I HEAR YOU’RE CALLING, BUT I CAN’T LISTEN IN

Pore over all the press releases, quarterly and annual reports, red herrings and proxy statements you like. If you’re not in on the conference call, you don’t really know what’s going on.

Conference calls have become the way management of public companies communicates with the investors who really matter to them: the institutional kind. That means buy- and sell-side analysts for major brokerages and portfolio managers for big funds. Assorted others sometimes get in on the call, too, including journalists and listeners who manage to obtain the 800 number that unlocks a company’s secrets.

So what’s wrong with conference calls? Nothing, if you’re a member of the in crowd and have time to listen. The problem — from the perspective of everyone who doesn’t qualify or lacks the time — is that what goes on during the call will determine which way a company’s stock moves in the very near term. If you plan to trade with a short investment horizon, being excluded from a conference call can be hazardous to your portfolio’s health.

Even the Securities and Exchange Commission is concerned. In a recent speech to a group of securities lawyers, SEC Chairman Arthur Levitt Jr. warned that some companies are using their conference calls selectively to disclose important market information not yet available to the public. Selective disclosure is a no-no, and if the SEC is paying attention, that means the inside-baseball crowd could be in trouble.

But Mr. Levitt is only getting at part of the problem. He’s worried about timing. What he also should fret over is that what gets disclosed in conference calls sometimes bears no relation to what is communicated to the investing masses. And that’s especially true when the subject is bad news.

For the uninitiated, here’s how it works: Typically a company will issue a press release for some major event: a “pre-announcement” of good or bad earnings, actual quarterly results, a major acquisition. Before the release, the investor-relations department will have contacted major investors with information on the call.

HERE’s how it works

Management will start by discussing the news (with other participants in listen-only mode) and then open up the call for questions from analysts. You can pick out the suck-ups because they’re the ones who begin their “questions” with comments like “Great quarter, guys” or “Congratulations on the deal, guys.” As Dave Barry would say, I’m not making this up.

It’s in the preliminary remarks and in answers to tough questions — they do occur — that the nitty-gritty seeps out.

I recently witnessed an example of how it works.

It happened on a call by Adaptec Inc., a Milpitas, Calif.-based maker of adapter cards that connect personal computers with disk drives that store a PC’s information.

Adaptec announced on a Thursday a fire-sale purchase of a U.S.-based unit of troubled Korean conglomerate Hyundai Group (motto: From Chips to Ships). The next day, Adaptec’s stock — already hammered by efforts of PC makers to reduce inventories — dropped 9% in heavy trading.

the story behind the story

Was Wall Street’s routine aversion to tech mergers to blame? Not really.

It took only a few minutes into a replay of Adaptec’s post-announcement conference call to figure out why the stock plunged. Before the Q&A even began, chief financial officer Paul G. Hansen dropped his bomblet: Revenues from the company’s semiconductor unit would be $10 million lower than previously expected. What’s more, a hoped-for increase in sales of adapter cards to offset the chip decline “is going to be increasingly difficult,” Mr. Hansen said.

Translation: Adaptec was saying clearly that previous earnings estimates needed to be lowered. Never mind that nifty acquisition. The stock’s gonna drop tomorrow.

And drop it did, after one analyst lowered his investment recommendation and another shaved his estimates. But nowhere did Adaptec address the very relevant financial information in its press release.

Like many companies, Adaptec doesn’t encourage individual investors to listen to its conference calls. That’s understandable. Not only might John Q. Investor ask silly questions, but prima-donna analysts have a way of clamming up when the non-professionals are on the line. Yet that doesn’t answer questions of fairness or selective disclosure.

Conference calls are a great way for companies to get the word out quickly to many investors at once and to add valuable insights to the number crunchers who need the data. But if companies keep sharing material information with the chosen few while neglecting to mention it to the net-worth challenged, their party call could be over.

Mr. Lashinsky is the technology-stocks columnist for the San Jose Mercury News. His column, Silicon Street, can be found at www.sjmercury.com.