Risk & Compliance

SEC Hits Flowserve with Reg FD Charges

The commission's case is the first involving an earnings reaffirmation and the first settled action against a director of investor relations.
Stephen TaubMarch 25, 2005

The Securities and Exchange Commission has charged Flowserve Corp. with violations of Reg FD, alleging that the company’s chief executive officer, C. Scott Greer., and its director of investor relations, Michael Conley, caused the breaches.

The case against the oil patch precision-equipment maker is the first Reg FD case filed by the SEC involving an earnings reaffirmation and the first settled enforcement action against a director of investor relations for violating the rule. (For a comment on what the Flowserve case says about the SEC’s approach to Reg FD enforcement, see Tim Reason’s blog entry today.)

Without admitting or denying the commission’s charges and findings, the company and Greer agreed to pay $350,000 and $50,000 penalties, respectively. Flowserve, Greer, and Conley also consented to the commission’s issuance of a cease-and-desist order.

The SEC found that the company and the two executives violated Reg FD when, the company reaffirmed a previous earnings guidance in a private meeting with analysts. (The rule bars public issuers from selectively revealing material nonpublic information to securities analysts, broker-dealers, investment advisers, and institutional investors, before disclosing it to the public.)

The Flowserve suit is the eighth Reg FD case brought by the SEC. Seibel Systems, the only company to be accused twice of violating the rule, is currently challenging it in court on First Amendment Grounds.

In November of 2002, Greer and Conley met privately with analysts 42 days before the end of Flowserve’s fiscal year. At that meeting, one of the analysts asked about the company’s earnings guidance for the year.

The commission alleged that neither Conley nor Greer gave the response required by Flowserve’s policy: “that earnings guidance was effective at the date given and would not be updated until the company publicly announced updated guidance,” according to an SEC release.

Conley, the investor-relations director, didn’t caution Greer before he answered the analyst’s questions, the SEC added. Conley remained silent as Greer reaffirmed the previous public guidance, issued several weeks earlier, “and thus provided additional material nonpublic information,” the commission asserted.

The SEC further noted that a day after an analyst who attended the meeting issued a report stating that Flowserve had reaffirmed its earnings guidance, Flowserve’s stock closed about 6 percent higher than the prior day on 75 percent higher trading volume.

The commission also stated that it partially penalized the men for not fully cooperating with its investigation, noting that both Greer and Conley denied that a reaffirmation occurred at the private meeting with the analysts.