## Facts

- In late May 2007, Office Depot’s internal information indicated it would likely miss analysts’ consensus estimates for Q2 2007.
- Senior management sought to reduce market expectations without issuing a press release because internal estimates were still incomplete.
- After discussions between the CEO and CFO, Office Depot used one-on-one calls with analysts late in Q2 2007 to “signal” that the company would not meet consensus expectations.
- The company avoided explicit earnings guidance and instead referenced negative earnings news from comparable companies and reiterated Office Depot’s prior cautionary public statements to imply an earnings shortfall.
- Office Depot’s investor-relations personnel, with CFO involvement, developed talking points and contacted 18 analysts on June 22 and June 25, 2007, conveying the message individually.
- On June 25, the CFO directed that the same message be conveyed to Office Depot’s largest institutional investors; additional analyst calls were made when consensus estimates did not fall as desired.
- Analysts promptly reduced estimates; the consensus EPS estimate declined from $0.48 to $0.45, and the stock price fell on unusually heavy trading during the period of private communications.
- Office Depot did not make simultaneous public disclosure during the calls and publicly disclosed the negative impact of a soft economy only on June 28, 2007, via a Form 8-K.
- Until June 2007, Office Depot lacked written Regulation FD policies and did not conduct Regulation FD training.
- Separately, Office Depot prematurely recognized about $30 million in vendor allowances, overstating net earnings from Q3 2006 through Q2 2007; the company later restated financial statements and reported a material weakness in internal control over financial reporting.

## Issues

1. Whether Office Depot violated Regulation FD by selectively communicating material, nonpublic information—directly or indirectly—about an expected earnings shortfall to analysts and institutional investors without simultaneous or prompt public disclosure.
2. Whether Office Depot violated Exchange Act reporting, books-and-records, and internal-controls provisions by filing materially inaccurate periodic reports and failing to maintain adequate accounting controls related to vendor funds.

## Decision

- The SEC instituted cease-and-desist proceedings and accepted Office Depot’s settlement offer, with consent to the order without admitting or denying the findings (except jurisdiction).
- The SEC found Office Depot violated Regulation FD and Exchange Act Section 13(a) by selectively disclosing material, nonpublic information and failing to make required public disclosure.
- The SEC found Office Depot violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) by failing to keep accurate books and records and failing to maintain adequate internal accounting controls, resulting in improper revenue recognition and inaccurate reports.
- The SEC ordered Office Depot to cease and desist from future violations of the cited provisions.
- In a companion federal action, Office Depot consented to a final judgment imposing a $1 million civil penalty.

## Legal Principles

- Regulation FD requires simultaneous public disclosure for intentional disclosures, and prompt public disclosure for non-intentional disclosures, when material, nonpublic information is communicated to enumerated recipients such as analysts and institutional investors.
- Regulation FD applies to indirect communications that effectively convey material, nonpublic information, including coded or “signaling” communications intended to move earnings expectations.
- Materiality may be supported by contemporaneous market evidence, including analyst estimate revisions and abnormal price and volume reactions following selective communications.
- Exchange Act Section 13(a) and related rules require issuers’ periodic reports to be accurate and not misleading.
- Exchange Act Section 13(b)(2)(A) requires books and records to reflect transactions and asset dispositions accurately in reasonable detail.
- Exchange Act Section 13(b)(2)(B) requires internal accounting controls sufficient to provide reasonable assurance that transactions are recorded properly and financial reporting is reliable.

## Conclusion

The SEC concluded that Office Depot unlawfully used selective, indirect analyst and investor communications to manage earnings expectations without timely public disclosure, and separately failed to maintain accurate accounting and adequate controls over vendor-fund recognition; the company agreed to cease-and-desist relief and a $1 million penalty in a settled resolution.


In re Office Depot, Inc., Exchange Act Release No. 63152 (Oct. 21, 2010)