On October 21, 2010, the Securities and Exchange Commission filed an enforcement action against Office Depot, Inc., Office Depot’s Chief Executive Officer, and Office Depot’s then-Chief Financial Officer for selectively conveying information to analysts that implied that the company would not meet earnings estimates.
While Office Depot did not offer specific earnings guidance as company policy, in late 2006 and early 2007 it believed that the earnings per share (EPS) growth it experienced in earlier years would not continue. In February, April, and May 2007, the company publicly warned investors that demand was softening due to economic conditions and that its business models contemplated EPS only in the mid- to upper teens.
In response to a notice to the board of directors that Office Depot would not meet the analysts’ consensus for EPS, 10 days before the end of the second quarter in 2007 the CEO and then-CFO decided that the company should talk to the analysts with the goal of having them lower their estimates. The CEO and then-CFO crafted a script for the calls, referring the analysts to both the recent earnings of two other publicly traded companies that announced that results were affected by the economy and to the cautionary statements made by the company earlier that year. Over the next several days, at the direction of the CEO and then-CFO, the director of investor relations called each analyst and certain institutional stockholders. Despite the fact that several analysts pointed out that there was no press release publicly available about the company’s earnings, the CEO and then-CFO directed the director of investor relations to continue making the calls. As a result, 15 of the 18 analysts lowered their estimates. Office Depot did not file a Form 8-K disclosing that earnings would be negatively impacted by the slowing economy until after the close of the market on the sixth day following the initial analyst call. During that time, Office Depot’s stock fell 7.7 percent.
Regulation FD prohibits issuers, and persons acting on the issuers’ behalf, from disclosing material nonpublic information to analysts and investors without also disclosing the information to the public. The issuer must ensure that the information is disseminated broadly, such as through a press release or Form 8-K. When the disclosure is intentional, the dissemination of the information to the public must be simultaneous. When the disclosure is non-intentional, the dissemination to the public should be "prompt," which means as soon as practicable, but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange.
The fact that the Office Depot did not directly tell the analysts that it would not meet the consensus guidance is irrelevant; the message was clearly implied. Further, an SEC C&DI says that "a confirmation of expected quarterly earnings made near the end of a quarter might convey information about how the issuer actually performed. In that respect, the inference a reasonable investor may draw from such a confirmation may differ significantly from the inference he or she may have drawn from the original forecast early in the quarter."
Office Depot agreed to settle the charges and consented to a cease-and-desist order and to pay a penalty of $1 million. Each of the CEO and then-CFO also consented to a cease-and-desist order and agreed to pay a penalty of $50,000.
It is important to note that, in the cease-and-desist orders, the SEC specifically referenced the fact that Office Depot did not have a written FD policy and that the company never conducted formal FD training. This would be a good time to review your FD policy or, if you do not have a written policy, to put one in place. We are available to help with the drafting and review of such policies and can conduct FD trainings in your offices.