"Fair disclosure means creating a level playing field for all investors," said Stephen M. Cutler, the SEC's Director of the Division of Enforcement. "Bestowing an informational advantage on a select few at the expense of others undermines investor confidence and cannot be tolerated."
"Providing guidance to a select few through a combination of spoken language, tone, emphasis, and demeanor, is precisely the kind of unfair advantage that the SEC wants to prevent," said Paul R. Berger, Associate Director of the SEC's Division of Enforcement. "When a public company decides to disclose market sensitive information, it must take appropriate steps to ensure that it is disclosed to retail and institutional investors alike."
In today's public filings, the SEC found that, during the week of September 30, 2002, Kogan and Schering's senior vice president of investor relations met privately in Boston with analysts and portfolio managers of four institutional investors (Wellington Management Company, Massachusetts Financial Services Company, Fidelity Management & Research Company, and Putnam Investments), three of which (Wellington, Fidelity, and Putnam) were among Schering's largest investors. The SEC further found that, at each of these meetings, through a combination of spoken language, tone, emphasis, and demeanor, Kogan disclosed negative and material, nonpublic information regarding Schering's earnings prospects, including that analysts' earnings estimates for Schering's 2002 third-quarter were too high, and that Schering's earnings in 2003 would significantly decline. According to the SEC, immediately after the meetings, analysts at Fidelity and Putnam downgraded their ratings on Schering, and portfolio managers at those firms and at Wellington heavily sold Schering stock. Fidelity and Putnam each sold more than 10 million shares of Schering stock over a three-day period following the meetings, accounting for more than 30 percent of the overall market for that period. The price of Schering's stock declined during this period by more than 17 percent, from $21.32 to $17.64 per share, on approximately four times normal volume.
The SEC further found that, on October 3, 2002, in the midst of this sell-off, Kogan held a previously scheduled private meeting with approximately 25 analysts and portfolio managers at Schering's New Jersey headquarters, during which he said, among other things, that Schering's 2003 earnings would be "terrible." Late that evening, Schering issued a press release providing earnings guidance for 2002 and 2003 that was materially below analysts' consensus estimates and, with regard to the full 2002 fiscal year, materially below the company's own prior earnings guidance.
Without admitting or denying the Commission's allegations and findings, Schering consented to the entry of a final judgment by the federal court that would require it to pay the $1 million penalty, and both Schering and Kogan consented to the Commission's issuance of its cease-and-desist order.
