G, re: <<If only we could get MONTHLY orders instead of 3-month moving averages.>>
Don't mean to be too cynical, but for us plain folk, we will continue to do without. Its then up to our fundamental and tech analyses, plus plenty of gut feel. Witnesseth:
Big Investors Get First Word With Market-Moving News
New York, Dec. 14 (Bloomberg) -- As Western Digital Corp.'s stock surged 37 percent on Dec. 1, only a select group of people at an Arizona resort knew why the disk-drive maker was having its biggest one-day gain ever.
Most of the Irvine, California-based company's 3,700 shareholders couldn't explain the sudden spurt that added $427 million to Western Digital's market value in a few hours. They hadn't been invited to the Phoenician in Scottsdale, where investment bank Credit Suisse First Boston was treating a private party to warm lobster salad, seared Hudson Valley foie gras, fillet of turbot and roasted rack of Colorado lamb in between a series of closed-door
meetings with top officials from more than 140 companies.
The Credit Suisse First Boston conference offered plenty of opportunities for the firm's clients to trade before the rest of the world learned what executives at the meeting were saying.
At one of these sessions, Charles Haggerty, Western Digital's chief executive, said business was getting much better. Some of his listeners, in a room with beige, silk-covered walls, reached for their cell phones and placed orders to buy the stock. Before the day was over, Western Digital had jumped 4 13/16 to 17 7/8.
'Like Insider Trading'
Such briefings -- attended by invitation only -- are routine. During the past several months, executives at Dell Computer Corp., Barnes & Noble Inc., Northern Telecom Ltd. and Tellabs Inc. have provided enough insight in these private situations to prompt unforeseen price fluctuations, adding or subtracting billions of dollars in market capitalization in less than a day.
''It sounds like insider trading to me,'' said Barbara Roper, director of investor protection for the Consumer Federation of America, a Washington-based non-profit advocate for about 50 million people. ''The big players are getting information and getting a chance to trade on that information before it gets out to the rest of the market.''
And there are big incentives to keep it that way. Securities firms are selling ''access,'' said Michael Holland, who spent much of his 30 years in the investment business working at the Wall Street firms Credit Suisse First Boston and Salomon Brothers before forming his own money management firm. By arranging exclusive meetings between their preferred customers and chief executives, securities firms have a better chance of receiving more buy and sell
orders, and the commission dollars that go with them.
'That's the Point'
''They're providing us with information,'' said Jon Burnham, chairman of Burnham Asset Management Corp., who has attended hundreds of these meetings in his 40 years as a professional investor. ''That's the point of these things for brokerages, to get information out and then to get commission dollars back for it, and they do it in spades.''
For their part, chief executives are only too willing to give the firms' analysts and selected investors the first word on market-moving news. Such intimacy creates the widest following for their company's stock and helps them put the best light on their results.
Western Digital's Haggerty didn't engage in selective disclosure at the Credit Suisse First Boston conference, said Robert Blair, vice president of investor relations. ''Anyone who's called me for the past week has gotten the same information,'' Blair said, soon after Haggerty spoke.
The difference is no one who called Blair was in the same room -- which could seat only 160 people -- where Haggerty told investors the company had whittled its inventory of disk drives, boosted market share and planned to ship products incorporating International Business Machines Corp. technology earlier than expected. Haggerty declined to comment about the way the information was disclosed at the conference.
The Conference's Cost
Other executives, representing companies from BMC Software Inc. to Intuit Inc., also made time in their busy schedules to spend a day at the Phoenician, playing the 27-hole golf course, dining on executive chef George Mahaffey's four-star cuisine and laughing at jokes from Dana Carvey, the comedian specially hired for the conference.
Credit Suisse First Boston, and dozens of other firms, can easily spend $4 million on events like this one, which included more than 500 guests, according to investment bankers familiar with the expenses.
Many of these conferences are annual, including NationsBanc Montgomery Securities' six-day meeting on growth stocks at the Ritz in San Francisco every September, and Hambrecht & Quist Group's week-long computer-industry gathering at the Westin St. Francis Hotel in the same city. The H&Q meeting this year drew executives from 320 companies.
While these may be the most overt examples of selective disclosure, the practice is widespread on a subtle level every day.
On Dell's Call
In a National Investor Relations Institute survey of 227 companies, 99 percent said they invite professional money managers to participate in regular telephone conference calls. Only 29 percent welcome individual shareholders and just 14 percent allow news reporters on those calls, according to the institute, a Vienna, Virginia-based association of 3,600 investor relations officers.
On July 21, Tom Meredith, Dell Computer's chief financial officer, told a select group of investors on a conference call that personal computer prices were still falling, even though analysts had expected them to recover. Dell, the best-performing stock in the Standard & Poor's 500 Index in 1996 and 1997, declined 4.4 percent in a couple hours, carving $3.3 billion out of its market value as big investors sold shares. Individuals who bought Dell
shares that day did so unaware of Meredith's remarks.
