The Commission issued an Order that found Flowserve violated Regulation FD when, in a private meeting with analysts near the end of a reporting period, the company reaffirmed its previous earnings guidance. Without admitting or denying the Commissions allegations and findings, Flowserve and Greer consented to the entry of a final judgment by the federal court that would require them to pay civil penalties of $350,000 and $50,000 respectively. Flowserve, Greer and Conley also consented to the Commission’s issuance of a cease-and-desist order.
This is the first Regulation FD case filed by the Commission involving a reaffirmation of earnings by an issuer and the first settled enforcement action against a Director of Investor Relations for violating this rule.
“Issuers cannot pick and choose the recipients of material information”, said Paul R. Berger, Associate Director of the SEC’s Division of Enforcement. “If issuers disclose material information to market professionals, then Regulation FD requires that they disseminate the same information to the marketplace.”
In its Order, the Commission found that, Flowserve, a calendar-year reporting corporation, began 2002 forecasting annual earnings per share in the range of $1.90 to $2.30. In July of that year, the Company revised that estimate to $1.70 to $1.90 per share. On Sept. 27, the Company lowered its earnings estimate to $1.45 to $1.55 per share, which the Company reaffirmed in its Form 10-Q filed on Oct. 22, 2002. The $1.45 to $1.55 range represented more than a 30% decline in earnings per share estimates since the beginning of the year.On Nov. 19, 2002, forty-two days before the end of Flowserve’s fiscal year, Greer, along with Conley, met privately in Irving, Texas with analysts. At that meeting, one of the analysts asked about the Company’s earnings guidance for the year. Neither Conley nor Greer gave the response required by the Company’s policy, i.e., that earnings guidance was effective at the date given and would not be updated until the Company publicly announced updated guidance. Conley did not caution Greer before Greer answered the analyst’s questions. In fact, Conley remained altogether silent. Instead, in response to the question, Greer reaffirmed the previous public guidance, which had been issued on Oct. 22, 2002, and thus provided additional material nonpublic information.
On Nov. 20, 2002, an analyst who attended the meeting issued a report stating that Flowserve had reaffirmed its earnings guidance. The next day, on Nov. 21, Flowserve’s closing stock price was approximately 6% higher than the closing price the day before. In addition, the trading volume of Flowserve’s stock increased by 75%, from 379,500 shares traded on Nov. 20 to 658,300 shares traded on Nov. 21. After the market closed on Nov. 21, Flowserve furnished a Form 8-K to the Commission acknowledging that it had reaffirmed its full year 2002 estimated earnings per share.
In addition to the underlying conduct, the Commission considered the Respondents lack of cooperation afforded the Commission staff. Specifically, and inconsistent with the Form 8-K furnished by the Company, both Greer and Conley denied that a reaffirmation occurred at the private meeting with the analysts.
Litigation Release
