Western Digital’s Stock Price Spike Illustrates Information Inequities
As Western Digital Corp.’s stock surged 37% on Dec. 1, only a select group of people at an Arizona resort knew why the Irvine disk-drive maker was having its biggest one-day gain ever.
Most of the company’s 3,700 shareholders couldn’t explain the sudden spurt that added $427 million to Western Digital’s market value in a few hours.
They hadn’t been invited to the Phoenician in Scottsdale, where investment bank Credit Suisse First Boston was treating a private party to warm lobster salad, seared Hudson Valley foie gras, fillet of turbot and roasted rack of Colorado lamb in between a series of closed-door meetings with top officials from more than 140 companies.
The conference offered plenty of opportunities for the firm’s clients to trade before the rest of the world learned what executives at the meeting were saying.
At one of these sessions, Western Digital Chief Executive Charles Haggerty said business was getting much better. Some of his listeners reached for their cell phones and placed orders to buy the stock. Before the day was over, Western Digital had jumped $4.81, to $17.88.
Such briefings--attended by invitation only--are routine.
During the last several months, executives at Dell Computer Corp., Barnes & Noble Inc., Northern Telecom Ltd. and Tellabs Inc. have provided enough insight in these private meetings to prompt unforeseen price fluctuations, adding or subtracting billions of dollars in market capitalization in less than a day.
“It sounds like insider trading to me,” said Barbara Roper, director of investor protection for the Consumer Federation of America, a Washington-based nonprofit advocate for about 50 million people.
“The big players are getting information and getting a chance to trade on that information before it gets out to the rest of the market,” she said.
And there are big incentives to keep it that way. Securities firms are selling “access,” said Michael Holland, who spent much of his 30 years in the investment business working at the Wall Street firms Credit Suisse First Boston and Salomon Brothers before forming his own money management firm.
By arranging exclusive meetings between their preferred customers and chief executives, securities firms have a better chance of receiving more buy and sell orders, and the commission dollars that go with them.
“They’re providing us with information,” said Jon Burnham, chairman of Burnham Asset Management Corp., who has attended hundreds of these meetings in his 40 years as a professional investor. “That’s the point of these things for brokerages, to get information out and then to get commission dollars back for it, and they do it in spades.”
For their part, chief executives are only too willing to give the firms’ analysts and selected investors the first word on market-moving news. Such intimacy creates the widest following for their company’s stock and helps them put the best light on their results.
Western Digital’s Haggerty didn’t engage in selective disclosure at the Credit Suisse First Boston conference, said Robert Blair, vice president of investor relations.
“Anyone who’s called me for the past week has gotten the same information,” Blair said, soon after Haggerty spoke.
The difference is no one who called Blair was in the same room--which could seat only 160 people--where Haggerty told investors that the company had whittled its inventory of disk drives, boosted market share and planned to ship products incorporating International Business Machines Corp. technology earlier than expected. Haggerty declined to comment about the way the information was disclosed at the conference.
Other executives, representing companies from BMC Software Inc. to Intuit Inc., also made time in their busy schedules to spend a day at the Phoenician, playing the 27-hole golf course, dining on Executive Chef George Mahaffey’s four-star cuisine and laughing at jokes from Dana Carvey, the comedian specially hired for the conference.
Credit Suisse First Boston, and dozens of other firms, can easily spend $4 million on events like this one, which included more than 500 guests, according to investment bankers familiar with the expenses.
Many of these conferences are annual, including NationsBanc Montgomery Securities’ six-day meeting on growth stocks at the Ritz in San Francisco every September, and Hambrecht & Quist Group’s weeklong computer-industry gathering at the Westin St. Francis Hotel in the same city. The H&Q; meeting this year drew executives from 320 companies.
While these may be the most overt examples of selective disclosure, the practice is widespread on a subtle level every day.
In a National Investor Relations Institute survey of 227 companies, 99% said they invite professional money managers to participate in regular telephone conference calls. Only 29% welcome individual shareholders and just 14% allow news reporters on those calls, according to the institute, a Vienna, Va.-based association of 3,600 investor relations officers.
