What information is “material” under securities law involves a very large gray area. Whether or not a publicly-listed company is going to make or miss earnings estimates, however, seems pretty clearly in the black: It is, after all, the kind of thing investors look out for on a quarterly basis, and one that usually has some impact on the price of a company’s stock. And, five years ago, AT&T was very much about to miss, and for the third time in a row. That the company considered this material seems clear from the fact that it felt the need to do something to prevent it. That something was not find an extra $76 million in revenue and quick, but to call all of the analysts covering AT&T and to tell them the not-yet-public information that their earnings estimates were too damned high. A clearer example of the selective dissemination of material nonpublic information that Regulation FD very specifically prohibits one can hardly imagine, unless, apparently, you are one of the analysts getting that information, or are anyone at AT&T not working in the compliance department.
AT&T’s internal compliance materials said that revenue and sales figures related to smartphones were material and covered by Regulation FD, the SEC’s court complaint says.
AT&T said smartphone sales were immaterial to its earnings because it is in the business of providing wireless service, not selling devices.
Analysts interviewed by the SEC as part of the investigation told regulators they didn’t believe the metrics were material, and thus didn’t report the communication from AT&T to their own compliance experts, a person familiar with the matter said.
The analysts did think the metrics were material in one sense, in that it made them collectively lower their estimates for AT&T’s revenue by an average of $323 million, which in a sense made the information about the company’s impending miss not material, as it was no longer true. But that’s not the principle under which AT&T apparently intends to fight.
“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,” the company wrote. “Unfortunately, this case will only create a climate of uncertainty among public companies and the analysts who cover them.”
“Something the SEC was worried about when it adopted” a regulation is not, alas, the same thing as the regulation itself. And whatever the SEC was worried about, what it wrote was that any dissemination of material nonpublic information to a limited group of individuals—say, the 22 analysts covering your company—must be accompanied by a press release or televised interview or fleet of skywriters or some other form of simultaneous public disclosure, thereby obviating the “nonpublic” bit. And, given that fact, the SEC is gonna have to take issue with AT&T’s claim about what, exactly, it was worried about 21 years ago.
“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,” Richard R. Best, director of the SEC’s New York Regional Office, said 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.”