Regulation FD requires full disclosure of securities issuers’ communications with analysts for the supposed purpose of protecting the hypothetical ordinary investor. It’s one of those regulations that sounds good on the surface, but fails miserably in practice.
The truth is that Reg FD attempts to regulate statements that perpetuate a myth — i.e., that the securities markets are a level-playing field for the ordinary individual investor. In fact, securities markets are hopelessly rigged against the individual investors, who really have no business attempting to compete in those markets against the pros. Rather, study after study has shown that the individual investor would be much better off simply investing in index funds rather than operating under the myth that the securities markets are fairer for the ordinary investor than, say, playing the slots in Las Vegas.

Nevertheless, most securities regulation is premised on the assumption that the little guy investor needs to be protected from being taken advantage of by the sharpies. Without such regulations, the theory goes, the ordinary investor will think that the securities markets are rigged and will not participate, which hurts those markets. Larry Ribstein aptly coined this syndrome of regulating statements that perpetuate the myth that securities markets are safe for ordinary investors as “the great securities regulation scam.” As Larry notes in this post:

In short, capitalism and its regulators desperately need to hide fundamental truths about investing from the little guy. You might say the whole setup is a vast conspiracy that depends on investors being foolish and irrational and does everything it can to perpetuate this irrationality.

With that backdrop, Bruce Carton of the Securities Litigation Blog and Larry had some fun with the announcement last week that the government has broadened its investigation into Dreamworks to include Pixar’s over-estimation of sales of its Incredibles DVD and “whether showing a gathering of analysts a prescreening of a movie constitutes disclosure of material information to a group of select people.” Larry comments:

How far is this going to go? Twenty years ago when I lived in Macon, Georgia, we used to get a lot of previews. I think it was the “play-in-Peoria” phenomenon. Maybe that’s still true. I remember seeing a sneak preview of ET, before I’d seen any publicity on the film. I decided that it was shlock filmmaking, not up to Spielberg’s earlier Duel, but was convinced it would be phenomenally successful. I almost went and bought some stock, and regretted not doing so for years.
Now I wonder, would this have been wrong of me? Even criminal?

And while regulating the pre-screening of movies borders on the absurd, the criminalization of similar statements is downright scary. As we recently witnessed in the Enron Broadband trial — which largely involved prosecution of statements made to securities analysts — these are not easy cases to prosecute, even where the government has promoted an effective propaganda campaign in support of its case. As a result, prosecutors — whose careers may depend on a successful prosecution in such a high-profile case — are highly incentivized to cross the line and utilize abusive tactics to buttress their difficult case, such as intimidating witnesses, eliciting false testimony from a key witness, and violating limine orders.
When such government abuse results from enforcement of laws to regulate these statements, it makes you appreciate the wisdom behind a certain Constitutional Amendment that really ought to protect those statements from regulation.