September 28, 2009

SEC Brings Relatively Rare Reg FD Case Against a CFO

It’s been quite some time since the SEC’s Enforcement Division brought a Regulation FD case (two years since the last one) – and I count only nine such cases since Reg FD was adopted earlier this decade (according to the list in our “Regulation FD” Practice Area). On Thursday, the SEC announced an administrative proceeding in which a former American Commercial Lines CFO (Christopher Black, who was the company’s de facto IRO) agreed to pay $25,000 for a Reg FD violation that occurred a few years ago. The CFO is alleged to have selectively disclosed material, nonpublic information regarding the 2nd quarter ’07 earnings forecast to a limited number of analysts. Here is the SEC’s complaint.

Here is a summary of what allegedly happened according to the complaint:

– In mid-2007, the company issued a press release projecting second quarter earnings in line with 1st quarter earnings.
– Later that week, the CFO sent an e-mail from his home to the eight sell-side analysts who covered the company that said that the company’s earnings per share for the second quarter “will likely be in the neighborhood of about a dime below that of the first quarter,” effectively cutting in half the second quarter earnings guidance.
– This selective disclosure and resulting analysts’ reports triggered a significant drop in the company’s stock price.

The SEC’s litigation release identified these factors to explain why an enforcement action wasn’t pursued against the company itself:

– Prior to the selective disclosure by Black, the company cultivated an environment of compliance by providing training regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations.
– The CFO alone was responsible for the violation and he acted outside the control systems established by the company to prevent improper disclosures.
– Once the illegal disclosure was discovered by the company, it promptly and publicly disclosed the information by filing a Form 8-K with the SEC the same day.
– The company self-reported the conduct to the SEC Staff the day after it was discovered and the company provided extraordinary cooperation with the Staff’s investigation.
– The company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.

These factors noted by the SEC serve as a good reminder that companies should have Regulation FD policies and well-documented compliance training programs in place. In our “Regulation FD” Practice Area, we have a bunch of sample Reg FD policies.

PCAOB Issues 1st Year AS #5 Implementation Report

Last Thursday, the PCAOB issued a report on the first year of implementation of AS #5 regarding internal controls. In FEI’s “Financial Reporting Blog,” Edith Orenstein wonders whether the SEC’s “Study of the Costs and Benefits” regarding internal controls reporting under the SEC & PCAOB rules is not far behind…

– Broc Romanek