A Very Fine Line
On March 5, the SEC filed a suit against AT&T (T) and three members of its IR department for an alleged violation of Fair Disclosure rules. According to the filing, in March of 2016 (yes, 2016) AT&T learned that a steeper than expected decline in smartphone sales would cause the company’s 1st quarter results to fall short of analyst’s estimates by over $1b, at which point the CFO instructed the company’s IR department to ‘work the analysts that still have equipment revenue too high.’ The Director of IR then instructed three members of the IR department to speak to analysts privately to ‘walk the analysts down’ to the lower level that the company now expected, avoiding the company’s 3rd quarterly miss.
Over the next month and a half the IR team spoke to ~20 analysts to induce them to lower their estimates, disclosing material non-public information, including the company’s equipment upgrade rate, its projected wireless equipment revenue or both. On some of the calls such information was presented as publicly available consensus information despite it being internally generated and far from actual consensus estimates at the time. Analysts presented with the information lowered their estimates enough that AT&T beat the ‘new’ consensus numbers when it reported 1Q ’16 results.
At the time of the incident, AT&T had changed the way it sold smartphones to its subscriber base, no longer offering up-front discounts on purchases and converting to a full-price pay-over-time model, which caused subscribers to hold onto their phones for longer periods, while smartphone brands also began to offer their own installment programs to customers, bypassing AT&T. Analysts had failed to ‘appreciate’ the effect this would have on the company’s wireless equipment revenue, which caused the consensus estimates to be ~$600m higher than what the company knew would be the case. AT&T’s CFO had indicated that such trends did exist during the previous year’s 4th quarter call, although the consensus estimates were still higher than the ‘new’ data that the company had developed, leading to a public statement by the CFO that such trends could continue, but gave no new guidance or new metrics.
Section 13(a) and Reg. FD specifically indicates that when a company or its representatives privately discloses material non-public information, the company must simultaneously disclose that information to the public. Both AT&T as a company and the three IR persons are defendants in the case with the SEC asking the court for injunctive relief and civil penalties, and ‘such other and further relief as this Court deems appropriate for the benefit of investors.”
Most of the time conversations with company executives or IR is a walk on a fine line, with analysts looking to discover a nuance that can help them gain an edge with their customer base, while not ‘wanting’ to hear anything that could be construed as non-public information. Cases like this, although we wonder why the SEC waited 5 years, can make IR departments even more wary than usual, and analysts the same, but the sell-side is always looking for an edge and companies are always looking to have their performance viewed positively by shareholders, which makes that fine line very thin….
Over the next month and a half the IR team spoke to ~20 analysts to induce them to lower their estimates, disclosing material non-public information, including the company’s equipment upgrade rate, its projected wireless equipment revenue or both. On some of the calls such information was presented as publicly available consensus information despite it being internally generated and far from actual consensus estimates at the time. Analysts presented with the information lowered their estimates enough that AT&T beat the ‘new’ consensus numbers when it reported 1Q ’16 results.
At the time of the incident, AT&T had changed the way it sold smartphones to its subscriber base, no longer offering up-front discounts on purchases and converting to a full-price pay-over-time model, which caused subscribers to hold onto their phones for longer periods, while smartphone brands also began to offer their own installment programs to customers, bypassing AT&T. Analysts had failed to ‘appreciate’ the effect this would have on the company’s wireless equipment revenue, which caused the consensus estimates to be ~$600m higher than what the company knew would be the case. AT&T’s CFO had indicated that such trends did exist during the previous year’s 4th quarter call, although the consensus estimates were still higher than the ‘new’ data that the company had developed, leading to a public statement by the CFO that such trends could continue, but gave no new guidance or new metrics.
Section 13(a) and Reg. FD specifically indicates that when a company or its representatives privately discloses material non-public information, the company must simultaneously disclose that information to the public. Both AT&T as a company and the three IR persons are defendants in the case with the SEC asking the court for injunctive relief and civil penalties, and ‘such other and further relief as this Court deems appropriate for the benefit of investors.”
Most of the time conversations with company executives or IR is a walk on a fine line, with analysts looking to discover a nuance that can help them gain an edge with their customer base, while not ‘wanting’ to hear anything that could be construed as non-public information. Cases like this, although we wonder why the SEC waited 5 years, can make IR departments even more wary than usual, and analysts the same, but the sell-side is always looking for an edge and companies are always looking to have their performance viewed positively by shareholders, which makes that fine line very thin….
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