Business

The Investor's Right to Know

Bay Street debates the sensitive question of disclosure: did Air Canada hold back?

Katherine Macklem October 23 2000
Business

The Investor's Right to Know

Bay Street debates the sensitive question of disclosure: did Air Canada hold back?

Katherine Macklem October 23 2000

The Investor's Right to Know

Business

Bay Street debates the sensitive question of disclosure: did Air Canada hold back?

Katherine Macklem

Patricia Chisholm

As Ben Cherniavsky was nearing the end of his Vancouver workday on the afternoon of Thursday, Oct. 5, he received a phone call from an Air Canada official in Montreal. The official didn’t want to talk; instead, she insisted Cherniavsky, an investment analyst, forward the call to his voice mail. Cherniavsky did, and then he listened to the message.

That same evening, eastern time, Air Canada made more calls and delivered more scripted messages to other analysts who follow the airline, each time using voice mail. By various accounts, the message discussed Air Canada’s financial situation. In the morning, when the markets opened, Air Canadas share price had fallen overnight by $ 1. During the course of trading on Friday, it dropped another 75 cents—but to most investors, it wasn’t clear why. At 3:57 that afternoon, an Air Canada news release hit the wires, expressing “disappointment” at the tumbling share price, which the airline blamed on information it said had previously been made I public. About the same time, the in| vestment community began to howl, I accusing Air Canada of breaching a se'i curities law dryly referred to as selecMonty: raising controversy tive disclosure. Shareholders large and with remarks about Teleglobe small, the critics charged, lost money

quickly and avoid a fall. In an era when information—and misinformation—travels in a flash, and when more Canadians than ever are in| vestors, it is critical to ensure everyone f knows what’s going on. But while the 1 concept is straightforward, its execu| tion is not. Securities regulators in l_

Ontario are investigating at least four cases of possible selective disclosure, but charges have never been laid in Canada.

On the same Friday that Air Canada’s stock was tumbling, senior executives of Teleglobe Inc., a separately listed longdistance phone carrier under the wing of BCE Inc., held a series of hour-long meetings in Washington with 10 analysts. Again, following the meetings, the question of selective disclosure was raised in the media. But BCE officials insist the analysts received no material information, and the stock price did not show any sharp swing.

Last June, BCE chairman and CEO Jean Monty raised controversy when he let slip in a meeting with analysts in New York City that BCE was renegotiating its purchase of Teleglobe. The next day, citing “inadvertent” comments by Monty, the company issued a press release about the new talks.

While disclosure of material information by publicly traded companies has always been a concern, it has become much more acute in recent years. One reason, says Frank Switzer, spokesman for the Ontario Securities Commission, is the explosion in the number of people investing in the stock market. Another is the Internet and other technological advances that allow information to move widely and quickly. These changes have prompted securities regulators to take a harder look at the issue. Ten years ago, companies met only with analysts, and “that probably was full disclosure,” Switzer says. But the world has changed. “Nowadays,” he says, “I would suggest that releasing material information to an analyst without releasing it more broadly is a no-no.”

because they weren’t privy to the voicemail briefing. “This is a black stain on the concept of market integrity,” says William Riedl, president of Fairvest Securities Corp., a firm that specializes in corporate governance issues.

Selective disclosure is illegal. The law says a company can’t give material information—crucial news that is likely to affect the stock price—only to some investors. The principle is simple: if you tell one investor, you have to tell them all. The concern is that people who have privileged information can act on it—either to get in early on a rising stock price or to get out

Jean-Claude Bachand, a Montreal business lawyer and a member of the board of the Caisse de dépôt et placement du Québec—Canadas largest pension-fund manager—has been thinking about the issue of selective disclosure for many years. Among the questions an executive should ask are: Is the information material? If yes, is it new? Will it affect the share price? Is it being broadly disseminated? “Its basically a question of common sense,” Bachand says. “If you’re a major player, you’re going to have to be more careful in this day and age about what you say or don’t say.”

Meetings are commonplace between company executives and investment analysts—essentially, highly paid specialists on companies and industries who assess the value of stocks for clients of the brokerages or funds that employ them. “Analysts have an important role in synthesizing the information in a way Joe Public can understand,” Bachand says. Some executives may be tempted to stop meeting the analysts, to avoid even the appearance of selective disclosure, he fears. “But maybe that would be a greater disservice to the investing public,” Bachand says.

John Grandy is a Toronto-based analyst who covers BCE and Teleglobe. He was among those left out of the meetings in Washington, yet he still downgraded the company. He says when companies hold analysts’ meetings and conferences, they should also provide simultaneous disclosure to the general investing public over the Internet. “We’ve got this amazing technology,” he says. “We should use it.” Grandy says he doesn’t think Teleglobe released material information and

he is not accusing it of selective disclosure. The company itself says it provides full disclosure. Maarika Paul, BCE’s vicepresident of investor relations, says conference calls to discuss quarterly results are Web-cast and archived on the Web.

Air Canada’s executives, too, insist no new information was released in their voice-mail messages on that Thursday night before the Thanksgiving weekend. In its news release the following day, the company acknowledged its share price had been in retreat since August. Its merger with Canadian Airlines, rising fuel costs and operational problems at United Airlines, an Air Canada partner, had been previously discussed, the airline said, and would contribute to a one-time reduction in its quarterly results. Analysts have speculated that the company was trying to lower expectations and engineer a soft landing for the declining stock.

The securities commission is taking a look at the Air Canada calls. While the OSC’s Switzer declined to speak direcdy about the Air Canada case, an official with the airline said the regulator has asked for certain documents. The papers, which she would not identify, will be sent on, she added.

Fairvesfs Riedl wants the Ontario regulator to go after Air Canada. The OSC, he says, is “being given a great opportunity to make an example of this—it sends a great message.” Whatever the regulator decides to do, the episode demonstrates just how critical the free—and instant—flow of information is to a market that so many Canadians have joined.

With Patricia Chisholm in Toronto