The Securities and Exchange Commission continues to signal its renewed focus on the enforcement of Regulation FD, which prohibits selective disclosure of material nonpublic information to investment professionals or holders of a company's securities. In March 2010, the SEC brought an enforcement action under Regulation FD against Presstek, Inc. and its former chief executive officer, Edward J. Marino, for signaling disappointing quarterly results during a telephone conversation between the CEO and an investment advisor. Given the SEC's renewal of its Regulation FD enforcement efforts, public companies should continue to monitor their compliance policies to prevent Regulation FD violations, and maintain a process for prompt corrective action should a violation occur.
SEC v. Presstek, Inc.
On March 9, 2010, the SEC filed a civil injunctive action against Presstek, Inc. and its former chief executive officer, Edward J. Marino, for violations of Regulation FD. Marino was one of three executives authorized by Presstek to speak on its behalf to investors, analysts and other securities professionals. According to the SEC's complaint, Marino was aware of Presstek's internal policy concerning periods of "corporate silence," generally beginning on the 15th day of the last month of each quarter, that precluded discussion of nonpublic company information with outside parties. The complaint stated that Marino received a call from an investment advisor two days before the end of the company's third quarter and he negatively commented on the company's thirdquarter performance. According to the notes taken by the advisor, Marino stated that "summer [was] not as vibrant as expected in North America and Europe," and that Presstek's third-quarter performance was "overall a mixed picture." During the call the advisor sent a message to his colleague indicating that the information he was receiving from Marino "sounds like a disaster," and immediately following the call he instructed his firm's trader to sell all of its Presstek holdings. That day, Presstek's stock price dropped 19 percent. The following day, Presstek issued a press release announcing that its results for the third quarter would be below prior estimates, and its stock price closed down an additional 10 percent.
Presstek agreed to settle the SEC's charges by consenting to an order enjoining the company from future violations of Regulation FD and directing it to pay a $400,000 civil penalty. In connection with the settlement, the SEC stated that it considered remedial measures Presstek took, which included revising its corporate communications policies and corporate governance principles, replacing its management, appointing new independent directors and creating a whistleblower's hotline. The settlement did not include Marino; the civil action against him remains ongoing.
Reconciling Recent Enforcement Actions
The SEC's decision to sanction Presstek for violations of Regulation FD stands in contrast to its decision, previously reported in our December 2009 Securities Update, not to bring an enforcement action against American Commercial Lines, Inc. when its chief financial officer sent a group of eight sell-side analysts an e-mail updating the company's earnings guidance. While the conduct of the executives in these actions presented relatively straightforward Regulation FD enforcement actions, the circumstances may have resulted in the different enforcement outcomes. In each of these cases, the company had a disclosure policy in place to prevent improper disclosures by company officials, and the executive alone was responsible for violating that policy. In addition, each company promptly disclosed the information to the public upon learning of the selective disclosure and took significant remedial actions to prevent future violations.
The SEC may have decided to institute an enforcement action against Presstek, but not against American Commercial Lines, because of differences in the companies' internal compliance programs and their level of cooperation with the SEC's investigation. The SEC indicated that prior to the violation, American Commercial Lines "cultivated an environment of compliance" by training its employees regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations. In addition, the SEC noted that American Commercial Lines self-reported the violation to the SEC staff the day after it was discovered and subsequently provided "extraordinary cooperation" with the SEC's investigation. Tellingly, the SEC did not make any similar comments with respect to Presstek.
Takeaways
Taken together, the two recent enforcement actions indicate that a strong internal compliance program and full cooperation with SEC staff inquiries are essential to minimizing damage in connection with a Regulation FD violation. Keys to an effective, active compliance program include training, periodic refreshers and written certifications, as well as an unambiguous internal policy that clearly defines the types of information considered material by the company. Moreover, companies should have a plan to limit company exposure if a violation occurs. This plan should include a process for taking prompt corrective action, including at a minimum the filing within 24 hours of a Form 8-K disclosing the information that was selectively disclosed, and full cooperation with the SEC as appropriate. In addition, companies should give due consideration to the potential value of self-reporting the violation to SEC staff.
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