• SEC Charges Another Public Company with Violating Regulation FD -- The Perils of Privately Reaffirming Publicly Disclosed Earnings Guidance
  • May 17, 2005 | Author: Ross H. Parr
  • Law Firm: Womble Carlyle Sandridge & Rice - Charlotte Office
  • On March 24, 2005, the SEC charged Flowserve Corporation, its CEO and director of investor relations with violating Regulation FD and Section 13(a) of the Securities Exchange Act of 1934, as amended. Although the SEC has initiated over a half dozen Regulation FD proceedings since the Regulation became effective in October 2000, this is the first case to allege that a senior officer's reaffirmation of a company's previously disclosed earnings forecasts violated Regulation FD. It is also the first case that the SEC filed against a company's director of investor relations. Flowserve and the two executives settled with the SEC without admitting or denying the charges.

    In early 2002, Flowserve publicly disclosed its estimate of 2002 earnings per share in the range of $1.90 to $2.30. In successive public announcements, it lowered the estimate in July to $1.70 to $1.90 per share and lowered it again in September to $1.45 to $1.55 per share. Flowserve publicly reaffirmed its September earnings guidance on October 22, 2002. On November 19, 2002, Flowserve's CEO and director of investor relations held a private meeting with selected investment and brokerage firms, during which the officers once again reaffirmed Flowserve's earnings guidance. The next day an analyst who had attended the private meeting published a report, which was distributed to subscribers of Thomson's First Call, noting Flowserve's reaffirmation of its previously disclosed earnings guidance.

    On November 21, Flowserve's trading volume increased by 75% and the price of its common stock closed approximately 6% higher than it had on November 20. Flowserve did not file a Form 8-K disclosing the private reaffirmation of its earnings guidance until after the market closed on November 21, 2002.

    According to the SEC, Flowserve's private reaffirmation of its earnings guidance (almost one month after Flowserve's most recent public reaffirmation of earnings guidance) constituted selective disclosure of material nonpublic information. As a result, the two-day delay in the public announcement of Flowserve's November 19 private reaffirmation of earnings guidance violated Regulation FD's contemporaneous public disclosure requirement.

    The Flowserve enforcement action demonstrates once again the perils of private meetings with market professionals. In particular, it underscores the importance of pre-meeting planning, i.e., thoroughly vetting questions that might arise during the meeting and considering whether the company's responses to such questions might trigger Regulation FD.