On July 21, Tom Meredith, Dell Computer’s chief financial officer, told a select group of investors on a conference call that personal computer prices were still falling, even though analysts had expected them to recover.
Dell, the best-performing stock in the Standard & Poor’s 500 Index in 1996 and 1997, declined 4.4% in a couple of hours, carving $3.3 billion out of its market value as big investors sold shares. Individuals who bought Dell shares that day did so unaware of Meredith’s remarks.
“We do not engage in selective disclosure on our conference calls or in any other distribution of material corporate information,” said T.R. Reid, a spokesman for Dell in Round Rock, Texas.
The July 21 call contained no new, important information that should have been disclosed because the company had said in May that PC prices were falling, he said.
Big and small investors alike aren’t convinced. “It’s not fair,” said Nicholas Moore, who follows technology stocks for Jurika & Voyles, an Oakland money manager of $5 billion.
By participating in Dell’s July conference call, “We would have a very big running start” on an individual investor that day, Moore said. “Why is that investor disadvantaged to that degree?”
Dell’s July conference call “is the kind of practice that perpetuates the belief that the little guy doesn’t get a fair shake on Wall Street,” said Roper of the Consumer Federation of America.
Since July 21, when Meredith spoke to a select group of people, Dell shares have lagged those of some competitors, including Compaq Computer Corp., IBM and Sun Microsystems Inc.--a contrast to the preceding 12 months when it outperformed all competitors in the market.
For many investors, getting an invitation to join a conference call is an opportunity to make money.
“If I hear something that I didn’t know that is extraordinarily positive, I’ll buy,” said Philip J. Orlando, chief investment officer at Value Line Asset Management Inc. in New York, which manages $6 billion. “If I hear something that is extraordinarily negative, I’ll sell. I may pick up a [trading] ticket and buy or sell right there” during a conference call.
A study this year by three University of Michigan professors found that during conference calls, stock prices swing more and bigger blocks of shares are traded than when there is no conference call--signs that institutional investors are trading during the briefings.
Those investors wouldn’t bother listening if the calls only reiterated previously released information, wrote Richard Frankel, Marilyn Johnson and Douglas J. Skinner.
“This evidence implies that conference calls are informative, but that not all investors have equal access to the information in these calls,” they wrote.
The top U.S. securities regulator says that kind of unequal access to information undermines the integrity of the market.
“As far as I’m concerned, that’s cheating, and it’s a stain upon our market,” Securities and Exchange Commission Chairman Arthur Levitt said in a Nov. 18 interview. “We’re clearly concerned about it; we’re clearly looking for it.”
Levitt warned in February that companies and brokerages could face insider trading sanctions if analysts or investors profit from corporate news before it’s available to the public. In an interview, he went further, urging companies to include reporters in their analyst calls.
The SEC has limited legal means to enforce what is essentially an issue of fairness, lawyers say.
The courts have held that insider trading occurs only when an analyst or investor who gets inside information gives something to the company executive in return, said John Coffee, a Columbia University Law School professor who specializes in securities law.
Stock exchanges have regulatory power over listed companies, and the exchanges require full and fair disclosure of information that could affect trading. Still, the only sanction stock markets are allowed by the courts is to remove a company from the exchange, Coffee said. That’s a blunt instrument that the exchanges are loath to use.
“It’s a major problem for the SEC,” Coffee said. “We have a problem without a clear legal remedy.”
The Nasdaq and the New York Stock Exchange say most companies are good about releasing news fairly.
“A vast number of the companies are in compliance and meet all of the listing standards, including disclosure requirements,” a Big Board spokeswoman said.
Many companies say they avoid selective disclosure by issuing a press release before briefing big investors, and then confining their comments in the briefings to what’s already been announced. That way, they say, all investors have similar access to information.
That doesn’t work because analysts and investors often see tremendous import in comments that executives consider immaterial. And often, companies give details about their businesses that haven’t been made available to the public.
For Levitt, the SEC chief, nothing less than the integrity of the U.S. stock market is at issue.
“If some individuals or organizations are getting information that others are not getting, that means our markets are no longer trustworthy and no longer credible, and that can’t be tolerated,” he said.
