Important Disclaimer SEC v. Christopher A. Black
New Regulation FD Case Shows Importance of
Company Compliance Programs October 2, 2009 On September 24, 2009, the U.S. Securities and Exchange Commission (SEC) filed and settled the case of SEC v. Christopher A. Black, Case No. 09-CV-0128 (S.D. Ind., September 24, 2009), the first Regulation FD1 case filed by the SEC in several years. A copy of the SEC's litigation release is available here, and a copy of the SEC's complaint is available here. Mr. Black is the former chief financial officer of American Commercial Lines, Inc. (ACL). On June 11, 2007, ACL issued a press release revising its annual earnings guidance for 2007 and including general earnings guidance for the second quarter of 2007, stating that ACL expected "2007 second quarter results to look similar to the first quarter." ACL's first-quarter earnings had been $0.20 per share. Mr. Black and ACL's chief executive officer spent the next several days meeting with analysts and discussing ACL's operations and the revised earnings press release with them. Following the meetings, Mr. Black suggested to ACL's chief executive officer that he send a summary email to the analysts, and the chief executive officer agreed, provided that ACL's outside counsel review it. Before sending the email, Mr. Black received revised internal analysis suggesting that ACL's second-quarter earnings could be significantly below the first-quarter earnings. On June 16, 2007, Mr. Black sent an email to the eight sell-side analysts who covered ACL. The email, titled "ACL Guidance Revision Notes," stated that he wanted to provide "some additional color" on the June 11, 2007, press release. Mr. Black discussed increased pressures on ACL's business, and stated "EPS for the second quarter will likely be in the neighborhood of about a dime below that of the first quarter based on this pressure." Mr. Black sent the message through a personal account from his home over the weekend, without first sending the message to outside counsel to review. The SEC alleged that Mr. Black's email triggered a 9.7 percent decline in ACL's stock price on unusually heavy volume on the first trading day following Mr. Black's email to the analysts and prior to any public disclosure of the contents of the message. After market close on that day, ACL issued a Form 8-K publicly disclosing the contents of Mr. Black's email. In settling the case, Mr. Black paid a $25,000 penalty and consented to an order in a follow-on administrative proceeding directing him to cease and desist from violating Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. In a departure from prior Regulation FD cases, the SEC did not include ACL as a defendant. In several prior prominent SEC cases involving Regulation FD violations, such as Schering-Plough, Flowserve, and Siebel II, the SEC filed suit against both the company and individuals at the company (CEOs, CFOs, and investor relations directors) alleged to have violated Regulation FD. Mr. Black's case appears to be the first Regulation FD case brought solely against a company official and not also against the company. In deciding not to bring an enforcement action against ACL, the SEC listed several factors they considered determinative: - Prior to Mr. Black's disclosure, ACL cultivated an environment of compliance by providing training regarding the requirements of Regulation FD to Mr. Black and other company employees and by adopting policies that implemented controls to prevent violations.
- Mr. Black alone was alleged to have been responsible for the Regulation FD violation, which also violated the control systems established by ACL to prevent such improper disclosures.
- Immediately after ACL became aware of the improper disclosure, it promptly and publicly disclosed the information on a Form 8-K.
- ACL self-reported Mr. Black's conduct to the SEC the day after it was first discovered and provided extraordinary cooperation with the SEC's investigation.
- Finally, ACL enacted remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.
What Should You Do Now The Black case illustrates several important lessons: - Companies should adopt and actively maintain corporate compliance programs in high-risk areas such as corporate communications/Regulation FD, insider trading, harassment and discrimination, import/export, foreign corrupt practices, and other areas included in company codes of business conduct. The compliance programs should include establishing and distributing company policies and conducting periodic training sessions. ACL's compliance programs, including training, were an important factor in the decision by the regulators not to bring a case against it in this circumstance.
- Be extremely cautious in one-on-one settings with securities professionals and in other private communications, such as emails. Not surprisingly, analysts and investors will probe for information when they have the opportunity, including in small settings, making it very difficult to stay on script. Having internal or outside counsel review communications going to a limited number of analysts or investors can help avoid selective disclosure of material non-public information.
- Take prompt action when potential Regulation FD violations are discovered. ACL quickly filed a Form 8-K with the information Mr. Black disclosed selectively, contacted the SEC to discuss the situation, and established further controls and procedures to ensure that the situation did not repeat itself.
Wilson Sonsini Goodrich & Rosati has extensive experience assisting companies to establish compliance policies and programs, including training programs. Please contact Steven E. Bochner, David J. Berger, Richard C. Blake, Lawrence M. Chu, your regular Wilson Sonsini Goodrich & Rosati contact, or any member of the firm's corporate and securities practice or securities litigation department with any questions you may have about these matters and the potential implications they could have for your company.
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