The SEC's AT&T Lawsuit Is a Warning for Corporate America

If a new government lawsuit against AT&T is any indication, the Biden administration is wasting no time in signaling a new approach to regulating corporate disclosure. The result could be a tectonic shift in the way all public companies communicate with analysts and investors.

Speaking with shareholders, analysts and other interested parties is a big part of corporate executives’ jobs. But they have to be careful what they reveal: If the information is important enough — in securities lingo, “nonpublic” and “material” — they must also share it with the public at large. Otherwise, they’d be giving some people an unfair advantage — a violation of a Securities and Exchange Commission rule known as Regulation FD.

In a lawsuit announced late on a recent Friday, the SEC alleges that AT&T crossed the line. The company was engaging in the common practice of earnings management: trying to steer analysts’ forecasts of earnings per share to a level that the company could easily beat, even if only by a penny or so. To that end, according to the SEC, AT&T’s investor-relations staff shared internal data on smartphone sales with analysts at 20 different firms, to move the latter to reduce their revenue estimates. This, the SEC claims, amounted to selective disclosure that violated Regulation FD.

It’s hard to imagine the SEC making a similar determination under its previous chairman, Jay Clayton, a longtime corporate lawyer who recently returned to his former firm, Sullivan & Cromwell. Given that the events in question occurred in 2016, it’s likely that the Clayton SEC was aware of them. AT&T, for its part, is demonstrating shock, calling the lawsuit “a significant departure from the SEC’s own long-standing Regulation FD enforcement policy.”

Corporate lawyers are worried. Davis Polk warned its clients “to expect heightened enforcement interest in companies’ conversations with securities analysts, particularly when they result in changes to estimates or otherwise provoke commentary.” Wachtell, Lipton, Rosen & Katz advised executives to be careful how they address any “perceived disconnect between a company’s internal estimates and Wall Street analysts’ views.” Directing analysts to a section of a 10-K and suggesting they “rethink their model” might be OK, but offering exact numbers — as the SEC claims that AT&T did — might not be.

Aside from the possible change in policy, what’s interesting about the SEC’s lawsuit is the light it sheds on conversations that few people ever hear, unless they happen to be analysts or investor-relations professionals. The complaint includes a helpful chart on page 16 showing when the conversations happened and when the analysts adjusted their forecasts — often by a lot. Five days after contact, for example, “Firm S” changed its forecast for equipment revenue from a 14.1% increase to a 17.3% decrease.

The complaint also offers an email exchange that appears to show AT&T executives engaging in a bit of subdued celebration after all the analysts had lowered their forecasts.

CFO John Stephens to investor-relations director: “We may just meet revenue consensus.”

IR director to Stephens: “I think we will :)”

Stephens to CEO Randall L. Stephenson: “These two updates may do it for us — we may beat revenue consensus — not by much, but a beat nonetheless.”

Stephenson to Stephens: “Good.”

In a published statement, AT&T said that “we look forward to having our ‘day in court’ to demonstrate conclusively that our investor relations employees complied with Regulation FD.”

If the SEC is changing tack, what will companies do? One option is to stop trying to play the earnings-management game, which at best serves as a distraction from businesses’ actual condition and prospects. Another, less desirable, is to find more confidential ways to communicate. Although firms are supposed to retain all records and personal cell phones are not supposed to be used, Wall Street traders have discovered plenty of private messaging tools. During the past year of remote work, many rules have been rewritten on the fly and personal cellphone usage has soared.

Given the age of the events in the AT&T lawsuit, it’s possible that the SEC has more cases that it’s been sitting on for the past several years, and that can now move forward. If so, things are going to get interesting pretty quickly.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

©2021 Bloomberg L.P.

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