This is why you will sell S3 into a several point rally and buy dips that go lower, this is how the game is being played.
Access Denied: Some Investors Lose When Kept Out
New York, Dec. 6 (Bloomberg) -- During the first 30 minutes
of trading on Aug. 12, Mark Trautman watched the market value of
Clorox Co. drop by $1.8 billion, or 14.5 percent, costing him $1
million.
The bleach maker had reported a 6 percent gain in fiscal-
fourth-quarter profit on a 3 percent drop in sales. Trautman, who
invests $65 million at Shay Asset Management in New York, was
convinced something else had caused Clorox stock to drop 15
points. Little did he know that Clorox Chairman Craig Sullivan
was warning investors and analysts on an invitation-only
conference call that profit wouldn't meet expectations for the
next two quarters.
''It's outrageous that I didn't have the same information as
some others'' says Trautman, who now holds 92,000 Clorox shares.
''I was completely in the dark.''
Almost daily, companies from Wal-Mart Stores Inc. to Apple
Computer Inc. to Abercrombie & Fitch Co. dole out market-moving
information to big investors and analysts in conference calls,
closed-door meetings, or one-on-one conversations. That gives
some large investors a chance to bail out or profit and leaves
some smaller money managers at a disadvantage.
Selective Disclosure
When companies parcel out critical information to some
investors and not to others, it's known as selective disclosure.
While experts don't always agree on when it occurs or even
whether it's illegal, regulators say selective disclosure is
unethical and damages the integrity of the stock market.
''Selectiveness is a disservice to investors, and it
undermines the fundamental principle of fairness,'' U.S.
Securities and Exchange Commission chairman Arthur Levitt said in
an October speech in New York. ''The practice is downright
deceptive and verges on illegality.''
Everyone with a stake in the stock market is affected by
selective disclosure. About 78.7 million people own shares --
either directly or through mutual funds and pension plans -- up
86 percent from 1983, according to a survey by the Investment
Company Institute and the Securities Industry Association.
Yet many money managers can't get timely information from
companies.
''The playing field isn't level,'' says Fredric Russell,
chief executive of Fredric E. Russell Investment Management Co.,
a Tulsa, Oklahoma, firm that manages $75 million. ''Some
investors are more equal than others.''
Making Distinctions
And there's no sign that that distinction will change
anytime soon.
Some recent examples:
-- In July, at the annual Sun Valley, Idaho, summer
conference held by investment bank Allen & Co., Pixar chief
executive Steve Jobs told a gathering of other CEOs and powerful
investors that his animation studio would beat quarterly earnings
estimates. That information gave those at the meeting a head
start in buying the stock, which gained as much as 6 percent that
day.
-- Officials at Apple Computer, Jobs's other company, called
up several Wall Street analysts on September 23 to tell them that
an earthquake in Taiwan had disrupted computer production and
could reduce quarterly revenue by as much as $50 million. Within
three days, Apple shares fell more than 7 percent.
-- On Oct. 8 an Abercrombie & Fitch Co. senior executive
told a Lazard Freres & Co. analyst that the retailer's third-
quarter sales would fall short of expectations. The company said
nothing publicly for five days, giving Lazard's clients a big
head start to sell shares or short them, essentially betting on a
decline. The stock dropped 15 percent before the company
confirmed the sales shortfall.
Nothing to Hide
''News has a way of filtering first to the ears of big,
powerful investors and analysts,'' says Carl Domino, who manages
$2.4 billion at Carl Domino Associates in West Palm Beach,
Florida. ''Some get invited to meetings before others. That's the
way corporate America works.''
Companies say they're not trying to hide anything and have
legitimate reasons for giving information to a screened group of
investment professionals.
''It's not feasible to invite everyone on a conference
call,'' says Craig Manson, vice president of investor relations
at Ceridian Corp. of Minneapolis, which provides human resources
services such as payroll processing for corporations.
''Conference calls are an enormous expense, a huge chunk of my
budget.'' He says a quarterly conference call that may include as
many as 120 analysts and investors costs more than $10,000.
Conference Calls
Conference calls cost companies a flat fee plus at least 30
cents per line per minute and additional charges for archiving
the presentations and replays. If Ceridian held four conference
calls per year at a total cost of $50,000, that would amount to
less than 1/100 of 1 percent of the $393.8 million it spent on
selling, general, and administrative (SG&A) costs last year.
Wal-Mart, the world's biggest retailer, says the lines would
clog if it opened up conference calls to all of its interested
shareholders.
''Physically, we'd have a hard time getting everybody on,''
says Wal-Mart senior vice president and treasurer Jay
Fitzsimmons, who also cited the expense of hosting a
teleconference. Wal-Mart had SG&A costs of $22.4 billion last
year.
