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By Peter J. Romeo and Richard J. Parrino
The Securities and Exchange Commission's action in two recent cases of selective disclosure of corporate information provides a useful guide for CFOs trying to steer a safe course through these regulatory waters.
In the most recent case, the SEC fined and sanctioned Presstek, a printing technology company based in Greenwich, Conn., and is pursuing separate action against its former CEO, Edward Marino. In the other case, against marine transportation company American Commercial Lines, of Jeffersonville, Ind., the SEC decided not to pursue any enforcement action.
What accounts for the difference in the outcome of the two cases? Essentially, ACL had more robust policies in place to prevent further violations, turned itself into the SEC, and cooperated fully with the subsequent investigation. Presstek seems not to have measured up to ACL in any of those ways.
Regulation FD prohibits the selective disclosure, by companies and persons acting on their behalf, of material nonpublic information to investment professionals and holders of the company's securities. To promote its purposes, Regulation FD requires "prompt" communication to the public of "non-intentional" disclosures of such information after a senior official discovers the disclosure and realizes (or should realize) that the information was material and nonpublic.
In the case of Presstek, Marino was authorized to speak on its behalf to investors and securities professionals, and was aware of Presstek's internal policy requiring "corporate silence" during the period beginning generally in the middle of the last month of each quarter.
At about 10:40 am on September 28, 2006, near the end of the 2006 third quarter, however, Marino received a telephone call from a managing partner of a registered investment adviser which managed investment funds holding nearly 500,000 shares of Presstek's stock. In response to a question about Presstek's performance in Europe during the summer of 2006, Marino said that the summer's results were "not as vibrant as . . . expected in North America and Europe" and that Presstek's performance for the quarter was "mixed." Believing that the information "sounds like a disaster" for Presstek, the investment adviser, within a few minutes after completing the call, instructed his firm's trader to sell all Presstek stock. Nearly 400,000 shares were sold during the remainder of the day, contributing to a decline of 19 percent in Presstek's stock price at the market close. About 13 hours after the call, at around 12:01 am on September 29, Presstek issued a preliminary announcement that its financial performance was below its prior estimates for the third quarter.
In response, the SEC pursued but settled enforcement proceedings in which Presstek consented to a permanent injunction against future violations and to a civil penalty of $400,000. It its ongoing civil action, the commission is seeking an injunction and civil penalties against Marino.
The SEC decided to go after Presstek and Marino despite the fact that the company had a disclosure policy that specifically prohibited company officials from disclosing the information conveyed by Marino, he was solely responsible for violating that policy, the company promptly disclosed the information to the public after learning of the violation, and the company thereafter instituted strong remedial measures to prevent future violations.
In contrast, the SEC decided in September 2009 not to institute an enforcement action against ACL for a violation of Regulation FD that occurred when its CFO updated earnings guidance in an e-mail sent exclusively to a group of analysts.
The two cases are similar in some ways. In both, the executives in question alone were responsible for the selective disclosure and for the failure to comply with express company policy. Also, both companies moved quickly to disclose publicly selectively disclosed information. And both took significant remedial measures following the public disclosures to prevent a recurrence of the improper conduct.
So why did the SEC go after Presstek but not ACL? The SEC indicated that, before the violation, ACL "had cultivated an environment of compliance" by training its employees regarding Regulation FD and by adopting policies to prevent violations. It also noted that the errant CFO had received training twice from ACL's counsel regarding Regulation FD. No similar statements were made by the SEC regarding Presstek.
In addition, ACL reported the selective disclosure to the SEC staff the day after discovering it and subsequently provided what the SEC described as "extraordinary cooperation" with the staff's investigation. Again, the SEC made no similar comment with respect to Presstek.
Although turning oneself into the SEC may not always be the best course, the two cases show that a strong internal compliance program and full cooperation with SEC staff inquiries regarding possible violations are essential to minimizing the damage from a Regulation FD violation.
To strengthen a compliance program, companies should put in place an unambiguous internal policy that clearly defines the types of information considered material by the company. Companies should also provide annual training and frequent reminders to directors and employees regarding Regulation FD and train newcomers regarding the rule as part of their orientation. And they should take prompt corrective action if a violation occurs.
That they should cooperate with an SEC investigation goes without saying.
Peter J. Romeo and Richard J. Parrino are partners in the law firm of Hogan & Hartson.
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