U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21703/October 21, 2010
Accounting Auditing Enforcement Release No. 3199/October 21, 2010
Securities and Exchange Commission v. Office Depot, Inc., Civ. Action No. 9:10-cv-81239 (S.D. Fla. Oct. 21, 2010)
SEC CHARGES OFFICE DEPOT WITH IMPROPER DISCLOSURES TO ANALYSTS
The Securities and Exchange Commission today announced an enforcement action against Office Depot, Inc. for violating fair disclosure regulations when selectively conveying to analysts and institutional investors that the company would not meet analysts' earnings estimates. The SEC also charged Office Depot with unrelated accounting violations.
Regulation FD requires that when issuers disclose material nonpublic information, they must make broad public disclosure of that information. The SEC's alleges that as they neared the end of Office Depot's second quarter for 2007, the company's CEO and then-CFO discussed how to encourage analysts to revisit their analysis of the company. Office Depot then made a series of one-on-one calls to analysts. The company did not directly state that it would not meet analysts' expectations, but rather this message was signaled with references to recent public statements of comparable companies about the impact of the slowing economy on their earnings. The analysts also were reminded of Office Depot's prior cautionary public statements. Analysts promptly lowered their estimates for the period in response to the calls. Office Depot did not regularly initiate these types of calls to all analysts covering the company.
The SEC's complaint alleges that Office Depot's CEO, in an attempt to get analysts to lower their estimates, proposed to the company's CFO that the company talk to the analysts and refer them to recent public announcements by two comparable companies about their financial results being impacted by the slowing economy. The CEO further suggested that Office Depot point out on its calls what the company had said in prior public conference calls in April and May 2007. The CFO then assisted Office Depot's investor relations personnel in preparing talking points for the calls.
According to the SEC's complaint, the CEO and CFO were not present during the calls but were aware of the analysts' declining estimates while the company made the calls. They encouraged the calls to be completed. Office Depot continued to make the calls despite the CFO being notified of some analysts' concerns about the lack of public disclosure among other things. Six days after the calls began, Office Depot filed a Form 8-K announcing that its sales and earnings would be negatively impacted due to a continued soft economy. Before that Form 8-K was filed, Office Depot's share price had significantly dropped on increased trading volume.
Unrelated to these Regulation FD violations, the SEC also charged Office Depot with overstating its net earnings in its financial statements for the third quarter of 2006 through the second quarter of 2007 as a result of accounting violations. The SEC alleges that Office Depot prematurely recognized approximately $30 million in funds received from vendors in exchange for the company's merchandising and marketing efforts instead of recognizing the funds over the relevant reporting periods in a manner consistent with Generally Accepted Accounting Principles. In November 2007, the company restated those financials and announced a material weakness in its internal controls over financial reporting that resulted from the failure of its personnel responsible for negotiating agreements with vendors to communicate all of the relevant information to financial accounting personnel.
Office Depot agreed to settle the SEC's charges without admitting or denying the allegations, and will pay a $1 million penalty. Office Depot also consented to the entry of an administrative order in a separate proceeding requiring it to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder, and Regulation FD.