The Securities and Exchange Commission has sued AT&T and three AT&T executives, saying the wireless carrier leaked nonpublic data about falling phone sales to analysts in order to convince the analysts to change their revenue forecasts. This scheme helped AT&T “beat” analysts’ revenue forecasts in the first quarter of 2016, the SEC said.
The complaint, filed Friday in US District Court for the Southern District of New York, alleges that AT&T repeatedly violated the Securities Exchange Act and the SEC’s Regulation FD (for “fair disclosure“) in March and April of 2016. The regulation “prohibit[s] selective disclosures by issuers of material nonpublic information to securities analysts,” the SEC lawsuit said. AT&T executives “disclosed AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T’s revenue and sales of smartphones were types of information generally considered ‘material’ to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD,” the SEC said in a press release about its complaint.
AT&T claimed in a response Friday that “there was no disclosure of material nonpublic information and no violation” and said it will fight the lawsuit. AT&T also said that the SEC “spen[t] four years investigating this matter,” but no charges were brought during the Trump administration. The lawsuit was filed about six weeks after President Biden appointed Democrat Allison Lee as acting chair for the SEC; although the SEC is an independent agency, its commissioners and chair are appointed by the president.
AT&T in early 2016 had “learned that a steeper-than-expected decline in smartphone sales by AT&T would cause its revenue for the first quarter of 2016 to fall short of analysts’ estimates,” the SEC complaint said. This “would have been the company’s third consecutive quarterly miss,” and AT&T wanted to avoid that.
AT&T’s internal data showed that its equipment upgrade rate, the rate at which existing customers buy new smartphones, “would be a record low for the company, with the result that AT&T’s consolidated gross revenue was expected to fall more than $1 billion below the consensus estimate—that is, the average of the forecasts for all analysts covering AT&T,” the lawsuit said. AT&T carried out a plan to convince some analysts to lower their forecasts by giving them information privately, the lawsuit said.
“Fearful of a revenue miss at the end of the quarter, AT&T’s Chief Financial Officer [John Stephens] instructed AT&T’s IR Department to ‘work the analysts who still have equipment revenue too high,'” the lawsuit said. The AT&T director of investor relations then instructed three executives in the investor relations department “to speak to analysts privately on a one-by-one basis about their estimates in order to ‘walk the analysts down’—i.e., induce analysts to reduce their individual estimates,” the lawsuit said. “The goal was to induce enough analysts to lower their estimates so that the consensus revenue estimate would fall to the level that AT&T expected to report to the public—i.e., AT&T would not have a revenue miss.”
SEC: AT&T leaks led analysts to change estimates
The three investor relations executives who allegedly carried out those orders were Christopher Womack, Kent Evans, and Michael Black, who “were principally responsible for communicating with sell-side research analysts who covered AT&T.” These three executives, along with AT&T itself, are the defendants named in the lawsuit. The lawsuit said that AT&T violated US law and SEC rules and that Womack, Evans, and Black aided and abetted AT&T’s violations.
The SEC lawsuit continued:
Between March 9 and April 26, 2016, Womack, Evans, and Black called approximately 20 separate analyst firms and spoke to analysts in order to induce them to lower their revenue estimate and thereby reduce the consensus estimate to the level that AT&T expected to report. During these calls, Womack, Evans, and Black intentionally disclosed material nonpublic information regarding AT&T’s results to date. Depending on the firm and the date of the call, Womack, Evans, and Black disclosed AT&T’s projected or actual equipment upgrade rate, its projected or actual wireless equipment revenue amount (presented as a percentage decrease compared with the first quarter of 2015), or both.
On some of Black’s calls to analysts, he represented to the analysts that he was conveying publicly available consensus estimates, when in fact he was providing AT&T’s own internal projected or actual results. Black knew or recklessly disregarded that he was misrepresenting the information he was conveying to analysts because he tracked AT&T’s calculation of consensus estimates—none of which matched the information he provided on the calls with analysts.
Public companies that intentionally make selective disclosures of material nonpublic information “must make a public disclosure simultaneously with the selective disclosure,” the complaint said.
All three executives named as defendants “knew or recklessly disregarded that the information that they provided to the analysts during these calls was both material and nonpublic,” the complaint said. “Among other things, they knew that they were prohibited from selectively disclosing AT&T’s internal revenue and related data to analysts, and they did so with the expectation that the analysts would act on the information to substantially reduce the estimates they published for investors.”
The plan worked, as “the analyst firms that received these calls promptly adjusted their revenue estimates, resulting in a reduced consensus revenue forecast for 1Q16 that AT&T beat when it announced earnings on April 26, 2016, in a Form 8-K filed with the Commission,” the lawsuit said.
Womack is an executive director in AT&T’s investor relations department, Evans is an assistant vice president, and Black is a finance director, the lawsuit said.
AT&T says it is innocent
AT&T said in a response given to reporters that the “information discussed during these March and April 2016 conversations concerned the widely reported, industry-wide phase-out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone upgrade rates and equipment revenue.”
AT&T said it “publicly disclose[d] this trend on multiple occasions before the analyst calls in question” and “made clear that the declining phone sales had no material impact on its earnings. Analysts and the news media frequently wrote about this trend and investors understood that AT&T’s core business was selling connectivity (i.e., wireless service plans), not devices, and that smartphone sales were immaterial to the company’s earnings.”
AT&T also said that the SEC did not “cite a single witness involved in any of these analyst calls who believes that material nonpublic information was conveyed to them.” AT&T said the evidence and “lack of any market reaction to AT&T’s first quarter 2016 results” confirms that there was no disclosure of material nonpublic information and thus no violation.
SEC seeks financial penalties
Whether a company meets or misses analysts’ estimates can affect its stock price. When public companies’ earnings results are announced, “news outlets and analysts compare the actual results to the consensus estimates. When actual results fall short of analyst estimates, i.e., ‘miss consensus,’ investors and markets typically treat such results as negative news for the issuer,” the SEC lawsuit noted.
The SEC asked for a court order requiring AT&T and the other named defendants to pay financial penalties under a US law that allows fines for each violation of up to $100,000 per person, $500,000 for each legal entity, or “the gross amount of pecuniary gain to such defendant as a result of the violation.” The SEC also asked for a permanent injunction “restraining and enjoining” the defendants from future violations of the US law and SEC rules in question, and for “further relief as this Court deems appropriate and necessary for the benefit of investors.”
The SEC currently has two Democratic commissioners and two Republicans. Biden has nominated Democrat Gary Gensler to join the commission and become the chair, but Senate approval for Gensler is still pending.