BY ALISON MAXWELL
WASHINGTON — Abercrombie & Fitch shares bounced back Wednesday after plunging Tuesday on news that the Securities and Exchange Commission had launched a formal investigation into the company.
A&F’s shares jumped 3 1/8 to 27 3/8 — a nearly 13 percent gain —Wednesday on The New York Stock Exchange. The stock was also upgraded to “recommended list” from “market outperform” by Goldman Sachs. This followed a drop of 4 1/16 on Tuesday.
At the same time, public outcry over A&F’s controversial catalog continued, as the Chicago City Council passed a resolution Wednesday “imploring the public and parents especially” to boycott A&F until it reconsiders its advertising tactics.
In its resolution, the Council said that A&F’s Christmas catalog includes sadomasochism, sex tips from a pornography star and nude models, “none of which are related to the promotion of Abercrombie’s particular line of clothing.”
The resolution calls for the boycott of A&F until the company withdraws the catalog from circulation. The controversy over A&F’s “Naughty or Nice” catalog has stirred protests from politicians in Michigan, Illinois, Missouri and Arkansas, some of whom have urged consumer boycotts of the retailer because of images contained in the book. Michigan’s attorney general also ordered the retailer not to sell the catalog to minors last month. Shot by Bruce Weber, it features photos and articles of a sexual nature that some have found offensive or inappropriate.
Regarding the investigation, A&F is under an SEC probe for an Oct. 8 selective disclosure incident in which a company executive allegedly disclosed sales trends to an analyst at Lazard Freres but not to the general public. This has triggered a host of shareholder lawsuits charging that A&F committed securities fraud when its investor relations director disclosed information about declining sales trends to one analyst but not to the public.
In order to prove selective disclosure, as the lawsuits charge, the SEC has to show that a company insider profited financially from the disclosure. While this does not appear to be the case, the lawsuits charge that Lazard’s top clients were privy to the inside information.
While insider-trading cases are not that common, the SEC has been trying to level the field between retail investors and institutional investors, who have greater access to information that could alter a company’s share price.
At a hearing in Washington on Wednesday, the SEC proposed new rules that would bar companies from selectively disclosing material information.
The proposal, called Regulation FD, would require that when a company discloses material information, it must do so through public disclosure rather than limiting initial access to the information to a privileged, select few, according to the SEC. Under the proposed rules, if a company learns that it has made an unintentional selective disclosure, it must make that information known to the public immediately.
In many reported SEC incidents, companies have “selectively disclosed” information like upcoming earnings figures in conference calls or meetings open only to certain securities analysts and not members of the public and media. Those who possess that information, the SEC said, have an unfair advantage over other investors.
“The all-too-common practice of selectively disseminating material information is a disservice to investors and undermines the fundamental principle of fairness,” SEC chairman Arthur Levitt said at an open meeting to discuss the rules.
The regulations are aimed at putting an end to an emerging culture that “allowed the pressure to meet earnings expectations to come before long-established precepts of financial reporting and ethical restraint,” Levitt said.
The selective disclosure proposal would make it easier for the SEC to take action against companies. Currently, the agency must prove a company expected to gain something in exchange for selectively releasing important news.
Under Regulation FD, companies can meet the public disclosure requirement by filing the information with the SEC, issuing a press release or providing public access to the conference call or meeting.
After the proposed rule is published in the Federal Register, the public has 90 days to comment. Following the comment period, the SEC will consider approving the rule.