An analyst writes that Silicon Valley Bank’s bad loans have increased marginally. Although management says it’s still going to hit the numbers for the quarter and the year, the stock goes into free fall – $25 to $15 on massive volume in a single day. The class action piranhas are in a feeding frenzy.
Summer may be over but investor relations officers are now sweating in the dog days of disclosure. On one side, investors are clamoring for more information, more broadly distributed in a more timely manner; and the SEC is still warning sternly against selective disclosure. On the other side, the shareholders are at the gate, launching strike suits at the fastest rate in 30 years; and the SEC is warning sternly against ‘the numbers game’ of managing expectations.
As if that weren’t enough, the market is revolting. ‘When the economy appears to be going to hell in a hand basket, it creates even greater disclosure pressures,’ notes Harvey Pitt of Fried Frank Harris Shriver & Jacobson in Washington DC.
‘It’s especially dangerous for public companies right now,’ says Boris Feldman of Wilson Sonsini Goodrich & Rosati. ‘The market is reacting very harshly even to fine tuning. You have companies missing estimates by a little bit, or warning that the Asian flu might affect them next quarter, and they fall 50 percent in a day. Companies do something that in the past would have made their stock fall a little bit; they do it now and they get massacred.’
‘They’re suing everybody,’ Feldman grimly reports of class action lawyers. ‘The lawsuits are coming at a record pace, virtually indiscriminately. Miss a quarter or announce a slow-down, have a drop in your stock, and you’ll get sued right away.’
No wonder there’s a tendency to think, ‘If I can just weather the storm, wait a couple of days, the problem is going to go away. Pitt acknowledges the all-too human instinct to avoid negative disclosure. ‘But this kind of economy places an even higher premium on prompt disclosure.’
Crisis du jour
On the swift-moving periphery of disclosure hurricane commercial wire services have a unique perspective. Its crisis during earnings season at Businesswhere has always been sensitive topicaccording to executive vice president Cathy Baron Tamraz.
Despite seeing an explosion of shareholder lawsuits, Tam-raz has observed no pull-back in disclosure by companies. More than half of BW’s news releases go beyond minimum disclosure requirements. In fact she notes a marked growth in the volume of press releases from companies. ‘There is more information going out,’ she says. ‘Companies are grabbing for space, especially in the technology field where if they don’t talk about themselves they’re going to be lost.’
Many companies are concerned about a ‘fuzzy line’ between what’s public and what’s not. At a Business Wire symposium on disclosure in March, Financial Relations Board chairman Ted Pincus argued that a lack of universal disclosure guidelines has mired a promising ‘corporate glasnost’ in legal confusion. Corporate boards, only recently opening up to investor scrutiny, are again veiled for fear of a disclosure disaster. Dean Dranias, president of Chicago’s Dresner Corporate Services, says a blue-ribbon panel of the SEC and top securities attorneys should be convened to define disclosure. Companies are unsure over what is material and at what point it’s considered publicly disclosed. In consequence they’re afraid to say much of anything. ‘For IROs, it’s like the old baseball adage: don’t walk him, but don’t give him anything to hit at,’ says Dranias.
Investor trust
High over the grim reality floats the lofty voice of the SEC. Early in 1998 chairman Arthur Levitt warned that the commission was on the lookout for companies with unusual trading patterns prior to issuing a press release on material news, for example during an earnings call.
‘Selective disclosure is a concern,’ confirms Jonathan Stokes, vice president of standards setting for the Association of Investment Management & Research (AIMR). ‘The key to the success of the markets is investors’ trust of companies, and any issue that goes to compromising that, whether it be selective disclosure or personal investing, hurts the market.’
In late September, Levitt spoke out on the core IR function of managing earnings expectations: ‘This process has evolved over the years into what can best be characterized as a game among market participants,’ Levitt said, adding that ‘too many corporate managers, auditors and analysts are participating in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation.’ Levitt detailed a hit list of accounting ‘gimmicks’, ‘hocus pocus’ and ‘illusions’ used to manipulate earnings, and announced a special panel to improve corporate board audit committees.
The SEC still has to find wrongdoers before the real action can begin. Pitt senses there will be an increase in enforcement cases after a lag. ‘There’s no doubt analysts will come under increased scrutiny. The commission has expressed a lot of concern about how analysts perform, and what they do with information.’
Just jawboning
There is doubt, however, whether the SEC is nimble enough to follow through on its disclosure action plan. ‘I’ve heard that song before,’ says Feldman. ‘But every time the SEC has litigated a selective disclosure case based on what a company said to an analyst, they’ve lost.’ Threats of heightened enforcement by the SEC, he says, are ‘just jawboning.’
Beware of the buy-side, though, Feldman told a meeting of the San Diego Investor Relations Group last month. ‘Buy-side analysts and money managers are just looking for a tip, and you can’t tell them anything that isn’t in the market already. Whereas sell-side analysts publish and advise the market, the buy-side are ‘inside trader wannabes’.’
When it comes to enforcing securities regulation on the internet, the SEC is but slowly catching up. ‘What would be helpful is if the SEC’s enforcement people actually had computers,’ says Douglas Clark, also of Wilson Sonsini, describing how he showed the Motley Fool and other investor bulletin boards to a visiting SEC enforcement chief. ‘It was like introducing technology to a primitive society,’ he quips.
The SEC is nonetheless playing the part of enforcer. In August, it launched an investigation into St Louis-based Zoltek Companies. The company may have leaked an early copy of its quarterly earnings release to a local brokerage, which then slipped it to at least one institution before the news was public.
