Excuse me while I cut in.

• Author: FERRARA, RALPH

Worried about the problem of selective disclosure, the SEC comments on dancing with analysts.

IN AN OCTOBER 18, 1999, speech to the Economic Club of New York, SEC Chairman Arthur Levitt brought out the heavy artillery. Raising as a target the selective disclosure of material information to Wall Street analysts by publicly traded companies, he shot it full of holes.

He called the practice "a stain on our markets" and "an insult to fair and public disclosure," and he discounted this particular brand of leaking as "a disservice to investors [that] undermines the fundamental principal of fairness." Just in case anyone missed the point, or perhaps wondered if he really meant business, Levitt promised new SEC rules that would "close the gap between those in the so-called `know' and the rest of us in the public."

While the extent of the problem might be debatable, there is no doubting the fact that the SEC considers the potential consequences of selective disclosure to be dire. The SEC's concerns in this area are two-fold.

First, there is the obvious concern that early disclosure of material information to analysts will lead to unusual trading activity prior to more general public disclosure. In the context of an initial offering, the worry would be that selective disclosure would create a highly informed subclass of traders.

The plaintiffs' bar shares the SEC's interest in the trading that follows selective disclosure, but for different reasons. Abercrombie & Fitch offers an illustrative example. When it publicly disclosed negative third quarter information, and the price of its stock immediately dropped, the company was hit with at least three class-action lawsuits alleging selective disclosure to certain analysts that, in turn, provided clients of the analysts' firms an advance window in which to unload the stock.

Second, the SEC is concerned with the "web of dysfunctional relationships" that can exist between analysts and the companies they track. Levitt points to reported financial results that are tailored more to consensus estimates than to business reality, companies that work to lower expectations they have every intention of beating, and analysts who are compensated based on the profitability of their firm's corporate finance division and their contributions to the deals to which they are assigned. His point is that, in a world where facts are malleable and analyst objectivity is compromised, the integrity and transparency of information...