Body language & tone are back

In a spirit of renewed regulatory machismo, the SEC is reportedly investigating whether generic drug company Mylan violated Regulation FD by “sounding excited” and dropping positive hints about upcoming earnings in a 2009 meeting with a analysts and investors, according to today’s Wall Street Journal (page C1).

The incident is a reminder of the risks of what should be normal investor relations activities – meetings and phone calls with the Street. Exactly what happened in the Mylan meeting isn’t clear from the WSJ or a similar Reuters article – but this story is going to be worth following.

According to the WSJ, the SEC has asked Mylan and some analysts who attended the meeting last September – three weeks before the end of the third quarter – what the company said regarding earnings for the quarter. The day after the meeting, the paper said, Mylan shares jumped 7% – and the stock rose further when earnings were reported in late October.

Mylan told the WSJ the company is “confident the communications made during the conference were entirely appropriate.” The meeting wasn’t webcast, and Mylan didn’t issue a news release or file anything with the SEC disclosing information from the meeting – as Reg FD would require if something material was said.

Details so far are scarce. The most color came from analysts cited by the WSJ:

A UBS analyst who attended the Sept. 9 meeting said in a report to clients the next day that Mylan’s “management sounded excited about the upcoming 3Q.” The report added: “although not saying it, management basically implied once again that it was confirming 2010 EPS guidance.” Other analyst notes also said the company was “excited” about reporting earnings.

SEC cases based on Reg FD have been rare. Reuters notes that the Mylan incident is reminiscent of an SEC action against Richard Kogan, former chief executive of another drugmaker, Schering-Plough. Reuters recalls:

The SEC investigated [Kogan’s] private meetings in September 2002 with four institutional investors in Boston, three of which were among the company’s largest investors.

“At each of these meetings, through a combination of spoken language, tone, emphasis and demeanor, Kogan disclosed negative and material, nonpublic information regarding Schering’s earnings prospects,” including that the company’s 2003 earnings would significantly decline, the SEC found.

In the Schering-Plough case, the stock price took a dive after the lunch meeting with investors. Publicly, the company remained silent. The CEO was gone a few months later, and Schering-Plough ultimately agreed to pay a $1 million civil penalty to the SEC. Kogan paid $50,000.

So … maybe body language and tone are back in the SEC’s sights. We’ll have to see. Today’s news is a reminder that IR professionals – and senior managers – need to be vigilant about even inadvertent guidance on earnings in private meetings.

One way to prevent this problem is to announce an analyst day in advance and webcast the presentations. That works for larger meetings.

I believe companies also should continue to meet personally with individual investors or small groups – this is how relationships are built. The executive team and IR should rehearse  beforehand what’s to be discussed – and not discussed – especially regarding upcoming earnings. If selective disclosure happens, Reg FD prescribes a pretty clear cure: broad disclosure of the information to the market.

What’s your approach to avoiding potential Reg FD problems?

© 2010 Johnson Strategic Communications Inc.

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One Response to “Body language & tone are back”

  1. Tweets that mention Body language & tone are back « IR Café -- Topsy.com Says:

    […] This post was mentioned on Twitter by Marco Schüller, MeetTheStreet. MeetTheStreet said: You: Body language & tone are back: http://bit.ly/cmBEZi […]

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