The Problem with Selective Disclosure

If you want to see a classic case of the problems with selective disclosure take a look at the recent SEC case against Presstek, Inc. and its former CFO.

Presstek was having a bad quarter in 2006. The CFO knew that the company would be reporting bad financial performance for the quarter. The CFO told an investor that the results would be bad. The investor immediately sold its shares in Presstek. The next day Presstek publicly released its poor financial performance for the quarter.

Slam dunk.

It’s that kind of selective disclosure that the SEC was trying to prevent when it enacted Regulation FD. It is bad that some investors could preferential treatment to material information and be able to act on that information before the general public.

“This investigation related to matters that occurred prior to the changes in executive leadership which took place in 2007,” said Jeff Jacobson, Presstek’s Chairman, President and Chief Executive Officer. “We feel very strongly about corporate governance and we are pleased to put this legacy issue behind us.”

In addition to the $400,000 settlement with the SEC, Presstek also had to pay a $1.25 million to settle a securities class action case related to the matter.

Even though it was a straightforward violation, the question I have is: How did the SEC find out? Perhaps they noticed the spike in the selling of shares and the purchasing of puts by the investor. Perhaps somebody blew the whistle? Perhaps the company self-reported?

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