Commission, but the company did respond to TheStreet.com's inquiry into the matter.

"The company intends to fully cooperate with the Attorney General's office in its investigation and to vigorously defend any allegations of wrong doing," Office Depot spokesman Jason Shockley said in an emailed statement.

"We believe the civil investigation being conducted by the Attorney General arises from allegations made by a former disgruntled employee, who was terminated for workplace misconduct," Shockley said. "Office Depot denies any allegations of intentional wrong doing, and we look forward to cooperating with the Attorney General's office in its review."

Earlier this year, the State of Georgia canceled a $40 million annual contract with Office Depot after a government agency said it warned the company about incorrectly priced items.

The California Legislature is currently exploring allegations of overcharges from Office Depot's $25 million annual contract with the state, according to a South Florida Sun-Sentinel article in early July.

So why hasn't the civil investigation by Florida Attorney General Bill McCollum that began in May been disclosed to investors?

"The SEC rules require only a description of 'material pending legal proceedings, other than ordinary routine litigation incident to the business,' " says Shockley, the Office Depot spokesman. "Government inquiries, including those from states' attorneys general, are not uncommon, and often resolve themselves at a preliminary stage. The referenced matter does not trigger mandated disclosure."

In its latest 10-Q filing, Office Depot said sales under government contracts amounts to less than 5% of its sales so far this year.

At this point, no one knows the ultimate ramifications -- if any -- from this investigation. But what's pretty clear is that it's hard to imagine how Office Depot and Office Max would consummate a merger before this dust cloud settles.

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