In re Office Depot

Exchange Act Release No. 63152 (2010)

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In re Office Depot

Securities and Exchange Commission
Exchange Act Release No. 63152 (2010)

Facts

Office Depot, Inc. (OD) (defendant) was a supplier of office equipment. After concluding on May 31, 2007, that OD would achieve disappointing earnings for the second quarter of 2007, OD’s senior management sought to avoid completely surprising the market with that news. OD’s chief executive officer (CEO) and chief financial officer (CFO) did not want to issue a press release because OD’s internal financial estimates were incomplete. Instead, the CEO and CFO decided to encourage analysts to reexamine their earnings expectations in light of recent earnings results for comparable companies that announced weaker financial performance due to the slowing economy. The CEO hoped that after doing so, analysts would lower their expectations for OD. Pursuant to that plan, the CFO, OD’s director of internal relations (IR director), and the IR director’s supervisor developed talking points that cited the comparable companies and explained that OD’s economic model assumed stable economic conditions. The IR director conveyed the talking points individually to all 18 analysts that covered OD on June 22 and June 25. On June 25, the CFO instructed the IR director to communicate the talking points to OD’s largest institutional investors. Also on June 25, the CEO (with the CFO’s knowledge) told the IR director to contact more analysts because the consensus analyst expectation for OD had not changed. Ultimately, many analysts lowered their earnings expectations. However, two analysts expressed their surprise that OD did not issue a press release. On June 28, OD publicly disclosed that its earnings had been negatively impacted by poor economic conditions. OD’s stock price declined 2.8 percent after the first day of the IR director’s calls, on trading volume 2.5 times higher than for the other days that week. In total, OD’s stock price declined 7.7 percent between the start of the IR director’s calls and OD’s public disclosure. Until June 2007, OD did not have written regulations or conduct training regarding compliance with Securities and Exchange Commission (SEC) Regulation FD (regulation), which prohibited selective disclosure of material, nonpublic information to analysts and institutional investors. The SEC initiated an administrative proceeding regarding OD’s compliance with the regulation, which the SEC agreed to settle in light of OD’s cooperation and OD’s prompt implementation of remedial action.

Rule of Law

Issue

Holding and Reasoning ()

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