Posts Tagged ‘Reg FD’

Reg FD: Does $50,000 get your attention?

September 7, 2013

Court gavelIn the old days, companies sometimes tried to soften the shock of bad news by getting on the phone with key analysts to tweak their assumptions, whether on this quarter’s earnings or another issue. A Regulation FD case against an IRO, resolved Friday by the Securities and Exchange Commission, sends a clear message: The old days are over.

Here’s my non-lawyer version of what Reg FD says to IROs: When things are changing in ways that may be material for shareholders, don’t think about “signaling” or “telegraphing” the market by talking to a few analysts and investors. Instead, broadly disclose the changes through a news release, 8-K filing, or conference call open to all investors. Selective disclosure is out, fair disclosure is in – that’s been true at least since Reg FD took effect in 2000.

The recent SEC case involves Lawrence Polizzotto, former head of investor relations for First Solar, Inc., an Arizona firm whose financing was part of the political controversy a couple of years ago over Energy Department loans to renewable energy companies. On Friday, Polizzotto agreed to pay a $50,000 penalty in the selective disclosure case and accepted a cease-and-desist order with the SEC, without admitting guilt.

Here’s the scenario the SEC painted: In September 2011 Polizzotto attended an investor conference with First Solar’s CEO at the time. The firm had conditional commitments from the Energy Department for three loan guarantees totaling $4.5 billion, and the CEO expressed confidence  the company would receive that backing.  Two days later, word came that First Solar would not get at least one of the guarantees. According to the SEC:

A group of employees including Polizzotto and one of First Solar’s in-house lawyers began discussing how and when the company should publicly disclose the loss of the loan guarantee.  The company lawyer specifically noted that when the company received official notice from the Energy Department, “we would not have to issue a press release or post something to our website the same day.  We would, though, be restricted by Regulation FD in any [sic] answering questions asked by analysts, investors, etc. until such time that we do issue a press release or post to our website …”

Comment: When lawyers talk, IROs should listen. SEC went on …

Polizzotto violated Regulation FD during one-on-one phone conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011 – the day after a Congressional committee sent a letter to the Energy Department inquiring about its loan guarantee program and the status of conditional commitments, including three involving First Solar.  This Congressional line of inquiry caused concern within the solar industry about whether the Energy Department would be able to move forward with its conditional commitments.

Analysts began issuing research reports about the Congressional inquiry, and analysts and investors began calling Polizzotto. Despite knowing that the company had not yet publicly disclosed anything, Polizzotto drafted several talking points that effectively signaled that First Solar would not receive one of the three loan guarantees.  His talking points emphasized the high probability of receiving two of the loan guarantees and the low probability of receiving the third.

Polizzotto delivered his talking points in the one-on-one calls with analysts and institutional investors, and he directed a subordinate to do the same.  Polizzotto went even further than his talking points when he told at least one analyst and one institutional investor that if they wanted to be conservative, they should assume that First Solar would not receive one of the loan guarantees.

So there it is: material nonpublic information. The proof of materiality is that, when First Solar learned of the one-on-one disclosures and issued a press release the next day, its stock dropped 6 percent.

If you want guidance on Regulation FD or its application, ask your securities counsel. You can read Reg FD here, see the Polizzotto order here or explore links on the SEC’s selective disclosure webpage.

The philosophical heartbeat of Reg FD was captured by Michele Wein Layne, director of the SEC’s Los Angeles office: “All investors, regardless of their size or relationship with the company, are entitled to the same information at the same time.”

© 2013 Johnson Strategic Communications Inc.

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IR nightmare: leaking earnings

August 2, 2011

As the Q2 reporting season winds down, a nightmare scenario for investor relations professionals comes to mind: accidentally leaking your company’s earnings release or M&A announcement by inadvertently posting it online. Such a leak spreads easily into a widespread spill into social or traditional media.

Can’t happen? Well, it does. A panel discussion at the NIRI 2011 Annual Conference in June was all about warning IR people of this potential mishap. Two folks from Microsoft, IR manager Dennie Kimbrough and IT manager Josh Bailey, courageously provided the red meat of the NIRI panel discussion called “Keep a Lid on It: How to Guard Against Leaks, and What to Do if One Happens.”

Most importantly for all of us in investor relations, the Microsoft staffers shared lessons learned on how to guard against similar leaks at our companies.

The software giant is one of a handful of companies – Walt Disney, NetApp and Transocean are others – recently tripped up by the interplay of humans and technology, causing the inadvertent, early and selective release of earnings.

For MSFT, it happened on January 27, 2011. According to Kimbrough, the first word of a problem came about 12:35 p.m. Pacific time, an hour before the market would close. A Reuters reporter called to confirm an online report of the software giant’s Q2 earnings – not due out until after the close. Not the media call you want to get.

