IBM, HP, and the SEC: Enforcement Lite

Is there a big company exception to SEC enforcement?  There is at the NYSE.  For the post, go here. 

In the span of a couple of weeks, the Commission has brought two cases against large public companies. In the case of Hewlett-Packard, the SEC brought an action for failing to file an accurate Form 8-K at the time a director resigned over a disagreement with the board. We have discussed this case here.  More recently, the SEC brought an action against IBM for misleading analysts.  The administrative proceeding is not entirely easy to follow but it seems that IBM told analysts to reduce their earnings estimates by $0.14 for the quarter and $.55 for the year.  IBM apparently gave the impression that this amount was a result of expensing stock options rather than any change in the business activity of the company.  In fact, IBM knew that only $.10 and $.39 were attributable to the new accounting treatment for options.   The administrative proceeding characterized it as "materially misleading." 

• "IBM violated the above reporting provisions by filing with the Commission a materially misleading Form 8-K. The filing contained materially misleading information about the amount of IBM’s stock options expense and the impact it would have on IBM’s earnings per share. The Form 8-K created the impression that IBM’s stock options expense would be greater than what IBM actually expected it to be for 1Q05 and FY05. In light of the statements made in the Form 8-K, IBM should have also included in its Form 8-K additional information it knew at the time relating to its stock options expense for 1Q05 and FY05, (i.e., that it expected the expense to have a $0.10 impact on earnings per share in 1Q05, and that it estimated the expense to have a $0.39 impact on earnings per share for FY05)." 

What do these two disparate cases have in common?  Enforcement lite.

Both involved large public companies.  Both involved serious alleged violations of the securities laws.  In both cases, however, the Commission brought only administrative proceedings (they have far fewer collateral consequences than injunctive proceedings), alleged non-scienter based offenses (in each case the companies were found to have violated only Section 13(a) of the Exchange Act, the provision that permits the Commission to regulate periodic reports), imposed no fines, and did not identify or otherwise sanction any responsible officer within the company. 

The Commission has every right to allocate resources and compromise where necessary.  And, of course, larger companies have the resources to fight, with penalties and fines hurting less (although the harm to reputation may be greater).  But these were serious violations and they send a message to the market that large public companies have greater latitude to bend the securities laws, not a message the Commission ought to be sending. 

Comments

[DLite]

Enforcement lite? There's more of an argument in the HP case than the IBM case. In HP, it should have been pretty darn obvious to even a junior securities lawyer that the 8-K was deficient. It clearly didn't comply with the instructions to Form 8-K. The IBM case is not as clear cut, hence the convoluted argument used in the Order. It may have been misleading, but materially so? Borderline. Clearly no intent to mislead, so forget about proving scienter. The funny thing is that, the way I read the rules, IBM wasn't even required to file slide presentation that got them into trouble. They filed the earnings release ahead of the call and the call was webcast. IBM tried to be good guys and file the transcript and slides for good measure and got burned for it. Had they not filed the slides, I don't think the SEC goes after them.