Tuesday, January 20, 2009

Apple’s New Disclosure Rule: Regulation Happy Talk

Happy talk, keep talkin’ happy talk,
Talk about things you’d like to do.

—“Happy Talk” from South Pacific, Lyrics by Oscar Hammerstein II

The facts, in brief:

In October 2003, Apple Founder and CEO Steve Jobs is diagnosed with pancreatic cancer—normally a swift death sentence. Fortunately, however, Jobs has a less-bad form (see “Steve Jobs: 42% vs. 4%” in these virtual pages, from December 18, 2008), which Jobs attempts to treat without surgery.

Meanwhile, ignoring Reg FD (Regulation Fair Disclosure, requiring material information to be disclosed publicly to all investors at the same time) Apple’s Board of Directors keeps mum on the fact that Steve Jobs has anything at all.

In July 2004, Jobs undergoes a very intense surgical procedure on his pancreas. In a subsequent email to the Apple community he says he is “cured.”

Now, the five-year survival rate for the type of pancreatic cancer Jobs apparently had is just 42%, which seems great compared to 4% for the bad kind—but is still less than 50-50. The 10 year survival rate is 22%, according to the National Cancer Institute. Hardly a “cure.”

And while anybody could look that stuff up, few apparently do: Wall Street doesn’t blink, and neither does most of the press. Steve had a “good” kind of pancreatic cancer, the story goes, and he’s cured. End of story.

But it is not.

In August 2006 Jobs speaks at Apple’s World Wide Developers Conference, looking decidedly gaunt, and the blogosphere goes wild. Before-and-After photos go up, and they are indeed striking.

Still, the company stonewalls: “Steve’s health is robust and we have no idea where these rumors are coming from,” Apple’s VP of Communications says.

In June 2008 Jobs appears at the same event, and looks even worse. Again, the blogosphere goes wild. Again, the VP of Communications stonewalls: Jobs had “a common bug,” she says, but thought it was important to attend the conference. He’s taking antibiotics, but he’s fine.

Late in 2008 the Apple reveals what, in Apple circles, is a jaw-dropping decision by Steve Jobs not to present the upcoming MacWorld keynote. A spokesman says “it doesn’t make sense for us to make a major investment in a trade show we’ll no longer be attending.”

Two weeks later, on January 5, 2009, however, Steve Jobs writes an open letter stating that what’s really going on is a “nutritional problem” caused by a “hormone imbalance”:

“The remedy for this nutritional problem is relatively simple and straightforward…. But, just like I didn't lose this much weight and body mass in a week or a month, my doctors expect it will take me until late this spring to regain it. I will continue as Apple's CEO during my recovery.”

That same day, the Apple Board of Directors issues a statement:

It is widely recognized both inside and outside of Apple that Steve Jobs is one of the most talented and effective CEOs in the world [emphasis added].

As we have said before, if there ever comes a day when Steve wants to retire or for other reasons cannot continue to fulfill his duties as Apple’s CEO, you will know it.

Apple is very lucky to have Steve as its leader and CEO[ emphasis added], and he deserves our complete and unwavering support during his recuperation. He most certainly has that from Apple and its Board.

Nine days later, however, Jobs sends out another letter—a quite different letter—to the Apple community. “My health-related issues are more complex than I originally thought,” Jobs writes, announcing he is stepping aside as CEO, but will “remain involved in major strategic decisions” until he can return.

So the benignly simplistic view of his deteriorating health put forth with all deliberation by Apple’s own PR flacks, as well as Jobs himself, turns out to have been prematurely optimistic, or hopefully naïve, or just plain wrong, or patently false.

And Wall Street is shocked, as the Wall Street Journal reports the next day:

Some investors said they were reeling from the disclosure. Charlie Wolf, a financial analyst with Needham & Co., said the "Steve Jobs health" factor could cause the stock to fall an additional 10% to 15%. He added, however, "If it were life threatening, I would anticipate that Steve would have resigned or the board would have called for his resignation."

Now, Charlie Wolf made his bones with one of the all-time great stock calls, recommending Apple stock before the iPod surge lifted the company back into the pantheon of Technology Greats, back when Michael Dell was saying the only thing to do with Apple was to liquidate the thing.

