Is Reg FD a joke?

The massive Galleon insider trading scandal "reveals a world where corporate secrets are thrown around with cavalier disregard for regulations," according to Reuters. We've noted in the past that companies must have a carefully constructed set of rules in place to guard against inadvertent Reg FD violations. But when it comes to this level of wrong-doing--if the charges are true--it's clear we're talking about something else entirely.

It's indeed shocking to see the big-name companies that have been implicated--Intel, IBM, Moody's, not to mention McKinsey. We may be in for shocking disclosures involving some big hedge funds. So a good question to ask right now is whether Reg FD is casually disregarded at most firms. Reg FD cases are indeed rare; most deal with disclosures perhaps inadvertent or at least not thought out to analysts not hard-trading hedge funds. 

For example, the SEC announced in September a recent action against Christopher Black, former CFO of American Commercial Lines. He was accused of sending an email to eight sell-side analysts informing that ACL's quarterly earnings were much lower than publicly disclosed in guidance issued five days earlier. The selective disclosure and resulting analyst reports led to a massive stock drop. 

This action was the first Reg FD enforcement action brought by the SEC in two years. Black agreed to pay a $25,000 penalty. 

One lawyer tells Reuters: This sort of stuff "happens every day of the week. The competition that now exists among hedge funds to top each other in earnings has led to this culture of skirting the law or getting as close as you can to get inside information and to convince a corporation to leak information."

Perhaps a timely reminder to employees is in order. The SEC, which has a lot to deal with, may take a more aggressive line going forward. The fact is there may be some CFOs or investor relations types who are not clear on the specifics of the rule. They may engage in various practices in which they offer information as long as the recipients keep it to themselves--in the name of relationship building. These sorts of practices--while not the kind of overt insider trading charges that have hurt the reputations of IBM and others implicated in the Rajaratnam scandal--could make your company vulnerable. 

This is good time to review your policies, enhance your training and remind personnel that the stakes are high. - Jim