Earlier this month, the elite of the technology world--people such as Yahoo Inc.'s Tim Koogle, Hewlett-Packard Co.'s Carly Fiorina and Compaq Computer Corp.'s new chief executive, Michael Capellas--gathered in a plush resort in Scottsdale, Ariz., so that big-money investors could get up close and personal.
Ordinary investors, however, were nowhere to be seen. Credit Suisse First Boston, the sponsor of the conference, did provide an Internet broadcast and let six reporters attend, throwing a few morsels to individual investors. But reporters had to agree to wait a day before publishing anything, giving conference attendees a one-day advantage. And the small breakout meetings--where executives really let their hair down--were off limits to both the Internet and reporters.
But such private gatherings may soon be trickier. Today, the Securities and Exchange Commission is expected to propose a rule designed to clamp down on practices that have divided the investing world between the In Crowd and those out of the loop.
"The goal is to prevent intentional selective disclosure of material nonpublic information, which is a serious impediment to the fairness and integrity of the market, but without reducing the flow of appropriate information to analysts," said Harvey J. Goldschmid, SEC general counsel.
In this new era of stock market trading, where individual investors are pouring online, where computer trading has increased the appetite for instant information, and where ordinary investors track stock moves and want in with the pros--not a day later, when they reach their broker--the expectations for disclosures are changing.
Last year, SEC Chairman Arthur Levitt Jr. signaled he was frustrated by corporate America's apparent habit of giving a nod or nudge to a favored analyst or otherwise selectively disclosing information to a special group.
Although the SEC has told Wall Street repeatedly that it is unhappy with selective disclosure, until today it has done little about it. That's because the rules of the game are murky, making enforcement actions difficult, according to lawyers.
"It isn't like there is a selective-disclosure section of the law," said John Halebian, a New York lawyer specializing in class-action securities lawsuits. "There is a whole body of case law that goes off in all kinds of directions."
Historically, selective disclosure has been treated as a kind of insider-trading fraud. Thus executives must have benefited personally to be convicted. "The insider-trading argument works in a scenario where one person inside the company warns friends and family about an earnings surprise," said Karl A. Groskaufmanis, a Washington lawyer with Fried, Frank, Harris, Shriver & Jacobson.
But that is a rather high threshold for selective-disclosure cases.
Indeed, a federal judge dismissed a lawsuit against Rational Software, whose chairman allegedly privately advised analysts to lower their estimates, because of insufficient evidence that he personally benefited. And Halebian's class-action lawsuit against Abercrombie & Fitch Co.--which is under investigation by the SEC after news reports that it tipped an analyst before publicly disclosing its sales forecasts--is using a different legal argument because of the difficulty of selective-disclosure cases.
Courts have set high hurdles because they fear stifling the flow of information between companies and analysts.
The SEC plans to try a new strategy, according to sources. It is taking a more straightforward and narrow approach, requiring that market-moving information be made available to the general public at the same time it's available to analysts.
That could require, for instance, that a news release be issued before analysts are briefed on important news. If key information is inadvertently issued during the meetings, then a news release would have to be issued within a day.
The SEC will have a 90-day comment period before adopting a permanent rule.
This proposal is similar to the guidelines already set by the National Investor Relations Institute, an association of investor relations professionals. "We're pretty comfortable with the direction they are heading," said Louis M. Thompson Jr., the association president.
Still the proposed rule could be controversial. "The devil is in the detail," said one lawyer.
For instance, a Credit Suisse First Boston spokesman said there was no violations of rules at the Scottsdale conference, because no new information was discussed in the small breakout groups. Major announcements were preceded by news releases. But information some companies consider minor clarifications may in fact move stock prices. And sometimes a chairman's downcast face or jaunty confidence can influence investors as well.