Securities and Exchange Commission v. AT&T Inc.

Background

The Securities and Exchange Commission (SEC) sued AT&T, Inc. and three members of its investor-relations department—Christopher C. Womack, Kent D. Evans, and Michael J. Black. The SEC alleged that, during March and April 2016, the defendants selectively disclosed material nonpublic information to analysts at investment firms. The alleged information concerned AT&T’s first-quarter 2016 total revenue, wireless equipment revenue, and wireless phone-upgrade rates. According to the SEC, the purpose was to persuade analysts to lower their estimates so AT&T could avoid missing consensus revenue expectations.

Regulation Fair Disclosure, or Regulation FD, generally requires a public company that selectively discloses material nonpublic information to certain outside persons to disclose that information publicly at the same time if the disclosure was intentional, or promptly if it was not intentional. The SEC sued AT&T under Section 13 of the Securities Exchange Act of 1934 and sued Womack, Evans, and Black for helping AT&T violate the regulation.

AT&T’s first-quarter 2016 results ultimately showed $40.535 billion in consolidated revenue, compared with consensus revenue of $40.468 billion, and a 5% phone-upgrade rate. The opinion described evidence that analysts lowered their estimates after communications with AT&T’s investor-relations employees. The defendants disputed the SEC’s interpretation of those communications and argued, among other things, that the information was not material or nonpublic and that they lacked the required state of mind.

Challenges to Regulation FD

The defendants argued that Regulation FD violated the First and Fifth Amendments, exceeded the SEC’s statutory authority, and was logically unworkable because of an exception for disclosures made in breach of a duty of trust or confidence to the issuer.

The court rejected each challenge. It held that strict constitutional review did not apply and that, even under the more demanding intermediate-review standard, Regulation FD was valid as applied to the factual business information at issue. The court reasoned that the regulation advances substantial interests in investor protection, fair dealing, and confidence in the securities markets, and does not prohibit speech or require a company to disclose new content; it requires public disclosure only after the company has selectively shared the same material nonpublic information.

The court also held that Section 13(a) of the Exchange Act authorized the SEC to adopt Regulation FD. It rejected the argument that the regulation’s exception for disclosures made in breach of a duty of trust or confidence leaves the rule no room to operate. According to the court, the exception addresses disclosures violating an existing duty to the issuer, while Regulation FD separately imposes a regulatory obligation against selective disclosure.

Summary-judgment analysis

Summary judgment is a decision without a trial that is proper only when no important factual dispute requires a jury’s consideration. The court identified three disputed elements: whether the information was material, whether it was nonpublic, and whether the defendants acted with scienter. Scienter here means knowing, or recklessly failing to recognize, that the information being communicated was both material and nonpublic.

On materiality, the court found that the SEC had presented overwhelming evidence supporting its position. A reasonable jury could find that information about AT&T’s total revenue, wireless equipment revenue, and upgrade rates was important to investors, particularly because the information could affect whether AT&T met analysts’ consensus expectations. The court rejected the argument that wireless equipment revenue was immaterial because it could have little effect on earnings or profit. Revenue can be material even when related costs offset its effect on earnings.

On whether the information was nonpublic, the court likewise found substantial evidence for the SEC. AT&T had not publicly released its first-quarter 2016 revenue, equipment-revenue, or upgrade-rate results before April 26, 2016. The court found that repeated similarities among analysts’ notes, the timing of estimate reductions, and testimony from some analysts could allow a jury to find that AT&T’s investor-relations employees communicated those internal figures or conveyed them indirectly through guidance. Public statements by AT&T’s chief financial officer about general trends did not, as a matter of law, make the later specific figures public.

Scienter presented a closer factual question. Evidence supporting the SEC included the number and duration of the alleged disclosures, the defendants’ training on Regulation FD, internal policies prohibiting disclosure of nonpublic financial metrics, and communications describing an effort to lower analysts’ estimates. Evidence supporting the defendants included their testimony that they did not understand the information to be material and nonpublic, the absence of internal communications expressing concern that the campaign was unlawful, and the absence of analysts’ contemporaneous objections. Because a jury could reasonably find for either side on scienter, neither the SEC nor the defendants was entitled to summary judgment.

The court also denied the individual defendants’ argument concerning eight analyst firms for which the SEC lacked analyst notes or testimony. The court treated that request as a pretrial evidence challenge rather than a proper summary-judgment motion because the complaint alleged unitary claims, not separate claims tied to individual firms.

Evidentiary motions and disposition

The individual defendants moved to exclude the analysts’ notes globally, arguing that the notes were unreliable and contained multiple layers of hearsay. The court denied that motion. It held that the notes could have significant value as evidence, especially where multiple analysts recorded similar figures matching AT&T’s internal information. The court emphasized that defendants could make document-specific or excerpt-specific objections at trial.

Both sides also sought to exclude the opposing parties’ proposed expert testimony under the rule governing the reliability and usefulness of expert evidence. The court did not decide those challenges at the summary-judgment stage because the lay evidence alone was sufficient for the claims to reach a jury and sufficient for a jury to find for the defendants on scienter. The court therefore denied the SEC’s and AT&T’s expert-evidence motions without prejudice to renewing them closer to trial.

The court denied all parties’ motions for summary judgment. It denied the individual defendants’ motion to strike the analysts’ notes, denied the SEC’s and AT&T’s expert-evidence motions without prejudice, and stated that the case would proceed toward trial unless the parties settled. The opinion did not enter a final finding that AT&T, Womack, Evans, or Black violated Regulation FD.