We waited over two years for some action and then all we got to witness was a slap on their wrists. The US Securities & Exchange Commission’s first Regulation Fair Disclosure enforcement actions did not quite produce the landmark cases that we had been warned to look out for when the rule was first introduced in October 2000. Still, venture beyond the headlines and the finer detail of the cases makes for interesting – and worrying – reading for investor relations officers.
The four cases were brought against Raytheon, Siebel Systems, Secure Computing and Motorola for alleged breaches of Regulation FD in their investor communications over the past two years. Raytheon signed a ‘cease and desist’ order, although it neither admitted nor denied any wrongdoing. Siebel Systems agreed to pay a civil penalty of $250,000, but also admitted no wrongdoing. And Secure Computing agreed to a ‘cease and desist’ order – again without admitting any wrongdoing. Judge Dredd leading the way with the heavy-handed enforcement of ‘justice’ it is not.
The most interesting of all these cases from an IR perspective is that of Motorola – the only one of the four in which the SEC decided not to take any action beyond issuing a report of its investigation. The Motorola case does not just stand out because of the lack of enforcement action; it’s also that it is the only one in which the SEC clearly refers to a company consulting its lawyers before the selective disclosures were made.
It seems that an advance huddle with lawyers helped protect Motorola from the full wrath of the SEC, even though it failed to prevent the selective disclosure taking place. Nor did it prevent the IR department from the ignominy of an SEC investigation.
According to the SEC’s report, the Motorola case was prompted by the selective disclosure of material information about the company’s quarterly sales and orders. The iffy communication occurred between the director of IR and various sell-side analysts. During these calls, the director of IR told analysts that first quarter sales and orders would be down by at least 25 percent. Previously, the company had only said in a news release and conference call that sales and orders were experiencing ‘significant’ weakness and that it would likely miss its earnings estimates for the quarter.
The clarification was a result of the IR director noting that analysts had not downgraded their reports sufficiently in the wake of the conference call and feeling they needed further prodding in the right direction.
The key to the case lies in the fact that the IR director then contacted corporate counsel to clarify the issue. The legal advice revolved around the idea that a quantitative definition for the qualitative term ‘significant’ was not material public information. In other words, the IR director could go ahead with one-on-one telephone calls to analysts without sending out another release.
The SEC’s report states, ‘Counsel’s factual assumptions and reasoning were demonstrably incorrect’. Lawyers, like investor relations officers, do not like being caught on the sharp end of an SEC investigation and the finding is likely to be very bad news for IR practice over the coming months as corporate counsel across the US take an ultra-conservative path.
The difficulty for IROs is that they once again face being caught between the pressures of open and honest communication and the ‘don’t-say-anything’ approach of corporate counsel. And the SEC report puts the whip hand back with corporate counsel. The same problem reared its ugly head when the SEC first introduced Reg FD, forcing the commission to reiterate that the rule was supposed to encourage rather than inhibit communication with the markets.
The SEC’s first Reg FD enforcement actions may not have the look of heavy-handed justice. But the effect of the Motorola report may be to leave IR practitioners reeling for months to come.