Forthcoming reporting changes in FAS 131 from the Financial Accounting Standards Board, which come into effect at the end of the year, can only turn up the heat on IROs. FAS 131 was the focus at a meeting of the Fairfield-Westchester Niri chapter last month, with a panel that included June Filingeri, a partner in Morgen-Walke Associates: ‘Companies right now are grappling with new disclosures in segment reporting. It could change the way Wall Street looks at companies.’
Some companies are worried that the heightened disclosure will put them at a competitive disadvantage, Filingeri reports. For example, operating margins in a particular segment may be deemed material for a small company but not for a large competitor. On the other hand, Filingeri suggests that companies turn the new rule to their advantage. ‘A press release is a good opportunity to shape the message and provide perspective on the new information that’s going to eventually show up in the 10k,’ she says. Skewered for slip-ups The most scathing IR critics can be found among the financial media. Selective disclosure is increasingly a pet peeve of Dow Jones, Reuters and Bloomberg, not to mention the commentators on populist investor sites like the Motley Fool and theStreet.com. Managements are regularly skewered for disclosure slip-ups. Tellabs, for example, was targeted by Bloomberg when a September conference call revealed it wouldn’t meet third-quarter estimates. The call was available only to a select group of portfolio managers and analysts, and by the time it was available for replay, Tellabs stock fell from as high as $52 to $38, losing about $1.27 bn in market value.
‘Hardly a day passes without some publicly-traded US company shafting its owners,’ according to a Wired columnist, portending the pro-disclosure, pro-corporate governance revolution brewing in the online investing world.
Much of the current discussion is centered around conference calls. Bloomberg’s contribution to the debate, brought to light in a showdown with General Motors last fall, has been simply to join company conference calls uninvited and rebroadcast them. Others, such as Dow Jones Newswires and Reuters, have been lobbying politely but vociferously for media to be allowed on all company conference calls.
‘What is defined as ‘material’ can vary significantly from company to company and from observer to the corporate officers who have to make the decision,’ comments Neal Lipschutz, managing editor of Dow Jones Newswires. ‘You hear corporate officers say nothing material is revealed in a conference call limited to analysts or institutional investors. That could be technically true, but all sorts of interesting information useful to investors and news media trying to understand the story could be included in the call. Statistics show that a very small percentage of companies open up their conference calls to media; I think that’s wrong.’
According to Niri’s 1998 member survey, 83 percent are conducting conference calls – and 89 percent of these are posting replays. 29 percent allow individual investors to listen in, and just 14 percent invite media. ‘The reality is the media are listening to a lot of the calls anyway,’ says Niri CEO Lou Thompson. ‘They simply get the numbers from the analysts or sit in analysts’ offices and listen to the calls.’
‘If you’re going to communicate with the investing public, you’ve got to allow the news media and anyone representing the investment public in on those communications just to ensure that one group doesn’t get more information than the other,’ adds Lipschutz.
‘Media presence on conference calls helps ensure that whatever gets said will be broadly disseminated,’ agrees Pitt. ‘These are public discussions about public companies that affect the stock market, and the broader the dissemination a company ensures, the less chance it has of being accused later of something inappropriate.’
Lawsuit ammunition
Wilson Sonsini, whose goal is to make sure disclosure is litigation friendly, counsels against letting the media in on conference calls. ‘There is a lot of tension,’ says Feldman. ‘But most of the well-managed IR departments I know don’t allow media on conference calls. There’s no legal requirement to do it, and it may actually dilute the call. It also gives ammunition to plaintiffs, who are listening in and taking notes.’
The law firm used to tell clients not to replay conference calls. That advice changed early this year because companies were being besieged by requests for replays, and it threatened to turn into a selective disclosure issue. The lawyers’ concession is for companies to offer a replay, but only for 48 hours and not including the Q&A session in the replay. ‘The shooting form the hip in the Q&A can hurt the most,’ says Clark.
As for putting transcripts of conference calls on the web, it’s a prospect that horrifies these litigators. Same with analyst correspondence via e-mail, which leaves a paper trail for plaintiffs to follow. Clark predicts that the content of web pages is going to be behind the next wave of securities litigation for one simple reason: Milberg Weis, which lodges the lion’s share of strike suits, just gave each of its lawyers a computer with internet access. ‘Until about a couple of months ago, the leading plaintiffs’ law firm did not have access to the internet,’ he says. On edge What’s a poor IRO to do, here between a rock and a hard place? And what ever happened to a safe harbor? The promised haven for forward-looking information seems to have had little or no impact on the volume of strike suits. Boeing, for example, recently lost a motion to dismiss a shareholder lawsuit because its safe harbor disclosure statements were too boilerplate and too general. The only good news coming out of the case is that the ruling provides corporate counsel with rare legal guidance on what constitutes a ‘safe’ safe harbor.
‘Very few companies use safe harbor correctly,’ according to Clark. ‘He says that when used correctly, it’s an extraordinarily cumbersome form of disclosure. You have to identify every forward-looking statement, and particular risks, on a statement by statement basis. Our hope in 1995 was that safe harbor would be salvation. It hasn’t turned out to be so. Courts have set a very high bar for companies in terms of disclosure and safe harbor.’
Investors and regulators, then, are feverishly concerned about issues of disclosure. The courts are offering scant relief. And management is sick with worry about stock price, which more than ever depends on the delicate management of earnings expectations.
It’s clear who’s in the hot seat: IROs.
