The SEC’s Regulation FD is one of those pesky little rules public companies are supposed to abide by. The basic idea behind this rule, called “FD” for “Fair Disclosure,” is to make sure that some parties don’t have an unfair advantage in buying and selling stock.
Although the rule itself has lots of details, it essentially requires an issuer (a public company) that discloses “material non-public information” to do so very promptly and very publicly. This means that a company can’t tell a person or a small group of people some information otherwise unknown to the general public, unless it makes that information widely available to everyone.
So for example, if a public company has developed new technology that could make the company a lot of money, they’ve got to communicate that information to everyone or no one. They can’t selectively disclose the information to people they want to give an advantage. When companies have important information that they’d like to tell, they typically will do press releases and make filings with the SEC. In this way, they’ve complied with Regulation FD.
Interoil Corp (NYSE:IOC) appears to have made a significant Regulation FD violation, and there’s hard proof of it. Today Barry Minkow and Fraud Discovery Institute did a press release and launched a website, InterNoOil.com.
FDI did an undercover investigation of Interoil, and caught the company’s Vice President of Investor Relations (the one guy at the company who ought to know more about Regulation FD than anyone else), Wayne Andrews.
Wayne Andrews was out trying to peddle IOC stock, and was salivating at what he thought was a client with $25 million to $50 million to invest. There’s a list of improper things he did during his sales pitch, and it was all legally recorded. He said:
“You know, if somebody, if the company involved in capital markets today, I’m probably not supposed to tell you what I think the share price can do, but I can tell you when I was an analyst, I covered the stock. I would talk to portfolio managers and used to tell them I believe that this is a several hundred dollar stock in the next three to five years.”
And he stated that InterOil, a company currently with a $1.3 billion market capitalization, is going to $10 billion:
“Off-the-shelf technology, very simple project and we’ve had an overwhelming amount of interest in it and if we could achieve, you know, if you calculate what the valuation is based on the sale, 3.6%, that values our interest something in the $10 billion range and we’re a 1.3 billion market cap company site.”
Even better, just days before Mr. Andrews engaged in this conversation, the company had issued a press release stating they were in the “early stage” of evaluating a reservoir and determining what volumes it might produce. Yet in the conversation, Mr. Andrews says something completely different:
“I’ve never seen a gas and condensate reservoir where that was not the case. So we tested 13 barrels per million up at the top, 2000 feet above where we are today. We expect there to be much richer condensate and it’s not like we’re hoping to find that. It’s natural that we should find that and that condensate richness or condensate ratio is not factored into our reserve report. The condensate itself could be worth more than all the gas and if we find that we can actually flow any kind of meaningful barrels of crude oil, that helps as well, but the condensate could drive all the economics for this project without and the gas would kind of get (unintelligible-42:48). So what we’re, what I’m suggesting is you said well maybe, you know, you will have an idea that things are going well. Well, I can tell you I think things are going well and I think we’re going to get a good test here and not just because, not just because I’m wishful or hoping for it. I think it’s natural and it should happen and it will be meaningful and you should, the best way to test it is doing exactly what we’ve just done, set casing, announce that that’s done and literally you should be growing this any day.
It would seem to me that this is very problematic for InterOil.