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.