But any doctor who knows anything about what Steve Jobs has been going through will likely tell you that what Steve Jobs has is life-threatening—there is no such thing as a “good” kind of pancreatic cancer.

And how this is a shock to anybody—least of all Wall Street’s Finest—is hard to fathom, except for the fact that Apple’s Board of Directors appeared content to keep the Happy Talk flowing for nigh on five years.

Now, our concern here is not with the ghoulish aspects of Jobs’ health, or his desire to keep personal stuff to himself. For the sake of not only Apple, but the millions of individuals whose lives have been in some way transformed by the innovative products flowing largely through the narrow gate-posts of that man’s brain, I hope he lives another fifty years.

But of all the public companies in America, only two—Apple and Berkshire—so depend on their CEO that the health of that individual is front page news.

Indeed, Apple’s own Board of Directors publicly acknowledged its company is “lucky” to have “one of the most talented and effective CEOs in the world.”

How is it, then, that this same Board has allowed misleading happy talk to create a distorted picture of the well-being of that CEO, to the possible detriment of the company itself, and investors who may have been misled by the happy talk?

Who exactly decided it was a public company’s prerogative to allow what appears to have been highly misleading information—“cured,” “a common bug,” “hormone imbalance”—to be fed to the press and public, over a number of years?

In other words, when did Reg FD—Regulation Fair Disclosure, which requires material information to be disclosed to all investors at the same time—be replaced by Reg HT: Regulation Happy Talk?

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

I agree that Apple appears to have been a bit misleading but on the other hand, he has a right to his medical privacy. HIPAA vs. disclosure.

Anonymous said...

I'm not sure you're aiming at the right target. Reg FD requires that firms, if they disclose material information, must provide that information publicly. It does not impose a requirement to disclose all material information. So in your first case, Apple's board keeping mum would in no way violate Reg FD unless they had disclosed the information to some market participants privately.

I think the more relevant question is whether Apple's disclosures (or failure to disclose) violated Rule 10b-5 - did they knowingly provide false information about a material fact? I don't think it's hard to argue that significant changes in Steve Jobs's health represent a material fact. (I think that's more or less proven by the stock price reaction to the recent news.)

So, again, I wouldn't focus on Reg FD as I haven't seen any evidence that Apple was selectively disclosing news of Jobs's health. Instead, I'd investigate whether Apple was knowingly issuing misstatements about his health or failing to correct prior statements that (although true at the time of issuance) became untrue.

Mark B. Spiegel said...

Steve Jobs is that rare combination of a brilliant business guy and a brilliant (and creative) engineer. However (as Joe Nocera has written many times), he's also been insufferably arrogant when it comes to living up to his "public company responsibilities". Investors are always free to choose how much of this they want to tolerate, and I chose "zero" a long time ago and, admittedly, missed a great ride up. On the other hand, I just can't get comfortable investing in a company whose CEO thinks SEC regulations don't apply to him.

I guess that's what makes a market.

Kevin said...

Jeff, I think your characterization of Reg. FD is a bit flawed. Sure, if the Apple board or senior execs were privately discussing Steve Jobs' health with analysts, investors or others who would reasonably be expected to trade on the information (and saying something other than what the company was saying publicly), then FD would oblige the company to issue a press release or file an 8-K with the same information. But that does not appear to be a problem here. Reg. FD only applies if the company is providing material information to a certain class of people (analysts and the like), who might benefit from getting the information exclusively.

I think your gripe is that Apple is either (i) not providing material information about Jobs' health or (ii) actually providing misleading information. With respect to the first point, absent a duty to disclose, there is no general obligation for a company to disclose all material information about the company. This is a very sensible and good thing for most companies - otherwise you'd have all sorts of trade secrets, etc. floating around the SEC's website. A duty to disclose would exist if Apple were in the market - either buying back its shares or engaging in an offering. Since it is doing neither, I don't think there is an issue here.

With respect to the second point, it is at least arguable that Apple has misled the public (though I don't necessarily agree). Neither you nor I are doctors, and I know Apple is not in the business of doling out medical advice. To expect them to accurately and conclusively explain to shareholders what the consequences are of having islet cell tumors growing on your pancreas is in my opinion unreasonable. I think it is enough to tell people he has the condition - and then reasonable and prudent investors can jump over to WebMD and make their own prognosis.