It seems MSFT’s 77-cent earnings per share figure was already out on StockTwits, through the work of Selerity, a “low-latency news aggregator.” For us non-techies, that means Selerity uses web crawler programs to snoop around continually for information on web pages that might move stocks – and move the data quickly to its clients, who are hedge funds, banks and prop traders.

What Selerity’s crawlers found was a page where someone at Microsoft posted Q2 earnings data on what they assumed was a secure “staging” page, but actually was a live web page. “It was just a simple human error,” Kimbrough said.

There was no link to it, as an official news release gets when posted to a website, but crawlers don’t need a link. Kimbrough said MSFT put its earning data up on the blind (but public) web page at 11:23 a.m., and Selerity’s crawler found it six minutes later. Selerity sent the numbers right out to its clients – and broadcast MSFT’s 77-cent EPS on StockTwits at 12:50, a full 70 minutes before the close.

Bailey, the Microsoft IT guy, explained three kinds of web crawlers: Those used by search engines “play nice” with web administrators in handling nonpublic files. Others scrape email addresses and phone numbers from thousands of websites to enable marketers to spam us. A third, scarier group of crawlers search for not-yet-public pages, systematically guessing URLs that might provide interesting data (something like “…/earnings/Q2/press release.html”).

The problem isn’t brand new. Another panelist, Andy Backman (a former IRO and now CEO of InVisionIR) recalled an encounter 10 years ago when a reporter guessed the URL for his company’s second-quarter earnings release – and reported the numbers an hour and a half before the release was due out.

Of course, the damage-control step to take if a leak of this sort happens is to issue the darn news release – get it out fast! Microsoft posted a brief statement to its corporate blog immediately after the reporter’s call and had the full earnings announcement up by 12:55 Pacific time, about 20 minutes after the reporter’s call.

But prevention is the real need.

And prevention is where IROs can play an important role by taking precautionary steps as part of the team that develops earnings and M&A announcements:

  • Keep online staging areas secure to prevent public posting of earnings and similar announcements. “The only way to protect yourself against web crawlers is to keep your files on your side of the firewall,” Bailey says. Both in-house staffers and third-party service providers like lawyers, CPAs and newswires need to have strict procedures in place. The IRO needs to check.
  • Don’t allow anyone to leave drafts lying around on a printer or desk. This is the old-fashioned leak, allowing non-confidential employees or even members of the public who pass by to see nonpublic information sitting out in the open. “Shred everything. Lock it away,” Backman advises.
  • Demand better code names for M&A projects or offerings. Lawyers and I-bankers love to create code names. And they’re fun – we all get a sense of adventure working on a hush-hush project called “Operation Pegasus.” Trouble is, Backman notes, code names are almost always picked because they point to the real name. We’re making a bid for Procter & Gamble, so we call it Operation Pegasus. Sometimes namers use a double entendre (the acquisition of Energizer might be “Project Bunny”). Backman suggests: Pick a code name that has nothing to do with the target company – a code name.

In many respects, IR professionals need to be a little paranoid. For most of us, Q2 reporting is finished (my excuse for not posting in July), but security of financial information is a process issue we can start working on now for next quarter.

As gatekeepers of material information, IR people need to work with colleagues in finance and IT to ensure that “Top Secret” remains so right up until our broad dissemination to the market.

© 2011 Johnson Strategic Communications Inc.

Open mouth, insert … No, wait!

July 8, 2010

“Keeping Your Foot Away From Your Mouth”

This headline in yesterday’s Wall Street Journal piece (p.D1) highlights a common human frailty. Citing gaffes from business leaders, politicians and entertainers, the WSJ says words do matter – and verbal errors can cause lasting damage.

In investor relations, of course, foot-in-mouth syndrome is one of our worst fears. We go to great lengths to avoid selective disclosure, much less erroneous disclosure, of financial information or strategic plans not yet ready for broadcast.

This is why we brainstorm key messages on quarterly earnings or strategic transactions in advance (and put them in writing to use as a reference) … why we write and review drafts of news releases and comments for investor meetings … why we create Q&As for conference calls and corporate events … why we try to make CEOs, CFOs and other spokesmen rehearse speeches and Q&A times.

The gatekeeper role is mission-critical in IR. We exist partly to create a process for orderly disclosure – helping our companies think before they speak.

Of course, some CEOs just are who they are. Most veteran IR people can tell horror stories – on more than one occasion, I’ve rolled my eyes at something coming out of the boss’s mouth. “Did he really say that?” Once the blurting is done, it’s too late for anything but damage control – which often doesn’t work too well.

Maybe one of the key performance indicators in an IR person’s annual goals should read: “Get through the year without anyone in top management sticking their foot in their mouth (at least around our investors).”

Any success stories or tips?

© 2010 Johnson Strategic Communications Inc.

Body language & tone are back

June 16, 2010

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.