Google\'s Earnings Incident Shines Light on a Stealth Industry

A little-known fact regarding corporate earnings was unexpectedly revealed last week when the third-quarter earnings for Google were filed with the Securities and Exchange Commission several hours ahead of schedule.

The filing hit the markets like a missile. Google's stock quickly fell 9 percent before trading was halted 21 minutes. Google quickly pointed the finger at R.R. Donnelley & Sons, the S.E.C. filings agent that Google has used since the company's first filing on April 29, 2004.

Considering the importance of earnings information, especially for widely held stocks like Google, the incident raises questions about whether the information could fall into the wrong hands. A growing number of companies are increasingly aware of this and are bringing the S.E.C. filings function in-house, at least when it comes to their earnings reports.

Doug Fitzgerald, a spokesman for R.R. Donnelley did not respond to several requests for comment. Donnelley, which dat es back to 1864, has long dominated this market. Estimates vary, but it is believed that it has as much as 70 percent of the filings market.

Until Thursday, it wasn't widely known that filings agents like Donnelley had access to a client's earnings in advance â€" sometimes as much as 48 hours early.

During that time, the filings agent “Edgarizes” the filing â€" that is, making various changes to the underlying code. That involves converting the file from standard HTML to something called EDGAR HTML so that the content can be submitted to the S.E.C.'s Edgar system.

Typically, several test files are sent to the S.E.C. to make sure everything is correct before the real filing is transmitted, said Rob Mossefin, a vice president of production at FilePoint, a filing agent based in Raleigh, N.C.

“Once you push the live filing button, it's like pushing the big red button. There's no getting it back,” Mr. Mossefin said. That appears to be exactly what happened on Thursday: a draft of Google's earnings â€" the filing said “Pending Larry quote” at the top to indicate that a quote was coming from the chief executive, Larry Page â€" was accidentally filed with the S.E.C. and went live instantly.

While Google's premature filing was the most prominent example, other incidents over the last few years have involved similar inadvertent releases of information. Most of those, however, have involved a company posting a release on its own Web site prematurely, instead of submitting a filing via the S.E.C.

Two years ago, Microsoft, the Walt Disney Company and NetApp used Web addresses similar to previous releases to upload current earnings information before they were publicly available. That gave anyone looking for the earnings an instant edge.

In other cases, the use of outside firms could lead to deliberate leaks of confidential insider information. Two years ago, a low-level employee at Google's outside inves tor relations firm, Market Street Partners, was connected to the convicted former hedge fund manager Raj Rajaratnam for providing details of earnings for Google and Akamai Technologies. Google quickly fired the firm.

Some of these issues could be resolved by bringing the filings processes in-house. On the same day that R.R. Donnelley filed earnings for Google, other companies including Boston Scientific, Halliburton, Sandisk and Southwest Airlines filed their earnings without using a filing agent.

Some, like Intel, which released its earnings last Tuesday, have been doing it this way for years. Most of these companies use third-party software platforms to handle the filings in-house.

“The more we can control the earnings release, the better off we are,” said an Intel spokesman, Chuck Mulloy, adding that Intel has been doing it this way for at least 18 years. “We own the liability and the risk, and this allows us to maintain the integrity of the report ing process. If there's a problem, it's our problem.”

An executive at Webfilings, a company based in Ames, Iowa, that sells an application that allows companies to self-file, used last week's events as a marketing opportunity, reminding customers that “this unnecessary mistake reinforces the need for public companies to completely control the release of their financial data,” as Mike Sellberg wrote on the Webfilings blog.

A spokeswoman for Google declined to comment on why the company doesn't handle its filings in-house. Kevin Callahan, a spokesman for the S.E.C., declined to comment on whether the agency was investigating Google's early release. It is also unclear whether the S.E.C. thinks there is a larger worry about earnings winding up in the wrong hands before being made public.

But given Google's technical prowess, it could easily move its earnings release in-house to prevent future problems.

“Our biggest challenge is the status quo,” said Matt Rizai, chief executive of Webfilings. “We represent technology that disrupts the industry.”

Michelle Leder is the editor of footnoted.com, a Web site that takes a closer look at companies' regulatory filings.