''We do not engage in selective disclosure on our conference calls or in any other distribution of material corporate information,'' said T.R. Reid, a spokesman for Dell in Round Rock, Texas. The July 21 call contained no new, important information that should have been disclosed because the company had said in May that PC prices were falling, he said.
A 'Running Start'
Big and small investors alike aren't convinced. ''It's not fair,'' said Nicholas Moore, who follows technology stocks for Jurika & Voyles, an Oakland, California-based money manager of $5 billion. By participating in Dell's July conference call, ''We would have a very big running start'' on an individual investor that day, Moore said. ''Why is that investor disadvantaged to that degree?''
Dell's July conference call ''is the kind of practice that perpetuates the belief that the little guy doesn't get a fair shake on Wall Street,'' said Roper of the Consumer Federation of America. Since July 21, when Meredith spoke to a select group of people, Dell shares have lagged those of some competitors, including Compaq Computer Corp., IBM and Sun Microsystems Inc. -- a contrast to the preceding 12 months when it outperformed all competitors in
the market.
Big Moves
For many investors, getting an invitation to join a conference call is an opportunity to make money. ''If I hear something that I didn't know that is extraordinarily positive, I'll buy,'' said Philip J. Orlando, chief investment officer at Value Line Asset Management Inc. in New York, which manages $6 billion. ''If I hear something that is extraordinarily negative, I'll sell. I may pick up a (trading) ticket and buy or sell right there'' during a
conference call.
A study this year by three University of Michigan professors found that during conference calls, stock prices swing more and bigger blocks of shares are traded than when there is no conference call -- signs that institutional investors are trading during the briefings. Those investors wouldn't bother listening if the calls only reiterated previously released information, wrote Richard Frankel, Marilyn Johnson and Douglas J. Skinner.
''This evidence implies that conference calls are informative, but that not all investors have equal access to the information in these calls,'' they wrote.
The top U.S. securities regulator says that kind of unequal access to information undermines the integrity of the market. ''As far as I'm concerned, that's cheating, and it's a stain upon our market,'' U.S. Securities and Exchange Commission Chairman Arthur Levitt said in a Nov. 18 interview. ''We're clearly concerned about it, we're clearly looking for it.''
Levitt's Warning
Levitt warned in February that companies and brokerages could face insider trading sanctions if analysts or investors profit from corporate news before it's available to the public. In an interview, he went further, urging companies to include reporters in their analyst calls.
The SEC has limited legal means to enforce what is essentially an issue of fairness, lawyers say. The courts have held that insider trading occurs only when an analyst or investor who gets inside information gives something to the company executive in return, said John Coffee, a Columbia University Law School professor who specializes in securities law.
Stock exchanges have regulatory power over listed companies, and the exchanges require full and fair disclosure of information that could affect trading. Still, the only sanction stock markets are allowed by the courts is to remove a company from the exchange, Coffee said. That's a blunt instrument that the exchanges are loath to use.
''It's a major problem for the SEC,'' said Coffee. ''We have a problem without a clear legal remedy.''
'In Compliance'
The Nasdaq Stock Market and the New York Stock Exchange say most companies are good about releasing news fairly. ''A vast number of the companies are in compliance and meet all of the listing standards, including disclosure requirements,'' a Big Board spokeswoman said.
Many companies say they avoid selective disclosure by issuing a press release before briefing big investors, and then confining their comments in the briefings to what's already been announced. That way, they say, all investors have similar access to information.
That doesn't work because analysts and investors often see tremendous import in comments that executives consider immaterial. Often, companies give details about their businesses that haven't been made available to the public.
In between visits to the Phoenician's cigar bar, golf course and its restaurant, Mary Elaine's, guests at the Credit Suisse First Boston conference had a chance to sit down with Intuit co- founder Scott Cook. He told them that advance orders for the 1999 version of Intuit's TurboTax software had already exceeded total sales of the 1998 version. While he was speaking, shares of the Mountain View, California-based company began rising and gained 11
percent, or 5 7/8, to close at 61 1/8.
'A Confirmation'
Cook's presentation wasn't significant or selective because the company had previously disclosed that the 1999 version of TurboTax was selling well, said Larry Wolfe, senior vice president of Intuit's Tax Products Division. ''It was a confirmation that things are going the way we expected them to go,'' he said.
Still, Wolfe acknowledged that Intuit hadn't previously disclosed that new orders exceeded total sales for the 1998 version.
Companies should see it as ''an ethical requirement'' to be evenhanded in distributing information, said Harvey Pitt, a partner in the securities law firm of Fried, Frank, Harris, Shriver & Jacobson in Washington. ''What's at stake here is how your existing or prospective shareholders are treated.''
On at least one front, companies have become more open in distributing news. The National Investor Relations Institute found this year that 26 percent of the companies in its survey said they would inform analysts before issuing a press release warning that earnings were likely to be disappointing. That's down from 40 percent in a 1995 survey.
Within Their Rights
The investor relations group recommends that companies allow reporters on conference calls to ensure that news gets broadly and fairly disseminated, though its chief executive acknowledges that most don't and can't be forced to.
