Investors bend SEC's ear on selective disclosure
seattletimes.com
by Adam Levy
Bloomberg News
WASHINGTON - It took investor Mark Finlayson two days to find out why THQ shares began tumbling the morning of Feb. 9.
Finally, after the shares had dropped 23 percent, THQ's investor relations head told him that 48 hours earlier the video-game software publisher's chief executive had warned a select group of analysts on a conference call that earnings in the next two quarters would fall short of forecasts.
THQ didn't publicly release that information, giving those on the call a chance to tell their clients to sell the stock. The company has since been sued.
"I have been defrauded and cheated," Finlayson wrote the Securities and Exchange Commission. "I was not privy to this."
When companies give key information to some investors and not to others, it's known as selective disclosure. The SEC has long condemned the practice and the agency's Chairman Arthur Levitt has called selective disclosure a "stain" on the stock markets.
Now, the agency is collecting comments from hundreds of individual investors like Finlayson, most in support an SEC proposal designed to halt selective disclosure. Dozens of investors, ranging from doctors and retirees to ministers and employees from companies such as Intel, wrote to the agency.
The rule would make it illegal for publicly traded companies to give anyone an edge. Release of market-moving nonpublic information would be outlawed. There would be no more private conference calls with chosen investors, no more "guidance" for privileged analysts.
Companies would have to offer conference-call access to all investors, issue press releases or file documents with the SEC at the same time it briefed analysts on potential stock-moving news on profits, new products or possible mergers.
When the SEC proposed the rule in December, it invited public comment. The comment period ends today. Now, Levitt and the four other SEC commissioners will begin to decide whether to adopt the rule, reject it, or revise it and seek more public input.
"I would hope we have it done by fall," SEC deputy general counsel David Becker said in an interview.
Michael Suchyta, who has been trading in stocks since 1968, told the SEC that he supports ending the information gap between the companies and the public because of what happened to shares he owned of Abercrombie & Fitch, the clothing retailer.
On Oct. 8, a senior Abercrombie executive told a Lazard Freres & Co. analyst that the retailer's third-quarter sales would fall short of forecasts. The company said nothing publicly for five days.
That gave Lazard's clients a head start to sell the shares or short them. In a short sale, an investor hopes to profit by borrowing shares, selling them and buying them back at a lower price for return to the lender. The stock dropped 15 percent before the company confirmed the sales shortfall.
"I was taken to the cleaners," Suchyta wrote.
The SEC is investigating Abercrombie & Fitch's release of its sales forecast and several lawsuits have been filed against the company. Abercrombie declined to comment.
"What arguments are there for the continuation of selective disclosure?" wondered Darrell Craig, an investor from Seattle.
C. Robert Wickizer is a priest at St. Mary's Episcopal Church in High Point, North Carolina. Before becoming a priest he founded two small, closely held high-tech businesses and then sold them to publicly traded Silicon Valley companies, he wrote in his letter to the SEC.
Adac Laboratories, one of the biggest makers of nuclear imaging equipment used in medical diagnosis, bought one of his companies in 1983, Wickizer wrote.
"I held stock in that company until 1998 and the amount of insider information and trading irregularities that continue to go on with that company could make a lawyer blush," he wrote.
Wickizer backs the new SEC rule: "I have personally witnessed the kind of private information sharing between fast-growing companies and the shark pool of securities analysts. I heartily support leveling the playing field."
Adac, in a written response, said it supports the SEC's efforts to achieve fair disclosure to all market participants. The company also said it has properly disclosed important information.
Investor Robert Hahl also supports the proposal. In his letter to the SEC he pointed to the 13 percent jump during two days in January in shares of priceline.com, the online auction house.
Priceline founder and vice chairman Jay Walker helped spark the stock's surge, telling an invitation-only crowd of analysts and money managers at a Donaldson Lufkin & Jenrette conference on Jan. 13 that the site had sold 80,000 airline tickets the week before, results that were far better than anticipated.
Priceline officials declined to comment.
While many small investors wrote in favor the proposal, there are some who oppose it, including two of the five SEC board members.
Last month, Commissioners Isaac Hunt and Laura Unger said the SEC's proposal would have little effect, in part, because it would be difficult to enforce.
Some companies could skirt the rule, they said.
"People just won't comply, and how are we going to find out?" Unger said. "We might end up getting less disclosure rather than more."
Randle Reece, an investors relations officer with StaffMark, a Fayetteville, Ark., temporary-staffing and executive-recruiting company, agreed that rules might backfire.
"The results for many companies, though abhorrent to me, may be that they leak information to analysts on an even more selective basis, and that the chosen analysts would communicate what they learn even more selectively, not in published comments that could be traced back to the source," Reece wrote to the SEC. "Otherwise, the results would be silence."
Copyright ¸ 2000 The Seattle Times Company
====================================
I guess if anything good coming out of this selective disclosure by THQ, this SEC proposal of changing of the regulation will be it.
|
