Costco Didn't Selectively Disclose Its Bad Earnings -- but It Sure Looked That Way

Oops.

When the news broke that Wall Street analysts and institutional investors got a gander at Costco Wholesale's (COST Quote - Cramer on COST - Stock Picks) earnings early Wednesday morning -- four-and-a-half hours before the news hit the wires -- it didn't take long for other investors to smell a rat. Those in the know got a chance to digest the news, which wasn't pretty, and were ready to dump Costco at the open. Which they did with a vengeance, as Costco quickly sunk 30%.

Was it another outrageous case of selective disclosure, of the little guy getting screwed by the system? Well, it turns out, not this time. Instead, blame the Seattle office of financial-news distributor Business Wire, which was to have released the earnings news to the world at the same time Wall Street got it. But it didn't.

"Costco did what it should have," Business Wire spokesman Daniel Savio said in copping to the blunder.

Costco released its results to a wide list of analysts and institutional investors in an email message received at about 5 a.m. EDT Wednesday morning, according to one recipient. That was when the news was supposed to go out via Business Wire, too. But, despite the mass of technology used in today's markets, Business Wire didn't hold up its end because of human error: One Business Wire editor in Seattle thought a second editor was handling the earnings release, while the second thought the same about the first, Savio said.

As a result, the news didn't get out until 9:31 a.m., but by then, the damage had been done. Morgan Stanley Dean Witter and Lazard Freres had downgraded Costco, the nation's largest operator of wholesale shopping clubs.

They had good reason: Not only had earnings for the third quarter, ended May 7, come in a penny short of expectations at 26 cents per diluted share, but the company had warned of soft results in the current quarter as well.

In preopening trading, Costco was down sharply on heavy volume. When the market opened, and investors at large had a chance to catch up with what the institutions knew, the loss held. By midafternoon, Costco was trading down 8 9/16, or 21%, at 32 1/16.

Company executives couldn't be reached for comment Wednesday. In Washington, a spokesman for the Securities and Exchange Commission declined to comment on whether the agency would probe today's snafu. The agency has condemned selective disclosure and is currently weighing comments for possible new regulations.