In its first Regulation FD enforcement action in almost two years, the SEC on Friday filed a cease-and-desist order instituting a settled administrative proceeding against Lawrence D. Polizzotto, the former Vice President of Investor Relations of First Solar Inc. Without admitting or denying the findings, Polizzotto paid $50,000 to settle the charges and agreed to cease and desist from further violations of Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD.
Regulation FD prohibits U.S. reporting companies from selectively disclosing material nonpublic information to market professionals and to security holders under circumstances in which it is reasonably foreseeable that the holders will trade on the basis of the information. It requires a company that intentionally discloses material nonpublic information to any of these persons to make a simultaneous public disclosure, and to make a prompt public disclosure if it learns of a unintentional selective disclosure.
According to the SEC’s order, Polizzotto and an uncharged subordinate under his direction revealed in phone calls with more than 30 analysts and investors that First Solar was unlikely to receive one of three loan guarantees totaling $4.5 billion from the U.S. Department of Energy for which the company had received conditional commitments, despite knowing the company had not yet publicly disclosed this information.
The circumstances surrounding Polizzotto’s calls make the SEC’s action entirely unsurprising. About a week before his calls, the company’s then-CEO expressed confidence at an investor conference that the company would receive all of the guarantees. The loan guarantees were important since they would facilitate low-cost financing for the underlying projects. The likelihood that the guarantees would issue had been subject to intense analyst speculation in the preceding months, since they were subject to the company’s satisfaction of several conditions prior to the termination of the DOE’s authority under the loan guarantee program. Two days after the conference, when Polizzotto and other executives learned that at least one guarantee would not be issued (representing more than a third of the total amount of guarantees), an in-house lawyer specifically noted that Regulation FD would restrict discussions with analysts and investors pending publication of the development by the company or the government. In an email, Polizzotto himself noted the development was “a material event.”
Moreover, a day before Polizzotto’s calls, a Congressional inquiry into the DOE’s loan guarantee program became public, prompting analyst reports about the impact of the inquiry and an 8% decline in the company’s stock price at the market open the next day. In his calls with analysts and investors that day, Polizzotto not only addressed the likely loss of one guarantee, but sought to place that in context by indicating the “higher probability” of receiving the other guarantees and noting the previously disclosed challenges faced by the project for which a guarantee would likely not be issued. He even referred to a rumor – not publicly confirmed by the company – that First Solar was in discussions to sell that project to a large energy company that could provide low-cost financing for the project. Having learned of Polizzotto’s calls, the company issued a press release before the market open the following day, and the stock price opened down another 6%.
The SEC’s press release about its action highlights again the importance of an effective Regulation FD compliance program. This is only the second time the SEC has pursued an individual without also pursuing the relevant company. The SEC’s release notes that it determined not to charge First Solar due to the company’s “extraordinary cooperation” with the investigation, which included self-reporting to the SEC staff, as well as the company’s culture of compliance through the use of a disclosure committee and its prompt remedial actions.
The SEC’s order may be found at http://www.sec.gov/litigation/admin/2013/34-70337.pdf, and its press release at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539799034.