The Grinch who Stole the Inside Tip: Mismanaging Analysts’ Expectations

PDF

What would you do if you were the head of investor relations at a public company that is now expecting to miss the analysts’ consensus estimate for revenues by nearly $1 billion? Would you start calling analysts to provide data to convince them to lower their estimates? According to a Securities and Exchange Commission (“SEC”) complaint[1] against AT&T, Inc. (“AT&T”) and three of its investor relations executives, that’s exactly what they did. The SEC just settled charges against the company and the three individuals for violating Regulation FD,[2] with AT&T agreeing to pay the largest ever Regulation FD fine of $6.25 million. Each executive agreed to pay a penalty of $25,000 for aiding and abetting AT&T’s violations.

In March 2016, AT&T was experiencing a sharp decline in smart phone sales. The company’s leadership realized that the company would miss the consensus revenue forecast for the first quarter by a wide margin, in what would be the third consecutive quarterly miss. According to the SEC’s complaint[3], the individual defendants began making a series of one-on-one calls to analysts in order to “walk the analysts down” – i.e., persuade the analysts to reduce their individual estimates of revenue and thereby reduce the consensus estimate to the level that AT&T expected to report. Calls were made to approximately 20 analyst firms, in which the executives explained the expected revenue shortfall and provided important metrics that had not been released to the public. The complaint also asserts that the nonpublic information provided on these private calls caused analysts to reduce their revenue forecasts. The calls occurred during March and early April of 2016, in advance of AT&T’s earnings release on April 26, 2016.

Regulation FD prohibits selective disclosure of material nonpublic information to specified persons, including market professionals and securityholders. Unless an exclusion to Regulation FD applies, a company is required to publicly disclose any material nonpublic information that it discloses selectively to the specified persons. The public disclosure must be made no later than simultaneously, in the case of an intentional selective disclosure. Regulation FD provides that material nonpublic information can be publicly disclosed by either filing or furnishing a Form 8-K or by disseminating the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad distribution of the information to the public. In the present case, AT&T made no effort to publicly disclose the information prior to sharing it with the analysts.

Public companies should carefully monitor communications with analysts and other market professionals to ensure that material information is not “leaked” in advance of public disclosure of the information.

For additional information about any of the above developments, or to discuss any questions that you may have, please contact a member of Maynard’s Public Company Advisory Group.

_{[1] The SEC Complaint may be accessed at the SEC website at this link: https://www.sec.gov/litigation/complaints/2022/comp-pr2022-215.pdf}

_{[2] 17 C.F.R. § 243.100 et seq. promulgated under the Securities Exchange Act of 1934, as amended.}

_{[3] The defendants consented to final judgments permanently enjoining them from violating, or aiding and abetting violations of, Regulation FD and Section 13(a) of the Securities Exchange Act of 1934, and ordering them to pay the above-referenced penalties, without admitting or denying the allegations in the complaint.}