Friday, March 25, 2005

Reaffirmance of Earnings Outlook Causes Reg FD Violation

Flowserve Corp. (FLS) agreed to pay $350,000 to settle Securities and Exchange Commission charges it violated the SEC's fair-disclosure rules by meeting privately with securities analysts in 2002 and reaffirming its earnings guidance. Flowserve Chief Executive C. Scott Greer will also pay a $50,000 fine.

The charges, and the settlement, are an important reminder to public companies and their officers, because the case is the first time that the SEC charged a company for a Reg. FD violation for reaffirming guidance that was itself publicly released. The SEC also charged the company's Director of Investor Relations, but the SEC did not indicate that any fines were imposed against him.

According to the SEC press release. Flowserve had originally forcasted earnings $1.90 to $2.30 a share, but lowered that in mid-year to a range of $1.70 to $1.90. Then in a quarterly report in September, the company knocked down the estimate to between $1.45 to $1.55.

The problem arose in mid-November 2002, when Flowserve's chief executive and investor-relations director met privately with analysts from four unnamed investment banks. The analysts apparently asked asked about the company's earnings outlook, and the CEO reaffirmed the previously issued guidance, 'and thus provided additional material nonpublic information,' the SEC claimed.

One analysts issued a report stating that the Company had reaffirmed its guidance, and the stock climbed 6% on significant volume. Only then did the company issue a 8-k acknowledging that it had reaffirmed its guidance.

The point that the SEC is making is one that it has always made since discussions first began regarding Reg. FD. Companies cannot selectively release material information. While these are undoubtedly a difficult set of facts - after all, the guidance was public - the case demonstrates the importance of a public release of information, and the importance of issuing a press release, or filing an 8-K for a material event.

Our only concern is that the severity of the fine, and the inclusion of the CEO personally, may cause issuers to completely stop talking, to anyone, about anything. However, this was the concern when Reg. FD was enacted, and corporate information continues to flow. The real lesson to be learned here is that earnings information is material, and if a dislosure is going to be made, the company needs to issue a press release.

Better safe than sorry.

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