Implied Signals: A Regulation FD Violation Alert

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On October 21, 2010, the SEC settled enforcement actions against Office Depot, its Chief Executive Officer, and its former Chief Financial Officer for alleged Regulation FD violations for selectively providing “signals” to analysts and institutional investors during one-on-one conversations that Office Depot would not meet analysts’ earnings estimates. The challenged statements did not explicitly disclose any material nonpublic information but packaged public information in a way allegedly designed to indicate that Office Depot would not meet the earnings estimates.

Communications in Question

Consensus estimates for Office Depot’s second quarter were higher than internal forecasts. Office Depot’s CEO and former CFO scripted and initiated one-on-one phone calls late in the quarter with all 18 analysts covering the company and multiple institutional stockholders, allegedly for the purpose of encouraging them to lower earnings expectations for the quarter. The approved talking points at issue included:

• “At beg. of Qtr we’ve talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.

• I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting.

• On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters.

• [Company C] mentioned economic conditions as a reason for their slowed growth.

• Some have pointed to better conditions in the second half of the year—however who knows?

• Remind you that economic model contemplates stable economic conditions – that is mid-teens growth.”

Following the calls, 15 of the 18 analysts contacted lowered their earnings estimates. Office Depot’s stock price dropped on increased trading volume. Six days after initiating the calls to the analysts, Office Depot filed a Form 8-K, which announced to the market that its sales and earnings would be negatively affected by the continued soft economy.

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