Other companies don't want small investors on their calls
because, they say, these listeners might be misled.
''Ours isn't a simple call,'' says Joseph Kolshak, director
of investor relations at Delta Air Lines, the third-largest U.S.
airline. ''It's really targeted for a specialized audience.''
Gillette Co., Caterpillar Inc. and International Business
Machine Corp. say they prefer that small investors get their
information from the Wall Street analysts who track the
companies.
''We're more comfortable with individual investors' getting
an account of the calls from the analysts,'' says Hervey Parke,
IBM's director of investor relations.
Big Investors
Big investors and analysts -- those who benefit the most
from selective disclosure -- like the practice.
''I don't mind companies' restricting attendance on calls
and conferences-as long as I'm invited,'' says Anthony Valencia,
an analyst at Van Deventer & Hoch, a Glendale, California, firm
that manages $1.5 billion. ''As a big investor with a big stake
in the company, of course I appreciate having a head start on
critical information before others.''
Wall Street analysts also covet the inside scoop so vital to
enticing prospective investors to buy. Company executives, in
turn, mete out information to gain favor with brokerage analysts
whose influential buy recommendations can make or break stocks.
''Executives believe they'll get good coverage from analysts if
they give them selected information,'' says Brian Bruce, a
finance professor at Southern Methodist University's graduate
business school who studies the flow of information from
companies to investors.
'Promoters, Marketers'
The SEC's Levitt is blunt in his condemnation of the ties
between Wall Street and companies.
''Analysts act more like promoters and marketers than
unbiased and dispassionate analysts,'' Levitt said in his October
speech, calling the ties between companies and analysts ''a web
of dysfunctional relationships.''
Some companies invoke federal copyright law either to
restrict access to the conference calls or to prevent
distribution of recordings to those who couldn't attend.
For the past year, General Motors Corp., the world's largest
automaker, has been copyrighting its conference calls to deter
others from rebroadcasting them and to ward off some listeners.
Copyright law, though, doesn't confer the ownership of calls that
those companies assert, says David Nimmer, the leading expert on
the subject in the U.S. and author of ''Nimmer on Copyright,'' a
10-volume work that has been cited multiple times by the U.S.
Supreme Court. Copyright law, he says, doesn't cover conference
calls because such calls involve impromptu conversations between
several parties and are not written statements.
''Federal copyright law doesn't apply to conference calls
because it only applies to works fixed in a tangible medium of
expression,'' says Nimmer, a lawyer with the Los Angeles firm
Irell & Manella. ''A conversation wouldn't qualify.''
Jawboning
The SEC has done plenty of jawboning to discourage selective
disclosure, but little else.
That's because the law is far from clear on the issue, says
John Coffee, a Columbia University professor of securities law.
While SEC rules prohibit selective disclosure, the agency has
never specified what it is.
''The SEC hasn't tried to push on selective disclosure,''
Coffee says, ''in part because it hasn't spelled out what it is
but also because it's hard to prove.'' The SEC would be able to
prosecute selective disclosure, he adds, only when it's clearly
insider trading.
SEC Action
One exception came in March 1991, when the SEC filed what it
said was its first insider trading case against a company
executive for leaking information to brokerage analysts.
The SEC alleged the founder and former chairman of
Ultrasystems Inc. of Irvine, Calif., had warned a group of stock
analysts in May 1987 about company earnings. Two of the analysts
passed the information to customers, who sold Ultrasystems shares
before the company publicly announced the news, which sent the
stock down.
The SEC charged that though the retired executive, Phillip
J. Stevens, didn't profit financially, he benefited because his
reputation was enhanced in the eyes of analysts. Stevens settled
the SEC charges by paying $126,455 in penalties. He neither
admitted nor denied the allegations. The SEC hasn't filed any
lawsuits over selective disclosure since then.
Selective disclosure takes on new meaning in an era when
more and more amateur traders are making their own investment
decisions. Online investors now account for 500,000 trades daily,
or one in six U.S. stock transactions.
Getting Even
In 1997 Mark Coker, a public relations specialist from Los
Gatos, California, owned 3,000 shares of Legato Systems, a maker
of software that backs up and recovers computer data. When he
tried to get onto a Legato conference call, the company denied
him access.
Coker, who's now 34, vowed to get even. He sold his Legato
shares at a profit of $120,000 and in March 1999 started
BestCalls.com, a Web site that tracks conference calls and aims
to prod companies into full disclosure.
''The information is out there,'' Coker says. ''And the
public wants it.''
