October 22, 2010
Office Depot "Talks Down" Analysts' Estimates, SEC "Talks Up" $1 Million Fine
The SEC announced enforcement actions yesterday against two Office Depot executives and the company. The SEC alleges that the executives made selective calls to certain analysts to indicate the company would not meet analysts' earnings estimates, although it was not directly stated that earnings would not meet expectations. The company never issued a broad public disclosure of this information, as would be required under Regulation FD if the disclosures to the analysts were material nonpublic information.
According to the SEC order against the company (pdf here), the talking points used for the calls were as follows:
- 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
Apparently, Office Depot did not make such calls to analysts on a regular basis, which made the calls especially suspect. According to the order, "Word of these calls quickly spread among analysts, some of whom believed that Office Depot was 'talking down' analysts’ earnings estimates."
I suspect the SEC is correct about the motivation for the calls, so perhaps this the right outcome. But I can't help but wonder if the market might not work more efficiently with a little gentle foreshadowing. This is hardly a bombshell call to analysts, so if these calls were material, they were not that material. The SEC itself seems to agree that not all analysts thought this call was about talking down earnings.
And, after all, the Federal Reserve often "hints" at future actions to help stabilize the market. Obviously, the Fed actions are at a macro level and Office Depot is at a micro level, but I think there is at least an argument such actions can work toward the same (arguably positive) end at either level.
This is just part of the problem of being a public company--a status possessed by far too many little companies that must waste far too much time and effort trying to make Wall Street richer by giving it a timing edge on the little old lady in South Dakota who will always be last in line for inside information.
Posted by: Arthur O. Armstrong | Oct 24, 2010 1:49:43 PM