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.

NASD Fines Citigroup, American Express and Chase $21 Million for Improper Sales of Class B and C Shares

Simply amazing. Three of the largest brokerage firms in the country have been fined for improper recommendations and sales of mutual funds to their customers without considering or adequately disclosing that an equal investment in Class A shares would generally have been more economically advantageous for their customers by providing a higher overall rate of return. The firms also had inadequate supervisory and compliance policies and procedures relating to these mutual fund sales according to the NASD.

The charges and settlement involved over 275,000 transactions and 50,000 households! Is the concept of mutual fund breakpoints and CDSC's too complicated for these firms, or was this just another example of improper supervision by some of the largest firms in the country?

If you are not watching breakpoints and the use of Class B and C shares in this day and age, you are simply asking for regulatory problems. The issue is simply too hot to be treated lightly. Brokers need to be certain that they have clear plans and explanations if they are going to use anything other than Class A shares, and firms need to insure that their compliance reviews include a careful look at the use of Class B and Class C shares by customers and investors.

NY Columnist Attacks the SEC, calls for Unified Regulatory Organization

SEC's Empty Quiver

The newest columnist attacked the SEC today in his column, based on information that they are going to cut a deal with Martha Stewart on the insider trading charges.

Mr. Byron basically claims that the SEC is ineffective and useless. He leads with:

"In their rush to get a piece of the action in the Martha Stewart fox hunt, they've been outwitted, outflanked and outclassed by their prey, and law enforcement on Wall Street is going to suffer for it for a long time to come."

Mr. Byron might be right, but for the wrong reason. Dropping the Martha case is the right thing to do, since it should never have been brought in the first place. An insider trading case against Martha would have been a huge stretch, and would have required the Commission to prove that Martha knew that Sam was selling, and undoubtedly WHY Sam was selling.

Tough case to prove, which is undoubtedly why the US Attorney did not include an insider trading charge in their indictment.

Any thoughts? Mr. Byron has missed a number of significant facts, like the SEC's ability to refer criminal cases to the US Attorney, which is exactly what happened in the Martha Stewart Case, but is Chris right? Do we need a unified regulatory authority with criminal as well as civil power?

I doubt it, and while anyone can take a pot shot at the NASD or the SEC, or any government organization for that matter, the question is, is an overhaul going to make the system better or worse? Elliot Spitzer proved that with some effort and attention, changes can be made, so do we really need an overhaul of the entire system?