SEC seen bringing pro forma, Reg FD cases soon
By Kevin Drawbaugh
WASHINGTON, Dec 31 (Reuters) - The U.S. Securities and Exchange Commission was expected to bring its first enforcement actions soon in two areas -- ``pro forma'' financial results reporting and Regulation FD, sources said on Monday.
The pro forma case was to have been brought before the holidays, but was delayed. Sources said it will now likely be brought in January. The company being targeted was unknown.
``The SEC absolutely needs to clamp down on pro forma earnings ... There have been some real abuses out there,'' Lynn Turner, former SEC chief accountant and now a professor at Colorado State University, said in an interview with Reuters.
If the SEC were to act soon and forcefully on pro forma reporting and Reg FD, it would help to answer critics suggesting that SEC Chairman Harvey Pitt is ``going soft'' on enforcement, which securities lawyers said is a ``bum rap.''
Pressure for the SEC to get tough on corporate reporting has increased in recent weeks since the stunning collapse of former energy trading giant Enron Corp.(NYSE:ENE - news), which cost thousands of people their jobs and much of their savings.
Pitt said earlier this month that pro forma numbers making a loss look like a profit, without explaining clearly how, were likely to be viewed as fraudulent. In mid-November, he said the SEC was sizing up possible pro forma enforcement actions.
Pro forma results skate over accounting conventions -- codified in the Generally Accepted Accounting Principles -- either to highlight good results obscured by outmoded conventions or, more often, to hide poor results.
They are sometimes labelled as ``core,'' ``normalized'' or ``adjusted'' results. Often they exclude costs related to mergers, stock options, unusual events, or other items.
The most frequent users of the pro forma style are technology companies -- such as Computer Associates International Inc.(NYSE:CA - news), Amazon.Com Inc. (NasdaqNM:AMZN - news) and Cisco Systems Inc.(NasdaqNM:CSCO - news). Reuters research showed 62 companies on the Merrill Lynch Technology 100 Index reported pro forma results in press releases for the third quarter of 2001.
Pro forma numbers are most often found in reports and press releases intended for comsumption by the media and the general public, if not for government regulators.
Sources said the SEC's New York regional office had been investigating four pro forma cases, but records were lost in the Sept. 11 attacks that destroyed some SEC offices. As a result, the case soon to be brought may be new, sources said.
A technology company is widely thought to be the target, although sources said Walt Disney Co. (NYSE:DIS - news) and other major, non-tech companies have recently issued pro forma results.
The Regulation FD case expected to be brought soon was not moving as rapidly as the pro forma case, sources said.
Regulation Fair Disclosure -- or Reg FD -- was adopted a year ago. It requires corporations to disclose key information to the public and the financial community at the same time.
It was drafted in response to widespread complaints from small investors that Wall Street insiders were being tipped off on big news hours or sometimes days before everyone else. The law is a regular target of scorn in the financial community.
Pitt has called ``unassailable'' the law's underlying principle -- ``that nobody should have an unfair advantage.'' No enforcement action has yet been brought by the SEC on FD.
``There's been talk that they're going to bring an FD case ... There were some violations,'' Chuck Hill, director of research at First Call, a market research unit of financial services group Thomson Financial, said in an interview.
(Additional reporting by Eric Auchard in New York).
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