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Legal Update

Office Depot Settlement Highlights Fair Disclosure Requirements

1 November 2010
Mayer Brown Legal Update

On October 21, 2010, Office Depot Inc. and the US Securities Exchange Commission (Commission) announced a settlement of enforcement actions against the company, its CEO, and its ex-CFO. Office Depot agreed to settle the action for $1 million. The two executives also agreed to pay $50,000 each. The Commission found that Office Depot’s CEO and its then-CFO directed selective communications to analysts intending to signal that the company would not meet expectations in the second quarter of 2007. Later, when analysts began to question the lack of public disclosure, Office Depot’s CEO instructed the company’s director of investor relations to call the company’s largest institutional investors and convey the same information. These one-on-one calls with selected analysts and investors violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. 

Regulation FD was adopted in 1999 to address the problem of selective disclosures of material non-public information by publicly traded companies. In the Commission’s view, such disclosures were often made to securities analysts and other securities professionals, such as institutional investors, to move the market or to prepare it for bad news. Regulation FD generally requires that whenever material nonpublic information is intentionally disclosed to selected parties, an issuer (or those acting at an issuer’s direction) must make a contemporaneous public disclosure of that information. If a selective disclosure is not intentional, Regulation FD requires the issuer to make a public disclosure promptly after learning of the unintentional disclosure. Under the regulations, “promptly” means “as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange).” Failure to make a required public disclosure is a violation of both Regulation FD and Section 13(a) of the Exchange Act.

According to the cease-and-desist order adopted by the Commission, Office Depot’s CEO and ex-CFO prepared talking points for one-on-one calls with selected analysts in the second quarter of 2007. During these calls, Office Depot signaled to the analysts that it would not meet expectations. It did this by drawing the analysts’ attention to prior cautionary statements by Office Depot and recent public statements by peer companies regarding the slowing economy and decreased earnings. As a result of these calls, analysts quickly lowered their earnings estimates for Office Depot.  

Office Depot continued these calls despite the analysts’ concerns about the lack of public disclosure. Upon being advised of these concerns, the CFO instructed the director of investor relations to call the company’s top 20 institutional investors to relay the same talking points to them. The company did not make a public disclosure announcing the lowered earnings expectations until it filed a Form 8-K, six days after the calls to selected analysts began.

This settlement highlights the need for all issuers to ensure that all personnel who communicate with the public are aware of the requirements of Regulation FD. According to the Commission, Office Depot did not have written Regulation FD policies in place at the time. Furthermore, Office Depot had never conducted any formal Regulation FD training prior to the discovery of these alleged violations. Such policies and training should be essential parts of any issuer’s compliance program. The rule for disclosures should always be “if you disclose, disclose broadly.”

For inquiries related to this Securities Litigation Update, please contact at +1 212 506 2559, at +1 312 701 7146, or at +1 212 506 2562.

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