Yesterday, I ran a popular poll about whether folks thought that Apple’s Tim Cook violated Regulation FD by emailing CNBC host Jim Cramer about how Apple was faring in China. The poll results indicated that 15% thought it was nowhere near a violation – and 21% indicated it might look that way to the untrained eye (but that it wasn’t). 29% thought it was clearly a violation – and 29% thought it was a toss-up and depended on how the SEC approached it (7% didn’t realize that Seinfeld is available around-the-clock on Hulu these days).
In my blog about it, I indicated that the facts as we know them are semi-sparse. Based on the facts as we know them, here’s my 10 cents:
1. I Agree That The Optics Aren’t Good – In a great illustration of “perception matters,” a plain face reading of the email that Cook sent to Cramer makes the securities lawyer in me cringe. The 2nd paragraph is about how Apple is experiencing strong growth in China, etc. Even worse is the start of the 3rd paragraph about “our performance so far this quarter is reassuring.” This all comes after Cook’s intro about how Apple doesn’t give mid-quarter updates. This “perception” is probably why so many in our community think it’s a clear-cut violation.
2. But Communications to Journalists Aren’t Reg FD Violations – To the extent Cook’s email was directed to Cramer as a member of the media (so intention matters) – and reasonably understood that way – there likely isn’t a problem (absent other facts). This is supported by this excerpt from the SEC’s adopting release in 2000:
Rule 100(b)(1) enumerates four categories of persons to whom selective disclosure may not be made absent a specified exclusion. The first three are securities market professionals — (1) broker-dealers and their associated persons, (2) investment advisers, certain institutional investment managers and their associated persons, and (3) investment companies, hedge funds, and affiliated persons. These categories will include sell-side analysts, many buy-side analysts, large institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information. The fourth category of person included in Rule 100(b)(1) is any holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that such person would purchase or sell securities on the basis of the information. Thus, as a whole, Rule 100(b)(1) will cover the types of persons most likely to be the recipients of improper selective disclosure, but should not cover persons who are engaged in ordinary-course business communications with the issuer, or interfere with disclosures to the media or communications to government agencies.[FN]
[FN 27] While it is conceivable that a representative of a customer, supplier, strategic partner, news organization, or government agency could be a security holder of the issuer, it ordinarily would not be foreseeable for the issuer engaged in an ordinary-course business-related communication with that person to expect the person to buy or sell the issuer’s securities on the basis of the communication. Indeed, if such a person were to trade on the basis of material nonpublic information obtained in his or her representative capacity, the person likely would be liable under the misappropriation theory of insider trading.
I’ve always wondered (or worried) about the journalist exception when the journalist is a conduit for the market. It’s possible that FN 27 wasn’t written to address this type of situation. For example, it may have been included to assure company officials that communicating high demand to a supplier in an effort to secure additional supplies would not violate Reg FD – even if the supplier is a “holder’ (which likely should have been written in the regulation as “owner”) of company securities.
And the thing about the press is that it’s not usually a very good way to plan for Reg FD compliance (although the live interview situation is probably not subject to the usual concerns about what the press will actually report – and when they’ll actually report it publicly).
3. Doubtful Directed to Cramer In His Investor Capacity – So far at least, there is no indication that Cook intended his email to be received by an investor. If so, any misuse by Cramer would create problems for Cook. Barring that type of situation, this is merely an exclusive with media. Done all the time.
As I understand it, Cramer is the manager of a charitable trust fund (at least, he’s portrayed that way), as well as the talking head on his own show. But if you ask 100 people what Jim Cramer does, my hunch is that at least 99 will say “media personality” or “news show host” – not “fund manager.”
On the other hand, there certainly is the argument that intent of the communicator is not intended to part of Reg FD – that it’s more mechanical. Instead, Cook might have a strong argument – similar to the “intent” concept – that the email to Cramer was not sent under circumstances that were reasonably foreseeable to Cook that Cramer would purchase or sell securities on the basis of the information contained in the email. More particularly, it seems reasonable that Cook could conclude that MSNBC has a policy, applicable to Cramer, that – to the extent it even allows trading in public securities – material information received by its personnel must be disseminated broadly before the personnel can trade securities of a company that is the subject of the information (or discuss the information in a selective forum, essentially equivalent to a “tip”). Thus, it seems reasonable that Cook could conclude that Cramer – even to the extent he is a manager of a fund that holds Apple stock – would be required to broadcast the material information in the email and allow for appropriate dissemination before using the information for another purpose. Presumably, that would not constitute a violation of Reg FD.
By the way, I have always wondered how MSNBC got comfortable with Cramer trading while running his own show, but that’s another ball of wax. And don’t forget to check out our comprehensive 119-page “Regulation FD Handbook“…
Conflict Minerals: GAO Says Most Companies Unable to Determine Source
On the same day that the SEC’s rules were dealt a blow by the DC Circuit last week (see our memos about that posted in our “Conflict Minerals” Practice Area), the GAO delivered this 60-page report about 2014 disclosures – not 2015! – and concludes that most companies were unable to determine the source of their conflict minerals. (And that conclusion seems unlikely to change in the report on 2015.) Here’s an excerpt from this Cooley blog:
Of those studied, 99% reported performing reasonable country-of-origin inquiries (RCOI) for the conflict minerals they used. The GAO spoke with some of the companies, which reported that they had “difficulty obtaining necessary information from suppliers because of delays and other challenges in communication.” According to the report, the vast majority of companies (94%) also conducted due diligence on the source and chain of custody of the conflict minerals they used, but 67% reported that they were unable to determine the source of the minerals (i.e., whether they came from the covered countries) and, not surprisingly, “none could determine whether the minerals financed or benefited armed groups in those countries.”
The report also indicates that 24% reported that the conflict minerals they used did not originate in covered countries, while 4% reported that they did source from the covered countries, but “indicated that they are or will be taking action to address the risks associated with the use and source of conflict minerals in their supply chains.” Only 2% indicated that their conflict minerals came from scrap or recycled sources.
The report estimates that only 47% of companies reported that they received responses from the suppliers they surveyed, while only 19 companies in the sample had response rates of 100%.
Shareholder Approval: SEC Seeks Comment on NYSE’s “Early Stage Companies” Proposal
As noted in this MoFo blog, the SEC is seeking comment by next Monday for the the NYSE proposal to amend the shareholder approval rules (Sections 312.03(b) and 312.04) to exempt an “Early Stage Company” from having to obtain shareholder approval before issuing shares for cash to related parties (or their affiliates or entities in which they have a substantial interest), so long as the company’s audit committee (or a comparable committee comprised solely of independent directors) reviews and approves of the transactions prior to their completion. An “Early Stage Company” is defined as a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation; however, the company will lose that designation (and will not be able to regain it) at any time after listing on the NYSE that it files a Form 10-K with the SEC in which it reports two consecutive fiscal years (including periods prior to listing) in which it has revenues greater than $20 million in each year.
– Broc Romanek