But many companies refuse to provide it, and conference
calls aren't the only venue where they give preferential
treatment to big shareholders.
In late September, Morgan Stanley Dean Witter & Co. invited
guests to attend a two-day mining-industry conference in New
York, at which Bethlehem Steel Corp. chairman and chief executive
Curtis Barnette discussed the company's third- and fourth-quarter
earnings forecasts and Samuel Siegel, chief financial officer of
number two U.S. steelmaker Nucor Corp., talked about the
company's acquisition strategy.
''We pay an absolute fortune so our clients flying out from
Los Angeles or Stuttgart have access to these companies,'' says
Morgan Stanley analyst Wayne Atwell, who helped organize the
conference. ''We don't want any Joe Blow to waltz in.''
In July, at the 17th annual investor summit sponsored by
billionaire Herbert Allen's Allen & Co., Steve Jobs, CEO of
Pixar, spoke to a group of invited CEOs and investors that
included Microsoft Corp.'s Bill Gates; Viacom's Sumner Redstone;
Amazon.com's Jeffrey Bezos; Michael Bloomberg, founder and CEO of
Bloomberg LP; Mario Gabelli of Gabelli Asset Management; Fayez
Sarofim of Fayez Sarofim & Co.; and billionaire Warren Buffett.
Jobs, who cofounded Apple Computer, touted better-than-
expected results from ''A Bug's Life,'' the company's animated
movie that pulled in more than $360 million at the box office.
With that information, investors had a head start in buying
shares of Pixar, which gained 6 percent from its low that day and
almost 10 percent in the next week, as word of the bullish
forecast made its way to small investors.
Sometimes selective disclosure is not a matter of restricted
access; it's a matter of loose lips or an intentional tip-off.
On Oct. 8 an Abercrombie & Fitch executive left a voice mail
message with Lazard Freres retail analyst Todd Slater signaling
that fiscal-third-quarter sales were sluggish, according to a
person close to the situation. Lazard had been one of the lead
underwriters on Abercrombie's 1996 initial public stock offering.
Moving Markets
Slater, who won't reveal the name of the executive, then
told Lazard's sales force, which distributed the market-moving
news to several key clients. These clients were able to sell
their holdings early or short the shares, a tactic that lets
investors profit when a stock drops.
BancBoston Robertson Stephens analyst Janet Kloppenburg says
she called the company, seeking an explanation for the stock's 13
percent drop that day.
''They didn't tell me anything,'' she says. ''They didn't
want to talk about it at that time.''
The clothing retailer kept silent for the next five days as
Lazard clients bailed out, and it refused to discuss its
quarterly outlook with other investors and analysts who called
and asked why the stock was dropping. Then, on Oct. 13,
Abercrombie issued a press release warning that sales would lag
expectations, driving its stock down another 20 percent.
''That's inexcusable, and there should be some action
taken,'' says Bill McVail of Turner Investment Partners, which
dumped its entire Abercrombie holding the day the company issued
its press release.
Abercrombie & Fitch on Nov. 12 said the SEC had opened an
informal investigation of the incident. The company also said its
investor-relations director, Lonnie Fogel, was told to take a
leave of absence ''because of this episode.''
Disclosure Failure
Six lawsuits have since been filed on behalf of Abercrombie
investors. The suits allege the company failed to properly
disclose the sales decline to all shareholders, defrauding
investors who didn't have early access to the information.
Abercrombie officials decline to comment.
Apple Computer officials were busy calling up Wall Street
analysts on Sept. 23. The message: The earthquake that had shaken
Taiwan three days earlier had disrupted production of iBook and
PowerBook notebook computers. That would cut revenue for the
quarter ending September 30 by about $50 million, the company
said.
Within three days, Apple shares fell more than 7 percent.
Many investors were in the dark the entire time.
''I am not happy that they actually called the analysts,''
says Robert Koh, a broker at ABN Amro. ''It sets a bad precedent.
Apple should release a statement officially instead.''
Apple spokeswoman Rhona Hamilton says the company didn't
think the information was important enough to warrant a news
release and that when analysts posed questions, Apple supplied
answers.
''These people asked us about Taiwan, and when we had the
information, we called them back,'' she says.
Change Afoot
Change appears to be brewing. Levitt, angered that selective
disclosure is so widespread, is pushing the SEC to consider rules
to force companies to open up.
''We want to close the gap between those in the so-called
'know' and the rest of us,'' Levitt said in his October New York
speech.
But any new SEC rules would face a gauntlet of opposition
from businesses and organizations such as the National Investor
Relations Institute, a 4,200-member association of corporate
officers and investor-relations consultants.
