In its first publicly reported enforcement actions under Regulation FD, the Securities and Exchange Commission has fined one public company $250,000 and issued cease-and-desist orders to two others. See In the Matter of Siebel Systems, Inc., SEC Release No. 34-46896 (Nov. 25, 2002); In the Matter of Secure Computing Corporation and John McNulty, SEC Release No. 34-46895 (Nov. 25, 2002); In the Matter of Raytheon Company and Franklyn A. Caine, SEC Release No. 34-46897 (Nov. 25, 2002). The SEC also released a Report of Investigation warning a fourth public company that it had violated the ban on selective disclosure, but sparing it from an enforcement action because it had relied in good faith on erroneous advice of its in-house counsel. See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., SEC Release No. 34-46898 (Nov. 25, 2002).
Regulation FD
Regulation FD, which went into effect in October 2000, bans U.S. public companies from selectively disclosing material nonpublic information to securities analysts, certain other market professionals or existing shareholders (where it is foreseeable that the shareholder will trade on such information). Regulation FD requires that an issuer making an "intentional" disclosure of material, nonpublic information to such persons do so in a manner that provides simultaneous disclosure of the information to the general public. If a "non-intentional" selective disclosure of material information is made, the issuer must "promptly" (generally within 24 hours after a senior official of the issuer knows, or is reckless in not knowing, of the selective disclosure) make public disclosure.
Public disclosure under Regulation FD requires inclusion of information in a Form 8-K or dissemination by press release or other means of broad, non-exclusionary distribution to the public. Posting information on a company's web site or announcing information at a meeting at which representatives of the press happen to be in attendance does not, by itself, constitute public disclosure under Regulation FD.
In the period since Regulation FD was adopted, the practice of intentionally giving earnings guidance to analysts in nonpublic conference calls has all but ceased. One-on-one (and other nonpublic) communications between company spokespersons and the analyst community have also reportedly substantially declined.
Siebel Systems Civil Penalty
The SEC imposed the $250,000 civil penalty on Siebel Systems after its CEO told analysts, institutional shareholders and other attendees at a Goldman Sachs invitation-only technology conference that he was "optimistic" about business returning to normal. The statement, based on nonpublic information regarding the improving sales pipeline, was in contrast to much more pessimistic statements made publicly three weeks earlier. Siebel's stock price increased 20% over the next 24 hours in heavy trading, some of which the SEC staff traced back to attendees at the technology conference.
Siebel made no press release or Form 8-K filing relating to the CEO's remarks either simultaneously or after the technology conference. Although the CEO may not have realized that presentations at the technology conference were not being web-cast or otherwise disseminated publicly, Siebel's IR Director had known this for weeks and had simply failed to tell the CEO.
The SEC concluded that the CEO's remarks, under the circumstances, constituted an intentional selective disclosure in violation of Regulation FD that merited a significant monetary penalty.
Secure Computing and Raytheon Cease-and-Desist Orders
The CEO of Secure Computing leaked news of a large, unannounced OEM agreement during conference calls with portfolio managers and brokerage sales personnel on two consecutive days (during which time Secure Computing's stock price increased a total of 15% on very heavy trading). The SEC found that the first conference call disclosure was non-intentional (triggering a "prompt" public disclosure requirement), but the second was clearly intentional (since the company was by then preparing a press release out of concern about the first). Secure Computing violated Regulation FD when it failed to make simultaneous public disclosure at the time of the second conference call. The SEC's cease-and-desist order also named the CEO individually.
In February 2001, Raytheon conducted an investor conference which was open to the public via web-cast in which it reiterated annual earnings per share guidance for 2001 but did not provide any quarter-by-quarter EPS distribution guidance for the upcoming year. Concerned that the street consensus for the first quarter and first half of 2001 was high, over the next six weeks, Raytheon's CFO initiated one-on-one calls to 11 of 13 sell-side analysts following the stock. The CFO wanted to convey more clearly Raytheon's expectation that EPS would be very steeply back-end-loaded during 2001 and that street estimates for the first quarter and half were too high. As a result, street consensus moved down. The SEC found the CFO's conference calls to be intentional selective disclosures of material, non-public information regarding expected quarter-by-quarter distribution of EPS. Since public disclosure of comparable information was not made until actual quarterly results were released, there was a clear violation of Regulation FD. The SEC's cease-and-desist order also named the CFO individually.
Motorola Investigation
In February 2001, Motorola had announced in a press release and public conference call that sales and orders were experiencing "significant weakness" and that Motorola was likely to miss its previously announced earnings estimates for the quarter and have an operating loss. Analysts lowered estimates, but Motorola management was concerned that street models still did not reflect the full expected weakness. Motorola's IR Director made a series of private telephone calls to sell-side analysts during March 2001 to clarify that "significant weakness" meant a "25% or more decline." The analysts significantly revised their models downward after the calls.
Before making the private telephone calls to analysts, the IR Director had asked in-house counsel responsible for SEC work whether such information could be legally communicated on a selective basis. Counsel advised that it could, reasoning that the IR Director was simply reiterating the information disclosed publicly in February with a quantitative definition for certain qualitative terms previously used. Counsel further reasoned that the quantitative definition of "significant" did not add materially to the information already made public and that Motorola had over the years associated "significance" sufficiently with a 25% benchmark that the definition could be viewed as already being public knowledge.
The SEC found counsel's advice erroneous, reasoning that the 25% definition clearly added materially to the previous public disclosure and that previous association by Motorola of "significant" with a 25% benchmark in a different context did not make the disclosures synonymous to the public. The SEC also noted that the analysts' reactions to the disclosures supported this conclusion.
Nevertheless, the SEC found that "Motorola acted based on advice of counsel that, although erroneous, was sought and given in good faith." Consequently, Motorola only received a warning instead of becoming subject to a formal enforcement action. The SEC noted, however, that "we would be less likely in future cases to credit reliance on counsel for the advice rendered here."
Conclusion
The SEC split in resolving these actions, based apparently on the differing penalties imposed in cases that are difficult to distinguish. Commissioners Glassman and Atkins objected to the Siebel Systems civil penalty. Commissioner Campos objected to the lack of monetary penalty imposed on Secure Computing and Raytheon. Chairman Pitt and Commissioner Goldschmid voted in favor of each of the final resolutions.
While there may have been some disagreement regarding appropriate remedies for this first round of Regulation FD offenders, the overall message from the SEC is clear. Enforcement of Regulation FD remains a priority at the SEC. Confusion or misunderstanding on the part of senior officers will be no excuse, especially when touching the "third rail" of selective disclosure of earnings guidance. Additionally, public company spokespersons must have a clear understanding of the ban on selective disclosure. And, ultimately, public companies must obtain the best possible legal advice when venturing into difficult Regulation FD situations.