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“Just Want to Touch Base”

October 28, 2010

Photo by aussiegall. Some rights reserved.

Charged last week by the SEC with violating Regulation FD, Office Depot chose just to fork over $1 million rather than contest the allegations.  (Technically, they did not admit wrongdoing.)  If you read the details of the Complaint, you won’t be surprised by that decision.

Quick background: Regulation FD (“fair disclosure”) prohibits companies from “tipping” securities professionals with earnings information that is not otherwise disclosed publicly. For example, you can’t give stock analysts a heads-up about your lukewarm quarterly performance if you don’t also tell any average Joe who might hold, or be thinking about acquiring, stock in your company. It’s all about keeping the playing field level.  But in the spring of 2007, a time when the economy was first beginning to sputter after years of strong growth, Office Depot did just that.

Except that they did it without actually doing it — they never actually said outright what they knew they weren’t allowed to say.  Here’s the scene.  Aware that it would fall short of sanguine projections for the quarter, Office Depot had its Investor Relations department initiate phone calls to 18 analysts and institutional investors.  The calls weren’t scripted exactly, but were guided by a list of “talking points.” Here is that list, verbatim, as excerpted in the SEC Complaint: 

  • Haven’t spoken in a while, just want to touch base.
  • At beg. of Qtr we’ve talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.
  • I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting.

•  On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters.
•  [Company C] mentioned economic conditions as a reason for their slowed growth.

  • Some have pointed to better conditions in the second half of the year – however who knows?
  • Remind you that economic model contemplates stable economic conditions – that is midteens growth

Now, granted, we don’t know how these “talking points” were actually articulated in the course of the phone conversations.  But the bullet list itself is comical, almost Seinfeldian, in the way it pretends not to say what it is so transparently saying.  That’s clear from the first item on the list: the calls are just to “touch base.” Oh, no, no agenda! We just missed the sound of your voice! And one can imagine the conversation continuing in that vein:

But now that you mention it, oh yes, comparable companies’ earnings sure are down.  That is, um, . . .  interesting, yes, very interesting.  Related to broader economic conditions, of course – oh, hey, did I mention we too face those same conditions?  Why, as a matter of fact, we actually did say just that at the beginning of the quarter, now, didn’t we?  Hmmm, so we did.  Of course, these conditions might improve . . .  but really, who knows?  I mean, I might marry the Queen of England, right?  Who knows!?  I’m just sayin’.  I mean, I’m not sayin’. I’m just sayin’.

To read more about this case, go to our Law Firm Memos page and search on “Regulation FD” for the past 7 days.

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