Judicial Insights from Rare Regulation FD Action

By: Carlos E. Juarez, Class of 2025

On December 5, 2022, the U.S. Securities and Exchange Commission (“SEC”) settled an action against AT&T (the “company”) and three of its investor relations executives (collectively, the “defendants”) alleging violations of Regulation FD.[1] Regulation FD prohibits selective disclosure of material nonpublic information (“MNPI”) by publicly traded companies to individuals or entities, including equity stock analysts.[2] The case was only the second Regulation FD enforcement action that reached adversarial litigation since the rule was promulgated in 2000.[3]

Despite the settlement of the case, an opinion by U.S. District Judge Paul Englemeyer provides rare judicial insight and guidance for public companies relating to interactions with equity analysts and the handling of MNPI.

Background

On March 15, 2021, the SEC filed a complaint in the Southern District of New York alleging defendants violated Regulation FD by selectively disclosing MNPI to certain equity analysts.[4] The SEC alleged that the defendants held private calls with analysts at 20 firms, where the company’s internal data and revenue metrics, including consolidated total revenue, wireless equipment revenue, and wireless upgrade rates, were disclosed.[5] In addition, the SEC alleged that analysts lowered the company’s revenue forecasts based on this disclosure, which led to an overall consensus revenue estimate that was lower than the estimate that the company reported to the public in April 2016.[6]

Discussion

As proceedings commenced, in September 2022, Judge Englemeyer denied cross-motions for summary judgment based whether or not the disclosed information was (1) material, (2) nonpublic, and (3) whether the defendants acted with the requisite scienter.[7]

Materiality. The court rejected the premise that only the quantitative impact of disclosed information is dispositive of materiality.[8] The court balanced quantitative impact with the significance of the disclosed information to the company and to the market. The defendants argued that the total consolidated revenue disclosed, for example, related to less than five percent of the company’s revenue and was therefore not material.[9] The court, however, found the “choreographed” efforts the company undertook to ensure the information was communicated in order to “walk down analyst estimates” indicated that the information was of great significance to the company.[10] In addition, the company’s disclosure of the information in earning calls, e-mails to chief executives, mandated SEC disclosures, and investor presentations, solidified that the information was significant to the company and, therefore, material.[11]

Nonpublic. The defendants did not dispute that the disclosed information was not previously made publicly available, but argued that the information could be extrapolated from already publicly available data.[12] The court rejected this premise, noting that the defendant’s claims applied only to a particular company metric, its upgrade rates, and that it “critically” left out the company’s other data from its argument.[13] The court also found that the analysts’ lowering of estimates promptly after the defendants’ disclosure of nonpublic information indicated behavior contrary to the defendants’ claim.[14]

Scienter. The court found plausible scienter arguments on both sides.[15] The court determined that a jury could find scienter based on the number of times defendants disclosed the information, the length of time these disclosures were being made, and the persistence of the disclosures in order to impact analysts’ consensus estimates.[16] Weighing heavily against the SEC was the lack of evidence pointing to conscious wrongdoing on behalf of the defendants and that there were no apprehensions from analysts, who were trained to identify possible violations of Regulation FD.[17] Determining that the jury could find for either side precluded the court from granting summary judgment, leading to the dismissal of the cross-motions.

Conclusion

The company ultimately settled with the SEC for $6.25 million.[18] Hindsight is always 20/20, and this is never truer than when a court is determining an MNPI-related issue. Going forward, public companies should consider that issues of materiality will be subject to a balancing test and not merely on a quantitative analysis. Further, the case signaled that proving that disclosed data was public after its disclosure may be difficult. Finally, the action serves as a reminder for public companies to review and reinforce its policies and procedures relating to the handling of MNPI in order to avoid mishaps or missteps.

---

[1] Press Release, U.S. Sec. & Exch. Comm’n, AT&T Settles SEC Charge of Selectively Disclosing Material Information to Wall St. Analysts (Dec. 5, 2022), https://www.sec.gov/news/press-release/2022-215.

[2] 17 C.F.R. § 243 (2023).

[3] Sarah Heaton Concannon and Toby E. Futter, SEC v. AT&T’ Summary Judgment Decision Provides Comprehensive Guidance on SEC Regulation FD, N.Y.L.J. (Dec. 2, 2022), https://www.law.com/newyorklawjournal/2022/12/02/sec-v-att-summary-judgment-decision-provides-comprehensive-guidance-on-sec-regulation-fd/?slreturn=20230031114247.

[4] Complaint at 2, SEC v. AT&T, Inc., 2022 U.S. Dist. LEXIS 162468 (S.D.N.Y. Sep. 8, 2022) (No. 21 Civ. 01951).

[5] Id. at 2-3.

[6] Id. at 14.

[7] SEC v. AT&T, Inc., 2022 U.S. Dist. LEXIS 162468, at *120 (S.D.N.Y. Sep. 8, 2022).

[8] Id. at *143.

[9] Id.

[10] Id. at *129.

[11] Id. *144-47.

[12] Id. at *152.

[13] Id. at *157.

[14] Id.

[15] Id. at *169.

[16] Id. at *170.

[17] Id. at *176-77.

[18] See Press Release, U.S. Sec. & Exch. Comm’n, supra.