Flowserve Corporation and C. Scott Greer
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19154 / March 24, 2005
SECURITIES AND EXCHANGE COMMISSION v. FLOWSERVE CORPORATION AND C. SCOTT GREER, Case No. 1:05CV00612 (U.S.D.C., D.C.) (filed March 24, 2005)
SEC FILES SETTLED REGULATION FD CHARGES AGAINST FLOWSERVE CORPORATION, ITS CEO, AND DIRECTOR OF INVESTOR RELATIONS
FLOWSERVE AGREES TO PAY $350,000 PENALTY
CEO AGREES TO PAY $50,000 PENALTY
On March 24, 2005, the Securities and Exchange Commission filed two settled enforcement proceedings charging Flowserve Corporation, a manufacturer of precision-engineered flow control equipment headquartered in Irving, Texas, with violating Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. First, the Commission filed a lawsuit in the United States District Court for the District of Columbia charging Flowserve with violating, and C. Scott Greer, Flowserve's Chairman, President and Chief Executive Officer, with aiding and abetting Flowserve's violations of, Regulation FD and Section 13(a). Second, the Commission issued an administrative order finding that Flowserve violated the same provisions, and that Greer and the Company's Director of Investor Relations, Michael Conley, were each a cause of Flowserve's violations. Without admitting or denying the Commission's charges, Flowserve and Greer consented to the entry of a final judgment in the federal lawsuit that requires the company to pay a $350,000 civil penalty and Greer to pay a $50,000 civil penalty. Flowserve, Greer and Conley also agreed to the issuance of the Commission's administrative order.
In both its federal court complaint and its administrative order, the Commission charged that, Flowserve, a calendar-year reporting corporation, began 2002 forecasting annual earnings per share in the range of $1.90 to $2.30. In July of that year, the Company revised that estimate to $1.70 to $1.90 per share. On September 27th, the Company lowered its earnings estimate to $1.45 to $1.55 per share, which the Company reaffirmed in its press release issued on October 22, 2002. The $1.45 to $1.55 range represented more than a 30% decline in earnings per share estimates since the beginning of the year.
On November 19, 2002, forty-two days before the end of Flowserve's fiscal year, Greer, along with Conley, met privately in Irving, Texas with analysts from four investment and brokerage firms. At that meeting, the attendees discussed various aspects of Flowserve's business, including recent acquisitions, debt covenants, and free cash flow. At one point, one of the analysts asked about the Company's earnings guidance for the year. Neither Conley nor Greer gave the response required by the Company's policy that earnings guidance was effective at the date given and would not be updated until the company publicly announced updated guidance. Conley did not caution Greer before Greer answered the analyst's questions. In fact, Conley remained altogether silent. Instead, in response to the question, Greer reaffirmed the previous guidance, which had been issued on October 22, 2002, and provided additional material nonpublic information. Having heard the exchange between Greer and the analyst, again Conley was silent and did nothing to explain Greer's statements. Conley also failed to reiterate the Company policy as to earnings guidance.
On November 20, 2002, an analyst who attended the meeting issued a report to the investment firm's subscribers stating that Flowserve reaffirmed its earnings guidance. The report was electronically distributed to subscribers of Thomson's First Call. The next day, on November 21, Flowserve's closing stock price was approximately 6% higher than the closing price the day before. In addition, the trading volume of Flowserve's stock increased by 75%, from 379,500 shares traded on November 20th to 658,300 shares traded on November 21st. After the market closed on November 21, Flowserve furnished a Form 8-K admitting that it had "reaffirmed its full year 2002 estimated earnings per share."
In addition to the underlying conduct, the Commission considered the Respondents' lack of cooperation afforded the Commission staff. Specifically, both Greer and Conley denied that a reaffirmation occurred at the meeting, which is inconsistent with the Form 8-K furnished by Flowserve.
