The SEC has accused AT&T of violating Regulation FD and has charged three of its investor relations executives with aiding and abetting those alleged violations by selectively disclosing material non-public information to research analysts – accusations the company rejects.
‘Regulation FD levels the playing field by requiring that issuers disclosing material information do so broadly to the investing public, not just to select analysts,’ says Richard Best, director of the SEC’s New York regional office, in a statement. ‘AT&T’s alleged selective disclosure of material information in private phone calls with analysts is precisely the type of conduct Regulation FD was designed to prevent.’
According to the SEC complaint, AT&T and executives including Christopher Womack, Michael Black and Kent Evans in early March 2016 learned that a steeper-than-expected decline in smartphone sales by the company would cause its revenue for the first quarter of 2016 to fall below analysts’ estimates.
The SEC alleges that Womack, Evans and Black were instructed to speak to analysts privately one by one about their estimates so as to ‘walk the analysts down’ – that is, to induce them to reduce their individual estimates. The aim, according to the agency, was to induce sufficient analysts to lower their estimates that the consensus revenue estimate would drop to the level AT&T expected to report.
Womack, Evans and Black between March and April 2016 called roughly 20 separate analyst firms and spoke to analysts in pursuit of this aim, and during these calls ‘intentionally disclosed material non-public information regarding AT&T’s results to date,’ the SEC alleges. Depending on the firm and the date of the call, the executives disclosed AT&T’s projected or actual equipment upgrade rate, its projected or actual wireless equipment revenue amount, or both, according to the agency.
‘Womack, Evans and Black knew or recklessly disregarded that the information they provided to the analysts during these calls was both material and non-public,’ the SEC states in its filing with the US District Court for the Southern District of New York. ‘Among other things, they knew they were prohibited from selectively disclosing AT&T’s internal revenue and related data to analysts, and they did so with the expectation that the analysts would act on the information to substantially reduce the estimates they published for investors.’
The analyst firms that received the alleged calls promptly adjusted their revenue estimates, leading to a reduced consensus revenue forecast for Q1 2016 that AT&T beat when it announced earnings on April 26, 2016, the SEC says.
AT&T rejects the accusations against itself and Womack, Evans and Black, who are still employed at the company. The company says in a statement: ‘[The] civil suit filed by the [SEC] targeting three AT&T mid-level investor relations employees for conversations they had with analysts five years ago represents a significant departure from the SEC’s own long-standing Regulation FD enforcement policy and is inconsistent with the testimony of all who participated in these conversations.
‘Tellingly, after spending four years investigating this matter, the SEC does not cite a single witness involved in any of these analyst calls who believes that material non-public information was conveyed to them. The information discussed during these March and April 2016 conversations concerned the widely reported, industry-wide phase-out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone upgrade rates and equipment revenue. Not surprisingly, without device subsidies, customers upgraded their smartphones less frequently, leading to a reduction in equipment revenue.
‘Not only did AT&T publicly disclose this trend on multiple occasions before the analyst calls in question, but AT&T also made clear that the declining phone sales had no material impact on its earnings. Analysts and the news media frequently wrote about this trend and investors understood that AT&T’s core business was selling connectivity (that is, wireless service plans), not devices, and that smartphone sales were immaterial to the company’s earnings.
‘The evidence could not be clearer – and the lack of any market reaction to AT&T’s first quarter 2016 results confirms – there was no disclosure of material non-public information and no violation of Regulation FD.
‘The SEC’s pursuit of this matter will not protect investors and instead will only serve to chill productive communications between companies and analysts, something the SEC was worried about when it adopted Regulation FD some 20 years ago. Unfortunately, this case will only create a climate of uncertainty among public companies and the analysts who cover them.
‘AT&T maintains the highest standards of ethics and compliance and we look forward to having our ‘day in court’ to demonstrate conclusively that our [IR] employees complied with Regulation FD, and that the allegations in the SEC’s complaints are meritless.’
An SEC spokesperson declined to comment beyond its initial statement and complaint.