Among the many voices clamoring for change on Wall Street, one voice is rarely heard: the individual investor's. Today, TheStreet.com is letting one investor speak his piece. David H. Rothman, a freelance writer and Schering-Plough investor, has some grave concerns about how the drugmaker's warning played out in the market last week.
I invested in
( SGP) stock this summer at around $23. SGP was like an old gray Mercedes -- dented and dowdy, but unlikely to turn into an ordinary Plymouth or, worse, become Stephen King's "Christine."
Everyone supposedly already knew the dark side. Claritin, the classic allergy medicine with global sales of $3.2 billion in '01, was going off patent, and that would hit 2003 earnings.
In less than two years, Schering-Plough's stock price had traveled southward from a high in the upper $50s. But hadn't Richard Jay Kogan, the 60-year-old, $5.9 million-a-year CEO at the wheel, learned enough to avoid fender-benders and worse? Schering-Plough was a value stock now -- a name for investors to retreat from riskier investments even if the going might be rough in the short term. No premature Halloween story here.
Bad call, bad move. The company's 2003 earnings, it now turns out, could be 37% less than those for 2002, a disaster that stunned even the Wall Street analysts who anticipated bad news. In four days last week, Schering-Plough shares dropped 17% from Monday's open of $21.27 to a then five-year low of $17.60 Thursday. And that was
the earnings warning late Thursday!
Schering might as well be "Shearing" or maybe "Sheer," as in "sheer gall." Did Kogan or his minions, violate the disclosure regulations of the
Securities and Exchange Commission
by giving an early heads-up to mutual-fund managers? The SEC wants to know: Today,
the agency asked the company to provide information about the timing of its communication to big investors and analysts. What is clear is that the existing disclosure regulations still aren't tough enough.
In Wall Street gobbledygook, publicly traded companies must not release "material nonpublic information" to mutual funds, hedge funds, investment analysts and other fat cats without tipping off us small fry at the same time. This is stipulated under a rule known as Regulation FD, which stands for Fair Disclosure. Will a company miss its earnings forecasts, the big driver of the stock price? Then you're supposed to learn of the new numbers at the same time as, say, Martha Stewart or the friends and business associates of the top executives of Schering-Plough,
AOL Time Warner
or other publicly traded companies.
But last week, Schering-Plough thumbed its nose at the spirit, if not the letter, of Regulation FD. In fact, 10 hours before the disclosure of the earnings revisions, while the stock was still imperiled, the company wrapped up a closed meeting with perhaps two dozen analysts and large investors. No Webcast. No release of a transcript. Just circumlocutions. Schering-Plough officials denied disclosing material information of the kind that would have caused the stock price to plummet. Instead, they told
that they had simply discussed research efforts without revealing new information.
But can't interpretations, can't nuances, count as much as material facts? One of my reasons for investing in Schering-Plough in the first place was Zetia, an anticholesterol drug now under review at the FDA. I'd love to have heard Schering-Plough's detailed and up-to-date commentary on the chances of the company's researchers finding a new Zetia. Optimism about Zetia was and is built into SGP's share price.
Asked about the lack of consideration for ordinary shareholders, a Schering-Plough spokesperson told Reuters that the small fry could simply call investor relations and talk. Sorry. Been there. Done that. I did it last week, in fact, before Schering-Plough 'fessed up. It more or less told me the same thing as the wire services at the time -- in other words, that it hadn't anything new to say.
An investor-relations woman would reveal only that some large sellers had decided they didn't want to hold on to the stock. Thanks, Schering-Plough. Rubbing in the insult were news reports that Kogan had traveled to Boston to meet with
last Tuesday, theoretically in time for the Putnam mutual fund managers to avoid bloodbaths of the severity that we small investors took.
Even without a full-power Regulation FD, Schering-Plough will owe the SEC some major explanations. Given the plummeting of investor confidence in U.S. stocks, however, we still need to strengthen FD.
One approach would be to force the Schering-Ploughs and AOLs and the rest to disclose major new interpretations of fact in a timely manner, not just new information itself, after the companies talked to analysts. That gets into a tricky area. A company, for example, should not have to broadcast every chat with every analyst. But the changed regulation could be carefully crafted to allow for such complexities. If nothing else, the SEC should make the biggest companies send out news releases almost immediately, and not just within 24 hours or before the next market opening, if top executives divulged important new facts or interpretations to analysts. No need for Warren Buffett-level thought. Just get the basic news out.
Another possible change might be to force huge publicly traded companies to announce revised earnings to the public and analysts instantly -- as soon as it became established that the results would vary by at least a certain percentage from previous expectations. Don't wait until the usual quarterly announcements or preannouncements. Pre-empt the leakers.
Furthermore, the SEC could require at least the larger companies to try to account for fluctuations in share prices -- and release the explanations immediately -- whenever the changes exceeded a minimum percentage. Washington might even force the corporations and the big mutual funds and other giants to disclose instantly the reasons for the very largest buys or dumps of stock. Such a requirement if nothing else would discourage the sloppy trading by the likes of Janus, which would be pressured to deal in smaller chunks, thus reducing the damage that this klutzy elephant might otherwise do to so many stocks. Along the way, the new rule also would make overpaid fund managers more accountable to their abused shareholders.
Besides news releases and other standard disclosure tools, the SEC should require companies to use mass emails to alert interested shareholders with the very freshest information and interpretation. Let the pros scream about this and other reforms. Just remember, the SEC exists most of all to protect common investors, not investment analysts, hedge funds, investment advisers or the mutual fund industry. And now that the technology is out there to keep individual investors updated, let's use it to help rebuild investor confidence. This new fairness will hardly kill off mutual funds or financial journalism, given all the complexities that the higher level of
disclosure will bring.
Granted, ordinary Americans should aim to invest for the long term, but much can go wrong in days or even hours in this Internet-era bear market, and the portfolios of small investors can take months or years to recover. In many cases when stocks tumble, long-term investors may want to hold on to their shares and even add to their investments at dollar-store prices. Whatever the case, however, Regulation FD is due for a major overhaul to help us small fry enjoy the same level of disclosure that the Putnams and the rest do -- or at least narrow the difference.
David Rothman, a freelance financial journalist and author of six books, lives in Alexandria, Va. He is reachable at email@example.com. As of this writing, he still owned stock in Schering-Plough. His commentary doesn't necessarily reflect the opinions of TheStreet.com. Thoughts on Rothman's piece? Talk to TheStreet.com at