On October 21, 2010, the SEC announced that it had settled a Regulation FD enforcement action against Office Depot, its CEO and its former CFO resulting from selective disclosure to analysts and institutional investors in the second quarter of 2007. The agency brought the action because of "signals" sent by Office Depot's director of investor relations at the behest of the CEO and then-CFO implying that the company's earnings would be lower than earlier projections and consensus EPS estimates.
Regulation FD requires that when issuers disclose material nonpublic information to certain groups, including analysts, they must make broad public disclosure of that information, generally through a press release and the filing of a Form 8-K. The regulation is explicit in that it applies whether such initial disclosure is intentional or mistaken. The SEC's enforcement action against Office Depot now indicates that the requirement applies whether the disclosure is express or implied.
In June of 2007, with the end of the quarter approaching and analysts' expectations remaining higher than internal projections, Office Depot's CEO and CFO directed the company's investor relations officer to contact all 18 analysts covering the company and to use the following talking points:
- "Haven't spoken in a while, just want to touch base.
- At beg. of Qtr we've talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.
- I think the earnings releases we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting.
- On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters.
- [Company C] mentioned economic conditions as a reason for their slowed growth.
- Some have pointed to better conditions in the second half of the year – however who knows?
- Remind you that economic model contemplates stable economic conditions – that is mid-teens growth."
The investor relations officer never made an explicit statement about Office Depot's expected earnings, and the company did not file a press release relating to the talking points. Between June 22, 2007, when the calls began, and June 28, 2007 when the company filed a Form 8-K announcing that earnings would be negatively impacted due to a softening economy, Office Depot's share price dropped 7.7% based on lowered analyst expectations.
In its order, the SEC stated that:
When an issuer official engages in a private discussion with an analyst who is seeking guidance about earnings estimates, he or she takes on a high degree of risk under Regulation FD. If the issuer official communicates selectively to the analyst nonpublic information that the company's anticipated earnings will be higher than, lower than, or even the same as what analysts have been forecasting, the issuer likely will have violated Regulation FD. This is true whether the information about earnings is communicated expressly or through indirect "guidance," the meaning of which is apparent though implied.
Under the SEC's view, Office Depot's discussions with analysts implied that it would not meet expectations and such implication - coupled with the timing of the disclosures, the private calls to analysts, and the ultimate effect on the market - rose to the level of a Regulation FD violation, even though the company made no direct statement about its own revised earnings projections.
Office Depot, its CEO, Stephen Odland, and its then-CFO, Patricia McKay, consented to the entry of a final judgment requiring them to pay civil penalties of $1 million for the Company and $50,000 for each of the CEO and then-CFO. Office Depot, Odland and McKay also consented to the SEC's issuance of a cease-and-desist order barring them from future violations of Regulation FD and Section 13(a) of the Exchange Act.