Every SEC Regulation Fair Disclosure ("Reg. FD") enforcement action details a perceived mistake. In each such instance, there is a "case study" for all public companies. This remains true even when the proceeding is fairly limited, such as the Commission's short order earlier this month imposing a $50,000 penalty on Lawrence Polizzotto, First Solar Inc.'s former head of investor relations.1
First Solar is a manufacturer focused on the solar energy business. In the fall of 2011, First Solar was attempting to secure loan guarantees from the Department of Energy ("DOE") for three separate projects before a September 30 deadline. The guarantees were important to First Solar because they would allow the company to receive guaranteed low-cost financing from the federal government. In a September 13, 2011 investor conference, First Solar's Chief Executive Officer publicly expressed confidence that the company would secure all three guarantees.
On September 15, 2011, First Solar was dealt a setback when management learned that the DOE had decided not to provide a loan guarantee with respect to the largest of the three projects – the Topaz Solar project. Marketplace speculation about the status of the guarantees sought by First Solar heightened on September 20, 2011 after a Congressional committee sent the DOE a letter seeking information on the loan guarantee program, including all three First Solar projects.
In a release issued before the market opened on September 22, 2011, First Solar disclosed that it would not receive the DOE guarantee for the Topaz project. The Commission noted that First Solar's stock price immediately took a 6% hit when the market opened that day.
The SEC alleged that over the course of the preceding day, Polizzotto and a subordinate contacted more than 30 analysts and investors. The Commission contends that these discussions conveyed the substance of the pending Topaz release; a number of analysts e-mailed equity sales teams in their organizations to report that they expected First Solar to receive two of the three pending loan guarantees.
Reg. FD forbids selective disclosure of material, nonpublic information by designated spokesmen for issuers. The Commission's order alleges that Pollizzotto's conduct caused First Solar's violation of Reg. FD.
For issuers, two key lessons can be gleaned from the Polizzotto order.
First, the order sends a warning about any effort to perform an "end run" around Reg. FD's prohibitions. The SEC did not claim that Polizzotto told any one investor – in clear and unequivocal language – that the DOE would not provide a loan guarantee for the Topaz project. Instead, the message was delivered indirectly. The respondent followed talking points stating that the other two loan guarantees were a higher probability and the Topaz guarantee was a lower probability. He highlighted previously disclosed facts that shined a negative light on the Topaz project. Through these and other statements, Polizzotto "effectively signaled" that First Solar no longer believed that it would receive the Topaz guarantee.
It is easy to underestimate the pressures borne by a management team when the market is pressing to evaluate a key driver for the business. Unlike an EDGAR filing that is developed internally at the company's pace and ends quietly with the press of a key, informal market contacts can come in an unscripted flurry of investor and analyst calls. Most managers who are the public "face" of the company want to be responsive to these inquiries. There is a temptation to look for a "middle ground" message that responds to questions on the eve of an important disclosure but falls short of disclosing material information. Pollizzotto's facts underscore the perils of that thinking.
Second, the order reinforces the common sense notion that Regulation FD compliance often has to be taught. The Commission's press release states the SEC had decided to bring no enforcement action against First Solar due to its "extraordinary cooperation." In part, the company was credited for taking prompt corrective action and self-reporting the relevant conduct. The Commission also emphasized that "First Solar cultivated an environment of compliance" through its disclosure committee and additional Reg. FD training for employees managing the company's public disclosure.
Financial reporting is handled by a cadre of employees who develop and hone reporting and accounting skills that are universal in the marketplace. That background does not necessarily prepare an individual for the "give and take" that comes with a regular stream of calls and meetings with analysts and investors. That process requires a keen sense of the market's flow of information and its relative importance to one specific company. A government loan guarantee can be critical to one company and a complete rarity at another.
For many managers, "real time" financial reporting skills have to be learned. Some of that education can only be learned through the daily flow of contacts on the job. Each company, however, with the advice of counsel, can give its point person the necessary tools and guidelines so they are alert to the calls that pose a particular risk under Reg. FD.
Footnotes
1 In re Lawrence D. Polizzotto, Exchange Act Release No. 70337 (Sept. 6, 2013).
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