''Our capital markets are working pretty darn well,'' says
Louis Thompson, president of NIRI. ''The rules need some
tweaking, that's all.''
Making an Effort
More and more companies are making an effort to give all
shareholders equal access. In a June survey of 412 U.S.
companies, sponsored by NIRI, 55 percent said they let small
investors listen to conference calls, up from 29 percent a year
ago. Forty-two percent let reporters listen to teleconferences, a
threefold increase from 14 percent a year earlier.
''That's a real sea change when it comes to equal access to
information,'' Thompson says.
On March 25 ConAgra, the producer of Butterball turkeys and
Healthy Choice meals, invited a select group of shareholders and
analysts to participate in a conference call. Management warned
them that fourth-quarter profit would miss earnings forecasts.
ConAgra shares promptly fell 9 percent.
The company never issued a press release forecasting the
anticipated shortfall. Several shareholders not on the call
protested, and ConAgra, the second-largest U.S. food company,
decided to mend its ways.
''We stepped back and we asked ourselves, 'How can we do
this in the most fair way?''' says ConAgra Chief Financial
Officer James O'Donnell. ''Now we want to make sure that the Wall
Street analyst is getting exactly the same information as Aunt
Betsy in Montana.''
Starting last summer, ConAgra began publishing earnings
reports after the close of New York Stock Exchange trading and at
the same time issuing a press release that invites all
shareholders to listen by phone or on the Internet to top
executives discussing the results. That call is taped, and
shareholders can access it anytime over the following two weeks
by dialing into a special number.
Investors Invited
Investors also are invited to call O'Donnell or Chief
Executive Bruce Rohde with questions. Those two then take calls
or return them later -- sometimes late into the first night and
for several days after, O'Donnell says.
AT&T Corp., too, has decided to put its conference calls and
written comments on strategy and finances on its Internet site at
the same moment it distributes that information to Wall Street.
''We've had it as a policy to broaden our disclosure,'' says
AT&T Chief Financial Officer Dan Somers. ''We had a long period
of time where our general communications was relatively couched
and not broad.''
About 700 investors phone in to the company's quarterly
conference calls, and thousands more have hooked up via the
Internet to listen to a simulcast of the call, the company says.
With about 3.5 million shareholders, AT&T is one of the most
widely held U.S. stocks, according to Merrill Lynch, which tracks
such data.
A Mission
Somers, who joined AT&T about two years ago, says he had
made it his mission to end the distinctions between treatment of
small and large investors. ''We don't want to play favorites with
any of our holders and want everyone to have the same
information,'' Somers says, adding that because of its huge base
of shareholders, AT&T believes it should advocate for shareholder
rights and prod others to open up.
The Internet may be the great democratizer, letting even the
smallest investors join analysts and money managers when they
tune in for potentially market-moving news.
''The Internet is the ideal medium to level the playing
field,'' says Tom Gonzales, CEO of StreetFusion, a San Francisco
Web broadcasting company that hosts more than 1,000 corporate
conference calls each quarter. ''It's cheap, it's ubiquitous, and
it's easy to use.''
On the Net
Companies such as Amazon.com and Iomega Corp. already use
the Internet to broadcast information they once parceled out to
the chosen few. The Internet also is cheap. A 45-minute Web
broadcast costs less than $600 and can reach thousands of
investors.
So far, though, few companies are biting. Only 10 percent of
490 companies surveyed by NIRI said they host Internet conference
calls. And, for the time being, the Internet is a less-than-ideal
medium for communicating with investors, because it's so
unreliable.
Southern Co., the largest U.S. electricity producer, knows
all about the shortcomings of the Internet. On July 20 the
Atlanta company planned to hold an online conference call to
review second-quarter earnings. Kinks in its computer system,
though, caused a five-hour delay in posting the call on its Web
site following the 9 a.m. teleconference.
Shareholder advocates say that all of the reasons cited by
companies for opposing full disclosure -- it's too expensive,
it's too risky, it's not required, it's technologically difficult
-- don't add up to much, especially when companies like ConAgra
and AT&T have shown that widely accessed conference calls can be
staged without much trouble.
''There's always excuses and justifications for why
companies can't open up their calls or access to management,''
says Patrick McGurn of Institutional Shareholder Services, a
shareholder advocacy group in Bethesda, Maryland. ''Face it:
Companies like having a wall between them and the investment
community.''
The forces breaking down those walls are gaining strength.
The SEC's Levitt wants to end selective disclosure, and so do the
legions of smaller investors who demand access to the same
information as the privileged few. All that stands in their way
are the analysts and big money managers who've gained from
getting the best tidbits first -- and the companies that don't
give equal treatment to all of their shareholders.
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