''Companies are totally within their legal rights to restrict those conference calls to whomever they want,'' said Louis Thompson, chief executive of the group -- even if the results show that big investors get the first crack at important corporate news.
Northern Telecom shares plunged Sept. 29 when the company's chief financial officer, Wes Scott, warned a select group of shareholders and analysts that revenue growth in Asia and Europe would be disappointing in the second half of the year. Scott made his remarks so close to the end of the four-hour session that many in attendance were no longer paying attention, according to analysts who were there. As investors compared notes, some whipped out cell
phones to call in sell orders to their trading desks, those in attendance said.
'We Were Surprised'
Northern Telecom shares slid 12 percent, knocking $3.2 billion off the company's market value. Four hours after the stock started falling, the Brampton, Ontario-based company issued a public statement confirming what the pros already knew. ''We were surprised with the reaction in the marketplace,'' said Chief Executive John Roth.
Another telephone equipment maker, Lisle, Illinois-based Tellabs, shocked big investors on a Sept. 14 call with news that third-quarter profit and sales wouldn't meet estimates. By the time small investors could listen to a recorded replay, Tellabs shares, which had risen as much as 7 3/8 to 52 3/8 before the call, plunged as low as 36, losing about $1.7 billion in market value.
''The minute he said this quarter would be a penny light, people started dumping the stock,'' said Scott Vergin, a money manager at Lutheran Brotherhood, a not-for-profit group in Minneapolis that provides financial services to members of the Lutheran faith.
A Bookseller's Decline
Barnes & Noble fell 9.4 percent Nov. 20 after the largest U.S. bookseller told analysts on a conference call that costs to advertise the New York-based company's Internet business would be greater than expected. Barnes & Noble fell 3 to 29 in trading of 3.9 million shares, five times the three-month daily average.
Big shareholders of Corrections Corp. of America and sister company CCA Prison Realty Trust learned in face-to-face meetings with executives in early November that the Nashville, Tennessee- based companies could get as much as $600 million in the next 12 months through stock purchases by HSBC Holdings Plc. It wasn't until Nov. 12 that D. Robert Crants, president of CCA Prison Realty, made the planned investment public in an interview.
The Credit Suisse First Boston conference at the Phoenician, the hotel that savings and loan executive Charles Keating built, provided a hit parade of senior officers from some of the hottest companies. Even Seattle-based Microsoft Corp., which has the world's largest market capitalization and rarely disappoints any of its shareholders, dispatched its chief financial officer, Greg Maffei, to Scottsdale this month.
News Tips
BMC Software shares gained 8 percent on Dec. 2 after Chief Financial Officer William Austin said the Houston-based company's current quarter looked promising. Nampa, Idaho-based Micron Electronics lost 12 percent after an executive warned of a price war for personal computers.
Credit Suisse First Boston didn't invite all investors to the conference, and only a handful of journalists were permitted to attend -- CNBC, the San Francisco Chronicle, the San Jose Mercury News, Forbes ASAP magazine, Upside magazine and Fortune. All agreed they wouldn't do same-day reporting of company presentations, said Cheryl Popp, a Credit Suisse First Boston spokeswoman.
Credit Suisse First Boston excluded Bloomberg News, Dow Jones News Service and Reuters from all meetings because their real-time format requires them to share news with readers as soon as they confirm it.
The firm limited the press because ''the amount of freedom that an executive feels he has in speaking is very closely correlated to who's in the audience,'' said Michael Kwatinetz, director of research for Credit Suisse First Boston's technology group. ''The things a CEO is willing to say change.''
Avenues to Openness
Experts say that in the age of the Internet, it would be easy to let all investors get a fair shot at market-moving company information. Opening up closed meetings such as the Credit Suisse First Boston conference would be the first step because it would give all investors the news at the same time, they say.
Letting reporters listen in on all conference calls would mean that news services could transmit important news instantly, said Thompson of the National Investor Relations Institute. Individual investors would have access to news on the Internet or cable television channels that cover financial markets. Companies also could let individual investors listen in to calls through their corporate Internet sites.
Advocates for individual investors say companies also need to think about the timing of their announcements to ensure a level playing field. Ideally, companies should release information while the market is open, from 9:30 a.m. to 4 p.m. New York time, said John Markese, president of the 180,000-member American Association of Individual Investors in Chicago.
After Markets Close
Many companies, including Intel Corp. and Amazon.com Inc., issue earnings reports and hold conference calls after the market closes. Big investors can absorb the news and then buy or sell shares on electronic trading networks such as Instinet that offer a market when the exchanges are closed. That's a service most brokerages don't offer to small investors.
Individual investors' after-hours stock orders generally sit with their broker until 9:30 a.m. the next day, when regular trading begins. ''The institutions have already traded on it and you're last in line,'' Markese said. ''It has to be more public, and broadly public rather than these conference calls.''
For Levitt, the SEC chief, nothing less than the integrity of the U.S. stock market is at issue.
''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.
17:45:57 12/14/1998
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