Anonymous said...

According to Fortune Magazine, Jobs had a treatable form of cancer and "the vast majority of those who underwent the operation survived at least ten years."

See second paragraph: http://xrl.us/bec8n7

"During a routine abdominal scan, doctors had discovered a tumor growing in his pancreas. While a diagnosis of pancreatic cancer is often tantamount to a swiftly executed death sentence, a biopsy revealed that Jobs had a rare - and treatable - form of the disease. If the tumor were surgically removed, Jobs' prognosis would be promising: The vast majority of those who underwent the operation survived at least ten years."

Jeff Matthews said...

Yes, Fortune reported that unsubstantiated claim regarding a "vast majority" surviving 10 years.

But based on the SEER data, it appears to be wrong.


Christopher Caputo said...


The SEC must be reading your blog!

Anonymous said...

I would suggest this story points out a few important facts:

1) The idea that a picture is worth a thousand words comes to mind. Anyone who saw the pictures and didn't believe SJ was seriously ill was delusional.

2) Every public company that I've been in communication with over time will provide a positive spin, if possible. That includes those that are on the verge of bankruptcy. What's needed is a healthy dose of skepticism.

3) It's better to be outside of the cult then drinking the kool-aid. Every message board (esp.
barrons) that discussed this issue had the Newtonions pooh poohing his health.

4) Do your research. If anyone had actually polled an Oncologist, or for that matter more than one they would have gotten a much clearer picture of SJ's true health situation.

If you're paid in stock options, planes, or millions of dollars in cash on behalf of shareholders then your health is an issue - regardless of HIPPA.

Anonymous said...

Fortune Magazine broke the story in the first place, I think they got it right. As far as we know Job's cancer didn't spread, it was localized. According to various studies, the median survival for those patients is about ten years.

Glossary of Statistical Terms (seer.cancer.gov):
"Localized cancer is cancer that is limited to the organ in which it began, without evidence of spread. Regional cancer is cancer that has spread beyond the original (primary) site to nearby lymph nodes or organs and tissues. Distant cancer is cancer that has spread from the primary site to distant organs or distant lymph nodes."

The difference is so huge between the localized, regional and distant stages that the global median survival rate is meaningless. It's important to know precisely which stage is relevant to the patient's condition. For patients with localized disease the median survival is indeed 124 months, or 10 years, with a staggering 95% confidence interval (CI).

Population-based study of islet cell carcinoma (ncbi.nlm.nih.gov):
"The median survival was 38 months. By stage, median survival for patients with localized, regional, and distant disease were 124 (95% CI, 80-168) months, 70 (95% CI, 54-86) months, and 23 (95% CI, 20-26) months, respectively. […] stage, primary tumor location, and age at diagnosis were found to be significant predictors of survival."

A node-negative cancer is a cancer that has not spread. According to this other study, the median survival is 10 years.

Surgical experience with nonfunctioning neuroendocrine tumors of the pancreas (ncbi.nlm.nih.gov):
"Median survival for node-negative patients was 124 months, for node-positive patients 75 months, and for patients with metastasis to the liver 9 months. […] Patients with localized nonmetastatic disease should be considered for pancreatic resection as estimated median survival is 75 months or greater. Hepatic metastasis is a major predictor of survival."

Besides, Steve Jobs has a strong personality and a purpose for living, he has access to the best available medicine and will not go down without a fight.

Jeff Matthews said...

We're not rooting for the negative; let's hope you're right about the intangibles.

But this is all raises the original point: nobody really knows, and the company's public comments have not clarified anything.


Anonymous said...


Your point is right on and should be raised.

Regardless what Fortune thinks, Steve has a very serious personal challenge ahead of him. He should retire and spend time with his family. He cleaned up a tired board and a company struggling from senior executive incompetence.

His current board serves at his pleasure. Not one of them will do anything to upset him, never have, never will, even if it is inappropriate for the shareholders.

The good news is that even though Steve has absorbed all available public spotlight, there is much talent within Apple. It's a successful company and Steve knew enough to give them their heads. Great products will continue to flow. This note is written on a Mac. Keep them coming.

...and great blog.

Cheap Cell said...

Well shiver me timbers Steve jobs! It appears nothing is sacred anymore and a perk o your position is owing people explanations!