Late release of inside information: two listed companies fined

The Financial Services Authority has fined Wolfson Microelectronics plc £140,000 for a delay of 16 days in announcing inside information. Entertainment Rights plc has been fined £245,000 for a delay in announcing inside information that led to a false market in its shares for about 78 days.

These two cases show that the FSA is focusing on the importance of swift publication of inside information irrespective of the state of the market.

The regulatory requirements

Broadly, inside information is information directly or indirectly relating to a publicly-traded company or its securities that:

• is precise, in the sense that it indicates actual or likely circumstances or events and is specific enough for a conclusion to be drawn on the possible effect on the price of the company's securities
• is not generally available and
• would be likely to have a significant effect on the price of the company’s securities if it were generally available (judged by whether a reasonable investor would take account of it in making investment decisions).

Under the FSA’s Disclosure and Transparency Rules (DTRs), a listed company - wherever it is incorporated - must as soon as possible announce through a regulatory information service any inside information that directly concerns it. There are limited exemptions permitting delays in certain circumstances, and allowing inside information to be disclosed selectively.

Listing Principle 4 provides that a listed company must communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuation of a false market in the listed securities.

The Wolfson case

On 10 March 2008, one of Wolfson’s major customers informed Wolfson that it would not be required to supply parts for future editions of two of the customer’s products, representing a loss of 8% of Wolfson’s forecast revenue for 2008 (approximately $20 million). The customer told Wolfson at the same time that it expected to increase its demand in relation to another of its products. The overall net position was expected to lead to overall revenue from that customer remaining stable and in line with the 2008 forecast.

On 12 March 2008, Wolfson discussed the matter with its investor relations advisers - but not with its corporate brokers or legal advisers. The investor relations advisers said that there was no need to disclose the negative news, and no announcement was made. This advice was wrong.

On 20 March 2008, Wolfson’s board reconsidered: it sought legal and corporate broking advice and was advised to disclose the negative news. Wolfson made the announcement of the loss and its share price closed around 18% lower than the previous day.

The FSA has ruled that the news on 10 March 2008 was inside information, and Wolfson was under an obligation to announce it to the market as soon as possible. As the information was not released until 27 March 2008, Wolfson had breached the DTRs. The delay led to the creation of a false market in Wolfson's shares during the period of delay, so Wolfson had also breached Listing Principle 4.

Wolfson was fined £200,000 for the breaches, but qualified for a 30% discount for early payment of the fine.

The Entertainment Rights case

In December 2006, Entertainment Rights plc and its subsidiary, Gold Key Home, entered into an agreement to distribute DVDs in the USA. In July 2008 the agreement was varied, reducing Entertainment Rights’ estimated profits for 2008 by US$13.9m.

As Entertainment Rights considered that there would be future opportunities to reduce the impact of the variation, it delayed making an announcement until September 2008. Its shares fell 55% on that day.

The FSA has ruled that the delay led to a false market in the shares for about 78 days. The fine was reduced to £245,000 as the company qualified for a 30% discount for early payment and the FSA took into account the fact that the company had taken steps to strengthen its board, had admitted the breaches to the FSA and co-operated fully with the investigation.

What the cases show

These cases show that listed companies and their directors should:

• be alert to the presence of inside information
• consult their legal advisers and corporate brokers, and not just their investor relations advisers, immediately if there may be a requirement to announce inside information
• where an announcement is required, make the announcement without delay
• not attempt to offset bad news against good news when assessing whether an announcement is required, or as a means of palliating the bad news
• not withhold negative inside information because they believe it would cause a fall in the share price or result in the share price not representing the true value of the company. It is for the market, not issuers themselves, to assess the news.