With earnings season under way, local corporate attorneys warn that the Securities Exchange Commission will take a dim view of public companies that reach too far in using the Sept. 11 terrorist attacks and their aftermath as an excuse for poor performance.
The post-Sept. 11 fallout clearly has impacted airlines, companies that were in and around the World Trade Center as well as some businesses that have complex inventory supply chains. But Orange County lawyers say most companies are getting hit mainly by a slowdown that already was under way before the attacks.
Ben Frydman, a corporate securities partner at Newport Beach-based Stradling Yocca Carlson & Rauth, said he believes the SEC will look negatively on excessively generalized disclosures that use Sept. 11 to cloak things going on internally in a business or industry. Such items need to be addressed independently of external events, he said.
“It’s difficult for most businesses to identify a specific impact from Sept. 11,” Frydman said. “But the consequences for most companies right now are no different than what you get in an economic slowdown,so there is the danger of overstating rather than understating the impact of the attacks.”
But dealing with,or not dealing with,the events of Sept. 11 is a double-edge sword. Companies in sectors such as the airline industry that were affected legally are required by the SEC to disclose specific effects from Sept. 11.
Phillip Kaplan, a litigation partner with Newport Beach law firm O’Melveny & Myers LLP, said companies that don’t report the specific occurrence or likelihood of negative effects from the terrorist attacks could face regulatory liability, which could lead to SEC fines.
“These things aren’t brought by the SEC that frequently but it’s happened before,” Kaplan said. “Caterpillar a few years ago was fined by the SEC for not adequately reporting the impact of hyperinflation in Brazil on a subsidiary the company owned there.”
When companies are providing guidance to analysts and they make a mistake, the companies are protected as long as they followed all the rules, qualified the guidance as a forward-looking statement and indicated risk factors, he said.
“If a company thinks their results could be impacted by the terrorist attack and they say so in their forward-looking statements, that’s ‘safe harbor,'” Kaplan said. “But you can’t just do it willy-nilly,you have to be specific and have a basis for it, and it has to be really identifiable.”
Patrick Seaver, a partner and chairman of the corporate department at Costa Mesa office of Latham & Watkins, said reporting potential harm from a terrorist attack is no different than reporting genuine risk from any other external event.
“If there’s a known event that’s going to have a known effect, then you have to describe it,” Seaver said. “For most businesses here in Orange County, the effect is not known yet.”
Kaplan pointed out that a lot of high-tech companies were in a significant slowdown that started in the summer, if not earlier.
“So if you did a trend line, there may not be much noticeable movement as a result of Sept. 11,” he said. “In those cases you won’t see disclosure specific to the terrorist attack.”
However, companies for now at least are getting a lot of leeway with regards to how they report the effects of the Sept. 11 attacks, Kaplan said. And there are plenty of companies other than airlines that have a case for reporting a negative effect on their revenues, he said.
Automaker-affiliated credit companies such as Ford Motor Credit Co. and Cypress-based Mitsubishi Motors Credit America are reporting that delinquency rates likely will be higher as a result of Sept. 11
“Apple, for example, included discussion in their latest quarterly report that they are seeing delays in their supply lines following Sept. 11 that would likely impact their ability to deliver product on time,” Kaplan said.
Ben Frydman said companies like security device-making companies that stand to benefit from current events also are required to report that in their statements.
“As a company with a product like that, if there’s a reasonable nexus there, you should talk about it,” he said. “But you can’t overstate it.” n
