The SEC fined and sanctioned the CFO of Office Depot, Inc., for allegedly violating Regulation FD in 2007.  She and the CEO selectively "telegraphed" to analysts that the firm would significantly fall short of quarterly earnings estimates.  As anticipated, the analysts responded to the officers' innuendos and implied messages by lowering their projections - though some asked about the press release.

    Summary.  Patricia McKay, an EVP and CFO, along with the company’s CEO conducted 1-on-1 calls with the analysts late in Q2 of 2007.  Rather than directly telling the analysts that the firm wouldn't meet their expectations, the pair made references to recent public statements of comparable companies about the impact of the slowing economy on their earnings, and reminded the analysts of Office Depot’s prior cautionary public statements.  Ms. McKay, 52, was a CPA who served as EVP and CFO from September 2005 through February 2008.

The analysts promptly lowered their estimates for the period.  Ms. McKay assisted in preparing the talking points for the calls, and she and the CEO were aware of the declining estimates while the company made the calls. The company also continued to make the calls despite McKay being notified of some analysts’ concerns of, among other things, the lack of public disclosure.  Six days after the calls began, Office Depot filed a Form 8-K announcing to the market, among other things, that its sales and earnings would be negatively impacted due to a continued soft economy.  Prior to that Form 8-K, Office Depot’s share price had significantly dropped on increased trading volume.

    Here's the Chronology of Events.  C-I presents an outline of the events.  For complete details, click onto:   [SEC '34Act Release, 10/21]

• Late 2006 and Early 2007.   CEO and McKay believed the significant EPS growth the company achieved in 2005 and early 2006 was not sustainable and set out to temper analysts’ expectations.
• February 2007.  During a publicly broadcasted earnings conference call, CEO and McKay said the firm contemplated mid- to upper-teens EPS growth over the long-term.
• Late April 2007.  Depot warned investors that its largest business segments were facing a softening in demand that was continuing into Q2.  Analysts published EPS estimates - most lowered their estimates.
• Early May 2007.   Depot reiterated at a publicly available investor conference that its business model contemplated only mid to upper teens EPS growth over the long-term and that the company faced a softening demand environment.
• 5/31/07.   CEO alerted Depot’s Board and the Executive Cttee that the company would not likely meet the analysts’ consensus $0.48 EPS estimate for Q2, and that senior management was discussing a strategy for advance communication to avoid a complete surprise to the market.
• 6/20/07.   Ten days prior to the close of the 2nd quarter, CEO and McKay, both of whom had investor relations experience, discussed how to encourage analysts to revisit their analysis of the company.  They agree that the company should talk to analysts and refer them to recent earnings announcements by 2 comparable companies that had recently publicly announced results which were impacted by the slowing economy.
• Friday, 6/22/07;  Monday, 6/25.   IR Director spoke individually with all 18 analysts covering Depot and conveyed to them the information contained in the talking points. Depot did not regularly initiate calls of this type to all 18 analysts covering the company. Word of these calls quickly spread among analysts, some of whom believed that Office Depot was “talking down” analysts’ earnings estimates.
• Saturday, 6/23/07.   McKay emailed the analysts’ revised estimates to the CEO and advised that the IR Director had spoken to most of the company’s analysts and that two had reduced their estimates.
• Tuesday, 6/26/07.   IR Director is told to relay the same "talking points" to the company's top 20 institutional investors.
• Thursday, 6/28/07 - after the close.   Six days after the calls to analysts began, Depot filed a Form 8-K publicly disclosing, among other things, that its earnings would be “negatively impacted due to continued soft economic conditions.”

    The Plan Works, However.....   Depot’s calls influenced many analysts to revise and lower their Q2 2007 forecasts, and bt the end of the second day of the calls, 15 of the 18 analysts had lowered their estimates, bringing the consensus estimate down from $0.48 to $0.45.  Between Friday, 6/22 (the day Depot began calling analysts) and 6/28 (the last market close before Depot filed its 8-K), the company’s stock dropped 7.7%.

It should be noted that one analyst expressed concern about the lack of a press release.  A second said he and several of his clients were surprised at the lack of a press release.  A third analyst, however, informed his customers that he expected Office Depot’s earnings to be down based on his call. 

The SEC fines Ms. McKay $50K for her efforts.