Ted, Ron, anyone, just throwing out an idea for an issue that IMHO has never gotten the attention it deserves from CNBC.
Why not do a series of pieces on the practice of corporate selective disclosure? Call it "The Slanted Playing Field". (I missed CNBC today, so I'll be extremely embarassed if this ground was already adequately covered).
Bloomberg ran a piece today citing some very insightful comments from SEC Chairman Arthur Levitt on the practice which I think are worth further exploration:
news.com
Levitt Says Selective Disclosure a 'Stain' on Markets (Update1)
Bloomberg News
November 19, 1998, 2:41 p.m. PT
Levitt Says Selective Disclosure a 'Stain' on Markets (Update1)
(Adds comment from Dell spokesman in 23rd paragraph; to
listen to interview, TNI SEC AV )
Washington, Nov. 19 (Bloomberg) -- U.S. Securities and
Exchange Commission Chairman Arthur Levitt condemned U.S.
companies that reveal market-moving information to securities
analysts before releasing it to the public.
''As far as I'm concerned, that's cheating, and it's a stain
upon our market,'' Levitt said in an interview. ''We're clearly
concerned about it, we're clearly looking for it.''
Some executives routinely exclude reporters from conference
calls they convene with analysts and money managers who follow
their companies. In some recent cases, stock prices moved more
than 25 percent after companies disclosed information in private
sessions. Sometimes, hours passed before companies announced the
news to the public.
I'd argue that one insidious potential byproduct of this practice is that since the press has to rely on participants on the calls, participants on these calls (who far from the ivory tower notion of "filling in the interstices in analysis" are here in the real-world nothing more than information gathering proxies for traders) are able to spin the story to the press on the fly.
Levitt said this practice, known as selective disclosure,
puts small investors at a disadvantage to institutional
investors, such as pension and mutual funds, that have analysts
to represent their interests.
The practice also can harm the integrity of U.S. markets,
Levitt said. ''If some individuals or organizations are getting
information that others are not getting, that means our markets
are no longer trustworthy and no longer credible, and that can't
be tolerated,'' he said.
Excluding Press
Levitt, the top securities regulator in the U.S., warned
against special treatment of favored analysts or big investors in
a February speech. Companies and brokerages could face insider
trading sanctions if analysts or their clients profit from
important corporate information before it's available to the
public, he said.
Obviously, "special treatment of favored analysts or big investors" has continued since Feb. Warnings were given, the participants decided to push the envelope, why not make good on this threat? Why not pick a test case to overthrow the ridiculous "homework exemption" precedent in Dirks? Why limit punishment to civil sanctions? This is effective deterence?
The SEC chairman went beyond those earlier remarks by
explicitly urging companies to include reporters in their analyst
calls. He voiced support for news organizations that try to gain
access to these calls and then report on the discussions.
''The media should persist,'' said Levitt, who used to own
''Roll Call,'' a Washington newspaper that covers Congress.
''They should press their case and continue to press it.''
I hope CNBC has been pressing and will continue to press.
Some executives prefer to provide exclusive briefings ''to
curry favor with selected analysts'' who can influence the price
of the company's stock, the SEC chairman said. He declined to
give examples.
If some quid pro quo could be adequately proven, would these types of cases rise to the level of securities manipulation?
In recent weeks, a number of major companies such as MCI
WorldCom Inc., Microsoft Corp., Amgen Inc., Gap Inc., Monsanto
Co., and Cendant Corp. held closed discussions with analysts
about company earnings or other corporate developments.
Tellabs Disclosure
In September, Tellabs Inc., a telephone equipment maker,
told some money managers and analysts on a conference call that
its third-quarter profit and sales wouldn't meet estimates. The
Lisle, Illinois-based company's shares fell as much as 27 percent
after the call began and before the information was more widely
disseminated.
Tellabs Chief Executive Michael Birck said at the time his
executives weren't planning to make significant comments in the
session with analysts. ''We didn't think we were announcing
anything of consequence there,'' he said.
And of course the irony here is that Birck was "guiding" analysts to .46/share in Sept. and yet I think TLAB reported .49 in Oct. Also, the conf. call was held in response to a PR announcing the terminiation of the CIEN deal (Is it unreasonable to suspect that this may have given some characters motivation to spin the story in a negative manner grossly disproportional to the reality of what Birck was saying?).
Levitt said his staff is monitoring corporate practices on
selective disclosure of important corporate information, and is
prepared to take enforcement action if necessary.
''It's clearly ethically wrong,'' he said. ''It wouldn't
surprise me to see the commission considering taking action if
the offense is sufficiently egregious.''
Three interesting examples are given in this piece - TLAB, NT, and IXC Communications.
The commission won't be preparing any rule changes to cope
with the problem, Levitt said, because companies have improved
their practices since he criticized selective disclosures earlier
this year. ''I have seen progress and I'm hopeful that we'll see
more,'' he said.
Improvements Seen
A National Investor Relations Institute study earlier this
year found that fewer than 20 percent of companies inform
analysts before telling the public that earnings will fall short
of expectations. That's down from about 33 percent in 1995,
according to NIRI, a trade group of corporate investor-relations
officers.
If those figures are correct, it shouldn't be difficult to find an example should it? Slightly less that 1 out of every 5 publiclly traded companies are engaging in a practice that the Chairman of the SEC wants ended.
Northern Telecom Ltd., North America's No. 2 telephone-
equipment seller, told analysts and money managers at a September
meeting in New York that second-half revenue growth would be less
than expected because of disappointing demand in Europe and Asia.
Northern Telecom's stock fell 13 percent that day, to 35
1/2. The Brampton, Ontario company issued a public announcement
four hours after shares began to fall and three hours after
trading was halted.
Northern Telecom Chief Executive John Roth explained the
delay in the company's announcement, at the time, by saying: ''We
had to understand what people thought they heard. We were
surprised with the reaction in the marketplace.''
Recent Examples
IXC Communications Inc. told analysts and some investors in
a conference call yesterday morning that fourth-quarter results
wouldn't meet analysts' expectations. The company didn't issue a
statement until 1:30 p.m., after trading had been temporarily
halted. The wholesale phone company's shares dropped 25 percent
yesterday, falling 9 to 26 3/4.
''We miscalculated the market reaction and the extent of the
market's interest in this,'' said IXC's chief financial officer,
Jim Guthrie. ''When we saw it had a larger effect, we moved as
quickly as we could to issue a press release.''
This isn't "sufficiently egregious"? According to the piece, the company didn't just tell analysts, it "told analysts and some investors".
Last week, Dell Computer Corp. excluded reporters from a
conference call after the world's No. 3 personal computer maker
reported fiscal third-quarter earnings. Dell is one of the most
actively traded stocks in the U.S., with an average daily volume
of about 39 million shares in the last three months.
''We are very conservative and scrupulous in following
securities regulations,'' said spokesman T.R. Reid at Dell, whose
policy of barring reporters from conference calls still is in
force.
Levitt said he plans to keep pressing so that companies
provide important information to the press and public investors
at the same time it's available to Wall Street professionals.
''We will continue to urge companies to see to it that
disclosure is to the broadest possible audience, and the practice
of selective disclosure is eliminated, because it really is wrong
and hurts our market and jeopardizes the interests of
investors.''
--Neil Roland in Washington (202) 624-1868 /bd/ch/
FWIW, here's my take on the subject.
Message 5876887
Best wishes,
Tom |
