Sunday, July 09, 2006

Murdoch meeting raises disclosure issues


NEW YORK (Reuters) - News Corp. shareholders learned how much revenue a closely watched Internet division would generate -- if they were lucky enough to be invited to a meeting in Australia last week with Chief Executive Rupert Murdoch.

Owners of the rest of the company's 3.2 billion outstanding shares were left in the dark until a day later, when UBS analyst Aryeh Bourkoff published a research note about the proceedings that was furnished to U.S.-based media.

The disclosure of sales targets for the unit that oversees the popular online teen hangout -- responsible for much of Wall Street's enthusiasm for the long term prospects of News Corp.'s stock -- has spurred experts on U.S. securities law to question whether Murdoch had given investors in Australia an advantage over those in the U.S.

While four experts contacted by Reuters stopped short of saying Murdoch had broken U.S. selective disclosure laws, they said the incident merited further probing, particularly given that News Corp. shifted its domicile from Australia to the U.S. in 2004.

"I see a fair amount of smoke -- I wonder how much fire is there," said James Cox, a securities law professor at Duke University. "Certainly, if I were on the enforcement staff of the SEC, I would want to collect more information from News Corp. to (learn) exactly what transpired."

The U.S. Securities and Exchange Commission (SEC) said it does not comment on individual companies.

Global companies like News Corp. hold investor meetings around the world all the time. When companies disclose significant information at such meetings, they typically issue news releases or a regulatory filing simultaneously or immediately afterward to inform the public.

"Most people cure these with 8-Ks," said Hillary Sale, a corporate law and finance professor at the University of Iowa College of Law, referring to a type of regulatory filing for the disclosure of information that could be "material" to a company's prospects.


At issue is whether Murdoch's statement -- that Internet revenue in fiscal 2007 would rise to nearly $500 million -- constitutes "material" non-public information, experts said.

"If you're talking about MySpace, a hot Internet-based property and you're talking about changes in revenue projection that's significantly beyond what was in the public domain before, I'm certainly curious whether that would be material," said Donald Langevoort, a law professor at Georgetown University. "It could be."

In 2000, the SEC approved a law on fair disclosure, Regulation FD, which bars companies from selectively disclosing information that an investor would consider significant in determining whether to buy, sell or hold a stock.

Two News Corp. investors said Murdoch's Sydney meeting did little to move shares, as the forecast for Internet revenue represent less than 2 percent of the $27 billion that analysts expected News Corp. to generate by fiscal 2007.

"Most people thought it would be somewhere around there," said Larry Haverty, a portfolio manager at Gamco Investors Inc., which owned 351,000 Class B shares and 19.3 million Class A shares of News Corp at March 31, 2006.

Another investor, Morris Mark of Mark Asset Management, agreed, but called for better disclosure of News Corp.'s Internet financial performance, which it does not break out on a consistent basis yet.

But there's little doubt on Wall Street that fast growing MySpace is key News Corp.'s future. "It's very important strategically and yet another example of how News Corp and Rupert Murdoch is focused on its vision and not what makes shareholders happy in the near term," Richard Greenfield, an analyst at Pali Research said.

A New York-based spokesman for News Corp. said Murdoch's Internet revenue forecast had not previously been disclosed, but the company did not consider it materially relevant.

"Fox Interactive Media's revenues are currently a little over 1 percent of our total revenues," a News Corp. spokesman said. "By no stretch of the imagination could that be regarded as material to a company of our size. That was evidenced by the complete lack of reaction in the market."

Greg Baxter, a spokesman in Australia for News Corp., said about 55 analysts and investors attended the meeting.

By Thursday, more than a week following the meeting, the New York-based media conglomerate had not issued a news release, an SEC filing or any transcript of the meeting.

Murdoch's remarks were enough for UBS to raise its revenue forecast for Fox Interactive Media to $465 million for fiscal year 2007, from its earlier estimate of $370 million.

The law's broad definition of "material" makes it hard to enforce, said securities experts. Late last year, a Reg FD case the SEC filed against software company Siebel Systems Inc. was dismissed by a district court on grounds the information in question was not that different to already public information.