SEC charges CFO with violation of Reg FD

By Cydney Posner

In late September, the SEC settled charges against the CFO of a public company as a result of violations of Reg FD. The CFO, while acting in his capacity as the company's designated investor relations contact, was alleged to have selectively disclosed material, nonpublic information to a limited number of analysts without simultaneously making that information available to the public. Ironically, it was the CFO who put together the company's investor relations policy, which included a section addressing the requirements of Reg FD.

The CFO was supposed to send an email to various analysts summarizing their discussions (which presumably were consistent with publicly available information). However, in the course of preparing the email, the CFO received an updated internal analysis indicating that EPS was expected to be well below prior published guidance. As a result, in his email, which he sent from home without advising anyone at the company or counsel, he provided "some additional color" regarding the earnings guidance. The "additional color" indicated that the company's quarterly earnings were expected to be about half of the amount the company had previously projected and publicly disclosed. The next trading day, there was heavy trading in the stock and a 10% price decline. When the CEO learned of the email, he caused the company to file an 8-K, but it did not get on file until near the end of the day.

The SEC decided not to bring an enforcement action against the company itself, and the factors the SEC considered in making that determination may be instructive. The factors include the following:

• the company cultivated an environment of compliance by
  • providing training regarding the requirements of Reg FD and
  • 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 staff the day after it was discovered;
• the company provided extraordinary cooperation with the staff's investigation; and
• the company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent this type of conduct in the future.

Here is the SEC's litigation release and the complaint in the case.

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