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A Fine Dilemma
By Francis X. Gilpin
Associate Editor
Sensitive information about your publicly traded company turns up in investor chat rooms on the Internet. What do you do?
It happened to TECO Energy Inc. An employee of another outfit with which the Tampa utility holding company did business was sharing inside information with the world.
"He's no longer employed by that firm," says Mark M. Kane, TECO's director of investor relations. "We went to their compliance people."
Kane's tale illustrates the types of predicaments that have followed the U.S. Securities and Exchange Commission's enactment five years ago of Regulation Fair Disclosure. Kane was among the experts who discussed the thorny questions surrounding Reg FD at a Nov. 17 luncheon co-sponsored by the Florida Venture Forum, an advocacy group for entrepreneurs.
Although the Sarbanes-Oxley Act of 2002 has become the biggest securities-compliance headache for public companies, particularly smaller ones, Reg FD is not something that should be ignored by entrepreneurs whose startups have gone public.
Even small companies coming out of an initial public offering should have a written policy on Reg FD, says former SEC lawyer Mark A. Danzi, a senior associate with Hill Ward & Henderson PA in Tampa.
The impetus for Reg FD came from Arthur Leavitt, the SEC chairman under President Bill Clinton.
The rule bans public companies from leaking market-moving news selectively to favored parties. Securities industry insiders have since been legally prevented from trading on material information before individual investors, who were formerly left out of the loop, could call their stockbrokers.
Perhaps the best-known outgrowth of the rule is a greater access by investors and the news media to conference calls held by companies when quarterly earnings are released.
A 2003 SEC enforcement action against Schering-Plough Corp., says Danzi, "was a perfect example of why the SEC thought Reg FD was necessary."
The New Jersey drug maker was fined $1 million. That stands as the largest financial penalty so far for a Reg FD violation. The chief executive was fined an additional $50,000.
The CEO was found to have met privately with a small group of analysts and managers of funds that are the company's three biggest shareholders. The CEO confided that Schering-Plough's near-term earnings would be "hard hit," a stronger statement than previous public guidance.
The analysts in attendance immediately downgraded their ratings on Schering-Plough, and the portfolio managers dumped more than 20 million shares, driving down the stock price by 17%.
During a subsequent SEC probe, investigators found a tape recording of one chortling portfolio manager telling a colleague: "No one had any idea why the stock was down ... Anyone who didn't meet with them ... doesn't have a clue as to what's going on."
Accidental disclosure of inside information can be somewhat remedied in the SEC's eyes if the company widely disseminates the news within 24 hours, according to Hill Ward shareholder David S. Felman.
As the years pass, however, Danzi says, the SEC has become less tolerant of slips of the tongue. That's because the commission assumes that all public companies and their officers are now familiar with the requirements of Reg FD.
Although the SEC has brought just seven Reg FD enforcement actions since 2000, Danzi says: "The tenor and tone of these cases has been getting significantly more aggressive."
About 80% of public companies have written policies on Reg FD. Surprisingly, Outback Steakhouse Inc. doesn't.
General Counsel Joseph J. Kadow says the Tampa restaurant chain is working on a policy. In the meantime, Kadow says, top executives recently got a Reg FD refresher course before 40 casual-dining industry analysts came to town for a conference.
Danzi says it may be harder for companies smaller than Outback to run afoul of Reg FD. After all, they have fewer employees who could commit a violation. But the companies still should have policies, he says.
If small companies ever get hauled before the SEC, the absence of a policy might constitute non-compliance not only with Reg FD but possibly Sarbanes-Oxley's internal-control requirements, according to Danzi.
Kane says TECO does have a policy that forbids employees from participating on Internet bulletin boards. But Kane does monitor the sites for mentions of TECO.
That's how TECO picked up on the inside information that was floating around cyberspace, courtesy of the other company's employee. "If we see something that alarming, we will take action," Kane says.
The lawyers didn't address the TECO episode. But Felman advises clients not to get "entangled" with Internet investor forums or analysts. "It's very important for the company to keep some distance from the analysts," says Felman.
Public companies have no legal obligation to correct erroneous information supplied to investors by a third party. On the other hand, Felman says companies should avoid posting data such as upbeat analyst reports solely on a corporate Web site. The SEC could view the practice as selective disclosure.
"That's really unfair to the investing public," he says. "Generally, whoever sees that first has the advantage of trading based on that information."
HOW JABIL CIRCUIT HANDLES REG FD
Jabil Circuit Inc. has a written policy on how the St. Petersburg electronics equipment manufacturer discloses non-public material information to investors. Here are a few highlights:
• Authorized spokespersons are the president and chief executive; the chief financial officer; the vice president of communications and investor relations; the treasurer; and the general counsel.
• During conference calls, management will make all reasonable efforts to avoid introducing new material information that wasn't included in the pre-scripted presentation.
• Under no circumstances will the company distribute analyst reports on the company externally. The names and firms of analysts known to follow the company are posted on the company Web site.
• Employees should not respond to rumors about the company, including those found in Internet chat rooms.
Source: Beth A. Walters, vice president of communications & investor relations at Jabil Circuit
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