The Securities and Exchange Commission sued AT&T and three AT&T executives, saying the wireless operator leaked non-public data about declining phone sales to analysts in order to convince them to change their revenue forecasts. This scheme helped AT&T to “beat” analysts’ revenue forecasts for the first quarter of 2016, the SEC said.
The complaint, filed on Friday in the United States District Court for the Southern District of New York, alleges that AT&T repeatedly violated the Securities Exchange Act and the SEC’s FD Regulation (for “fair disclosure”) in March and April of 2016. The regulation “prohibits[s] selective disclosures by non-public material information issuers to securities analysts, “said the SEC filing. AT&T executives” released AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact internal documents specifically informing Investor Relations staff that AT&T smartphone revenue and sales were types of information generally considered to be ‘material’ for AT&T investors and therefore prohibited from selective disclosure under the FD Regulation, “he said. the SEC in a press release about your complaint.
AT&T said in a response on Friday that “there has been no disclosure of material nonpublic information and no breaches” and said it will fight the lawsuit. AT&T also said that the SEC “spen[t] four years investigating this matter, “but no charges were filed during the Trump administration. The lawsuit was opened about six weeks after President Biden appointed Democrat Allison Lee as acting president of the SEC; although the SEC is an independent agency, its commissioners and president are appointed by the president.
AT&T in early 2016 had “learned that a sharper than expected drop in smartphone sales by AT&T would cause its revenue for the first quarter of 2016 to fall short of analysts’ estimates,” said the SEC complaint. This “would have been the company’s third consecutive quarterly error”, and AT&T wanted to avoid that.
AT&T’s internal data showed that its equipment update rate, the rate at which existing customers buy new smartphones, “would be a record low for the company, with the result that AT&T’s consolidated gross revenue should drop more than $ 1 billion below the consensus estimate — that is, the average forecast for all analysts covering AT&T, “the suit said. AT&T has executed a plan to convince some analysts to reduce its forecasts by giving them information in particular, the suit said.
“Afraid of a loss of revenue at the end of the quarter, Chief Financial Officer of AT&T [John Stephens] instructed the AT&T IR Department to ‘work[] analysts who still have very high equipment revenue, “” the suit said. The investor relations director at AT&T instructed three executives in the investor relations department “to speak to analysts in particular, one by one, about their estimates. to ‘get analysts down’ – that is, induce analysts to lower their individual estimates, “said the process.” The goal was to induce enough analysts to lower their estimates so that the consensus revenue estimate would fall to the level AT&T expected. reporting to the public – that is, AT&T would not lose revenue. “
SEC: AT&T leaks prompt analysts to change estimates
The three investor relations executives who allegedly executed these orders were Christopher Womack, Kent Evans and Michael Black, who “were primarily responsible for communicating with the research analysts on the vendor side who covered AT&T.” These three executives, along with AT&T itself, are the defendants named in the lawsuit. The lawsuit said that AT&T violated United States laws and SEC rules and that Womack, Evans and Black helped and incited AT&T violations.
The SEC process continued:
Between March 9 and April 26, 2016, Womack, Evans and Black called approximately 20 separate analyst companies and talked to analysts to trick them into lowering their revenue estimate and thereby reducing the consensus estimate to the level that AT&T expected to report. During these calls, Womack, Evans and Black intentionally disclosed non-public material information about AT&T’s results to date. Depending on the company and the date of the call, Womack, Evans and Black released AT&T’s projected or actual equipment update rate, the actual or projected wireless revenue amount (presented as a percentage reduction compared to the first quarter 2015), or Both.
In some of Black’s calls to analysts, he represented to analysts that he was transmitting publicly available consensus estimates, when in fact he was providing AT&T’s own projected or actual internal results. Black recklessly knew or disregarded that he was misrepresenting the information he was passing on to analysts because he tracked AT&T’s calculation of consensus estimates – none of which corresponded to the information he provided in the calls to analysts.
Public companies that intentionally make selective disclosures of material non-public information “must make a public disclosure simultaneously with selective disclosure,” the complaint said.
All three executives named as defendants “recklessly knew or disregarded that the information they provided to analysts during these calls was material and not public,” the complaint said. “Among other things, they knew that they were prohibited from selectively disclosing AT&T internal revenue and data related to analysts, and they did so with the expectation that analysts would act on the information to substantially reduce the estimates they published to investors. “
The plan worked because “the analyst companies that received these calls readily adjusted their revenue estimates, resulting in a reduced consensus revenue forecast for 1Q16 that AT&T surpassed when it announced its profits on April 26, 2016, on a Form 8-K filed with the Commission, “said the suit.
Womack is executive director of AT&T’s investor relations department, Evans is assistant vice president and Black is chief financial officer, the suit says.
AT&T says it is innocent
AT&T said in a response to reporters that the “information discussed during these March and April 2016 conversations concerned the widely publicized phasing out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone update rates. and equipment revenue. “
AT&T said it “will publicly disclose[d] this trend on several occasions before the analyst called in question “e” made it clear that the drop in phone sales had no material impact on his earnings. Analysts and news media frequently wrote about this trend and investors understood that AT & T’s main business was selling connectivity (ie wireless service plans), not devices, and that smartphone sales were irrelevant to the company’s profits. company. “
AT&T also said that the SEC has not “cited a single witness involved in any of these calls from analysts who believe that material nonpublic information has been transmitted to them”. AT&T said the evidence and “the lack of any market reaction to AT&T’s first quarter 2016 results” confirms that there has been no disclosure of material nonpublic information and therefore no breach.
SEC seeks financial penalties
Whether or not a company complies with analysts’ estimates can affect the stock price. When earnings results for public companies are announced, “the media and analysts compare real results with consensus estimates. When real results fall short of analysts’ estimates, that is, ‘consensus fails’, investors and markets typically treat these results as negative news for the issuer, “noted the SEC filing.
The SEC requested a court order requiring AT&T and the other named defendants to pay financial penalties under a U.S. law that allows fines for each breach of up to $ 100,000 per person, $ 500,000 for each legal entity or “the gross amount of the pecuniary gain for such a defendant as a result of the violation. “The SEC also requested a permanent injunction” restricting and ordering “the defendants for future violations of the United States law and SEC rules in question, and for” additional relief as this Court deems appropriate and necessary for the benefit of investors. “
The SEC currently has two Democratic and two Republican commissioners. Biden has appointed Democrat Gary Gensler to join the commission and become president, but Senate approval for Gensler is still pending.