The Securities and Exchange Commission has sued AT&T and three AT&T executives, saying the wireless service provider leaked non-public data on declining phone sales to analysts to persuade analysts to change their revenue forecasts. This scheme has helped AT&T analysts’ revenue forecasts in the first quarter of 2016 to ‘beat’, the SEC said.
The lawsuit, filed Friday in New York’s Southern District Court, alleges that AT&T repeatedly violated the Securities Exchange Act and the SEC’s “fair disclosure” regulation in March and April 2016. The regulation “prohibits”[s] selective disclosure by issuers of material non-public information to security analysts, “the SEC lawsuit said. AT&T executives” disclosed the internal data of AT & T’s smartphone sales and its impact on revenue statistics, despite the fact that internal documents Investor Relations staff specifically informed that AT & T’s revenue and sales of smartphones were types of information that are generally considered ‘material’ for AT & T investors, and therefore it is prohibited to disclose selectively under Regulation FD, ” the SEC said in a press release on its complaint.
AT&T claimed in a reply on Friday that “no material non-public information and no offense has been disclosed” and said it would fight the lawsuit. AT&T also said the SEC’s buckle[t] has been investigating the case for four years, “but no charges were filed during the Trump administration. The case was filed about six weeks after President Biden appointed Democrat Allison Lee as acting chairman of the SEC; although the SEC is an independent agency. is its commissioners and its chairman is appointed by the president.
“In early 2016, AT&T ‘learned that a stronger-than-expected decline in smartphone sales by AT&T would prevent revenue for the first quarter of 2016 from falling in the analysts’ analysis, ” the SEC complaint reads. This ‘would be the company’s third consecutive quarterly miss’, and AT&T wanted to avoid it.
AT & T’s internal data showed that the upgrade rate of equipment, the rate at which existing customers were buying new smartphones, would be a record low for the company, with the result that AT & T’s expected gross revenue is expected to exceed $ 1 billion would fall below the consensus estimate. “These are the average forecasts for all analysts covered by AT&T,” reads the lawsuit. AT&T has executed a plan to persuade some analysts to lower their forecasts by giving them private information, the lawsuit said.
“Afraid of a revenue miss at the end of the quarter, AT & T’s CFO [John Stephens] AT & T’s IR division instructed to ‘work'[] the analysts who still have too much equipment income, ” the lawsuit said. The AT&T Director of Investor Relations then instructed three executives in the Investor Relations division to talk one-on-one privately with analysts about their estimates to ‘distract analysts’ – ie to encourage analysts to reduce their individual estimates, “the lawsuit said. The goal was to attract enough analysts to lower their estimates so that the consensus revenue estimate would drop to the level that AT&T expected to report to the public – that is, AT&T would not miss any revenue. ”
SEC: AT&T leaks led analysts to change estimates
The three investor relations executives who allegedly carried out the assignments were Christopher Womack, Kent Evans and Michael Black, who were ‘primarily responsible for communicating with sales analysts at the AT&T sales office’. These three executives, along with AT&T itself, are the accused mentioned in the case. The lawsuit alleges that AT&T violated U.S. law and SEC rules, and that Womack, Evans and Black assisted and supported AT & T’s violations.
The SEC lawsuit continued:
Between March 9 and April 26, 2016, Womack, Evans, and Black called approximately 20 separate analyst firms and spoke with analysts to entice them to lower their revenue estimates, thus reducing the consensus estimate to the level AT & T expected to report. During these calls, Womack, Evans and Black have deliberately disclosed non-public information regarding AT & T’s results to date. Depending on the firm and the date of the call, Womack, Evans and Black presented the upgrade rate of AT&T, the projected or actual wireless equipment (offered as a percentage decrease compared to the first quarter of 2015), or both.
In some of Black’s calls to analysts, he told analysts that he discloses consensus estimates, while delivering AT & T’s own internally projected or actual results. Black knew he was misrepresenting the information he passed on to analysts because he tracked AT & T’s calculation of consensus estimates, and none of that matched the information he provided on the calls with analysts.
Public companies that deliberately make selective disclosure of material non-public information ‘must make a public disclosure at the same time as the selective disclosure’, the complaint reads.
All three executives named as accused ‘knew or recklessly disregarded that the information they provided to the analysts during these calls was material and non-public’, the complaint reads. “They knew, among other things, that it was forbidden to selectively disclose AT & T’s internal revenue and related data to analysts, and they did so with the expectation that the analysts would handle the information based on the estimates they published for investors. significantly reduced. “
The plan worked as the analytics companies that received these calls immediately adjusted their revenue estimates, resulting in a reduced consensus revenue for 1Q16 that beat AT&T when they announced earnings on April 26, 2016, in a Form 8 “What about the Commission,” reads the lawsuit.
Womack is an executive director in AT & T’s investor relations division, Evans is an assistant vice president and Black is a finance director, the lawsuit said.
AT&T says it’s innocent
AT&T said in a response to reporters that the “information discussed during these March and April 2016 talks relates to the widely reported, overall phasing out of subsidies for new smartphone purchases and the impact of this trend on smartphone upgrade rates and equipment revenue. . “
AT&T said it was ‘made public'[d] this trend has repeatedly made an appeal ‘and’ made it clear to the analyst concerned that the declining telephone sales had no material impact on his earnings. Analysts and news media regularly wrote about this trend and investors understood that AT & T’s core business was selling connections (ie wireless service plans), not devices, and that smartphone sales were not important to the company’s earnings. ‘
AT&T also said the SEC did not quote a single witness involved in any of these analyst calls, alleging that material non-public information was passed on to them. ‘AT&T stated that the evidence and’ the lack of any market reaction to AT & T’s first quarter 2016 results’ confirm that there was no disclosure of material non-public information and therefore no infringement.
SEC seeks financial fines
Whether a company quotes or misses analysts’ estimates can affect the share price. When publishing public companies’ earnings results, news outlets and analysts compare the actual results with the consensus estimates. If the actual results fall short of the analytical estimates, ie ‘lack of consensus’, investors and markets usually regard such results as negative news for the issuer, “the SEC litigation noted.
The SEC has called for a court order requiring AT&T and the other named defendants to pay fines under U.S. law that allows fines for each offense of up to $ 100,000 per person, $ 500,000 for each legal entity, or ‘the gross amount of monetary gain to such accused as a result of the offense. The SEC also called for a permanent injunction to “deter and compel” the accused from future violations of U.S. law and relevant SEC rules, and for “further relief, as this court deems appropriate and necessary for the benefit of investors. “
The SEC currently has two Democratic commissioners and two Republicans. Biden has nominated Democrat Gary Gensler to join the commission and become chairman, but Senate approval for Gensler is still pending.