Avoid the fare for unfair disclosure

Richard Carpenter, CEO at Bladonmore, dives into the case behind the SEC’s largest ever fair disclosure fine and shares what we can learn.

In December last year, the US Securities and Exchange Commission (SEC) announced that telecommunications giant AT&T agreed to pay a $6.25 mn settlement for violating Regulation FD (Fair Disclosure). It’s the largest ever fine paid by a single company for selectively disclosing material information.

In 2000, when it first became law, Reg FD was a very hot topic and for the next several years it was top of mind for investor relations officers (IROs). Over the past decade, fears of falling afoul of selective disclosure rules have waned somewhat – but this should bring it back into focus.

For IROs, the scariest part of this story may lie in the fine print. AT&T’s IR executives Christopher Womack, Michael Black, and Kent Evans were each fined $25,000 as part of the settlement for making private phone calls to analysts, encouraging them to lower revenue numbers before earnings were released. The three were publicly named in SEC press releases about the settlement.

What happened?

According to law firm Cooley LLP, Regulation FD ‘prohibits a public company from selectively disclosing material non-public information about itself or its securities to certain persons outside the company, unless it also discloses the information to the public.’

In the case of AT&T, most of the facts are not in dispute. AT&T neither admitted to, nor denied, the allegations in the settlement that was eventually reached.

In early 2016, facing disappointing sales because of a lack of smartphone upgrades, the telecom’s IR team made one-on-one calls to analysts at some 20 Wall Street firms and provided information to analysts that would lower earnings estimates ahead of quarterly results.

In other words, they gave analysts sales information before it became public. It meant that, with revised projections, AT&T beat consensus revenue estimates, an important step in avoiding a stock price hit.

To prove a Reg FD violation, an individual must know (or be reckless in not knowing) that he or she is communicating information that was both non-public and material.

Proving what an individual does or doesn’t know can be tough. As evidence of knowledge, the case cited several pieces of evidence. That included the number of calls made, the variety of internal data shared, the duration of the calls, and the internal concern and persistence until estimates were lowered.

What can we learn?

Typically, Reg FD cases never reach a courtroom. This one was settled, too, but only after a New York court denied summary judgement for both sides. Because the case advanced so far, the court issued a 129-page opinion in SEC v. AT&T, 9/08/22, which gives an important glimpse into how evidence was weighed.

Here are some takeaways:

SEC takes selective disclosure very seriously

Indeed, this shows no sign of changing. When the court analysed the AT&T case, it considered the constitutionality of Reg FD in light of free speech protections. The court reaffirmed the constitutionality of the rule.

Having policies and procedures may not be enough

‘At AT&T,’ writes law firm Morrison Foerster, ‘the relevant policies, procedures, and training expressly prohibited the disclosures at issue.’ Morrison Foerster continues: ‘Companies should consider whether changes or updates are warranted in their compliance programs to help mitigate the risk of unintended Reg FD violations.’ Additional targeted trainings for employees who communicate directly with analysts is one change suggested by the firm.

Various job titles can be implicated

The SEC has historically only implicated executives at the highest levels of a company in Reg. FD violations. Past SEC enforcement cases charged senior leadership at companies, including CEOs, CFOs, and heads of investor relations, according to Davis Polk. The AT&T case underscores that IR professionals at all levels should be careful, too.

Think before phoning analysts for private conversations

‘Calls to analysts in advance of the reporting of quarterly earnings remain risky, especially if the purpose of the calls is to adjust analysts’ expectations,’ according to law firm Davis Polk.

Its memo notes that ‘the risk increases as the quarter progresses and is especially heightened when company personnel making the calls, or instructing personnel to make the calls, have non-public information about the quarter’s results.’

This case has shown not only the importance of proper communication with investors and analysts, but also in using the right channels to do so.

If you’re looking for help engaging safely and constructively with investors and analysts, get in touch.


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Richard Carpenter

Chief Executive Officer

Richard is responsible for driving Bladonmore’s strategy and the running of our global business.

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