Securities: SEC starts action over favouring of analysts when releasing information

It's long been a puzzle: why do companies hold press conferences and analysts' briefings to announce company news when there are far more instant - and cost effective - methods of getting that information out.

Worse, the media and those analysts are, by definition, in possession of market sensitive information ahead of the general market - often before filings are made with the markets themselves.

That leads to the potential to distort markets - and the prospect of insider dealing.

According to the SEC "Regulation FD requires that when issuers disclose material non-public information, they must make broad public disclosure of that information. The SEC's orders find that as they neared the end of Office Depot's second quarter for 2007, CEO Stephen A. Odland and then-CFO Patricia A. McKay discussed how to encourage analysts to revisit their analysis of the company. Office Depot then made a series of one-on-one calls to analysts. The company did not directly state that it would not meet analysts' expectations, but rather this message was signalled with references to recent public statements of comparable companies about the impact of the slowing economy on their earnings. The analysts also were reminded of Office Depot's prior cautionary public statements. Analysts promptly lowered their estimates for the period in response to the calls. Office Depot did not regularly initiate these types of calls to all analysts covering the company."

The SEC's civil action has already gone away: filed yesterday, there was an immediate settlement. Office Depot agreed to settle the SEC's suit without admitting or denying the findings and allegations, and will pay a USD1 million penalty. Odland and McKay also agreed to settle the Regulation FD claim against them without admitting or denying the findings and will pay USD50,000 each.

"Office Depot executives selectively shared information with analysts and the company's largest shareholders in order to manage earnings expectations," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This gave an unfair advantage to favored investors at the expense of other investors and, as today's action shows, is illegal."

"Talking Wall Street down from its earnings projections whether done expressly or through signals is prohibited," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Regulation FD is designed to level the playing field so that all investors receive the information at the same time."

But that's not all: in addition to the "alleged" breaches of Regulation FD, the company was accused of "unrelated accounting" breaches.

The SEC says "Unrelated to these Regulation FD [breaches], the SEC also [sued] Office Depot [alleging that it ] overstat[ed] its net earnings in its financial statements for the third quarter of 2006 [until and including] the second quarter of 2007 as a result of accounting [breaches]. Office Depot prematurely recognised approximately USD30 million in funds received from vendors in exchange for the company's merchandising and marketing efforts instead of recognising the funds over the relevant reporting periods in a manner consistent with Generally Accepted Accounting Principles. In November 2007, the company restated those financials and announced a material weakness in its internal controls over financial reporting that resulted from the failure of its personnel responsible for negotiating agreements with vendors to communicate all of the relevant information to financial accounting personnel. The SEC did not [sue] Odland or McKay [over]any issues in connection with the restatement."