UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 46897 / November 25, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10950

In the Matter of Raytheon Company and Franklyn A. Caine, Respondents.

: : : : :

ORDER INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Raytheon Company ("Raytheon") and Franklyn A. Caine ("Caine") (collectively, the "Respondents"). Accordingly, it is hereby ordered that public cease-and-desist proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted against Raytheon and Caine.

II.

In anticipation of the institution of these public cease-and-desist proceedings, Raytheon and Caine have each submitted an offer of settlement ("Offers of Settlement"), which the Commission has determined to accept. Solely for the purposes of these proceedings, and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings set forth herein, except that Raytheon and Caine admit the jurisdiction of the Commission over them and over the subject matter of these proceedings, Raytheon and Caine consent to the entry of this Order Instituting Public Cease-And-Desist Proceedings, Making Findings, and Imposing A Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order").

III.

On the basis of this Order and the Offers of Settlement submitted by Raytheon and Caine, the Commission finds that:

A. SUMMARY

1. This matter involves violations of Regulation FD by Raytheon through its Chief Financial Officer, Caine. Caine selectively disclosed quarterly and semi-annual earnings guidance, the prototypical disclosures Regulation FD aimed to prohibit, to sell-side equity analysts (collectively, the "Street"). Caine's disclosures concerned Raytheon's estimate of its expected quarterly distribution of earnings per share ("EPS") for 2001 overall, and for the first quarter in particular. Specifically, Caine communicated to the analysts that their first quarter EPS estimates were too high.

2. On February 7, 2001, Raytheon conducted an investor conference where it reiterated annual EPS guidance, but did not provide any quarterly EPS guidance. After the February 7, 2001 investor conference, Caine directed his staff to contact each sell-side analyst whose estimates are included in Thomson Corporation's First Call Service ("First Call") and request copies of the analysts' quarterly model of Raytheon. Caine then arranged and conducted a one-on-one call with each analyst. During the calls that ensued, Caine knew that Raytheon had provided no public quarterly earnings guidance for 2001, that the analysts' first quarter 2001 EPS estimates generally exceeded Raytheon's internal estimate, and that the analysts' 2001 quarterly earnings estimates reflected a less seasonal quarterly distribution than 2000 results.

3. During the one-on-one conversations with analysts, Caine delivered substantially the same earnings information to each analyst: that in 2001 Raytheon's earnings would likely have the same seasonal distribution as in 2000, and, more specifically, that Raytheon would generate one-third of its EPS in the first half of the year and the remaining two-thirds in the second half of the year. Caine also told certain analysts that their estimates for first quarter earnings or revenue for particular divisions were "too high," "aggressive," or "very aggressive."

4. After their conversations with Caine, the analysts revised their estimates. The revised estimates caused the Street's consensus to fall to one penny below Raytheon's internal 2001 first quarter EPS estimate.

B. RESPONDENTS

5. Raytheon, a Delaware corporation headquartered in Lexington, Massachusetts, is a leading defense contractor. During the first quarter of 2001, Raytheon had two classes of common stock, Raytheon A and Raytheon B, registered with the Commission pursuant to Section 12(b) of the Exchange Act. Raytheon securities are included in the S&P 500 index.

6. Caine, age 52, has been Raytheon's Chief Financial Officer since April 1999.

C. FACTS

7. From 1999 to 2000, the price of Raytheon stock dropped following a series of company warnings that Raytheon's quarterly and yearly EPS would miss analysts' expectations. Since then, Raytheon's ability to meet the Street's consensus estimates has been used as a benchmark of Raytheon's recovery. <

At The Time Raytheon Called The Analysts, Raytheon's Internal First Quarter 2001 EPS Estimate Was Lower Than The Street's Consensus.

8. Raytheon maintains internal quarterly EPS estimates, which Caine receives on a regular basis. From December 2000 to mid-February 2001, Raytheon maintained an internal earnings estimate of $0.19 per share for the first quarter of 2001. Raytheon also monitors the Street's consensus quarterly earnings estimates as reported by First Call. As with Raytheon's internal estimates, Caine is informed of the Street's consensus quarterly earnings estimates. On February 9, 2001, First Call reported a consensus estimate of $0.31, i.e., $0.12 above Raytheon's internal estimate. In mid-February, due in large part to the gain on the sale of a business, Raytheon changed its internal first quarter 2001 earnings estimate to $0.28, $0.03 below the Street's consensus estimate as then reported by First Call. Caine was informed by his staff of the variances between Raytheon's estimate and the Street's consensus estimate.

Raytheon Provided No Public Guidance Regarding Quarterly EPS Distribution For 2001.

9. On February 7, 2001, Raytheon conducted an investor conference that was publicly available via web-cast. During the conference, Caine reiterated guidance that Raytheon's 2001 annual EPS would be between $1.55 and $1.70. However, Raytheon did not disclose how it expected its earnings would be distributed quarterly throughout the year. At no time before or during the first quarter of 2001 did Raytheon publicly disclose guidance regarding its first quarter EPS or its 2001 quarterly or semi-annual earnings distribution.

10. Before Caine conducted the one-on-one conversations with analysts, analysts covering Raytheon attributed a general "seasonality" to Raytheon's quarterly earnings pattern where the first quarter generally was the weakest and the fourth quarter generally was the strongest. According to that pattern, Raytheon, like other companies in the aerospace-and-defense sector, produced earnings in an ascending slope where profits increase on a quarterly basis throughout the year. Uncertain to analysts trying to forecast Raytheon's earnings, however, was how steep that earnings slope would be in 2001. In 2000, the slope was steep -- Raytheon generated one-third of its earnings in the first half of the year. Prior to their one-on-one conversations with Caine, analysts projected that Raytheon's 2001 earnings distribution would be more evenly distributed, i.e., less seasonal, than in 2000.

Raytheon Collected Analysts' Models And Initiated One-On-One Conversations with Analysts Who Cover Raytheon.

11. After the February 7, 2001 investor conference, Caine instructed his staff to collect models from each sell-side analyst whose estimate is included in the Street's EPS consensus estimate and to schedule phone calls with those analysts. Caine's staff collected the analysts' models and arranged the one-on-one calls. In addition, Caine's staff created a spreadsheet on which they monitored the quarterly EPS projections contained in each sell-side analyst's Raytheon model, as well as Raytheon's internal projections. Caine's staff brought the spreadsheet to the one-on-one conversations that ensued and updated the spreadsheet as analysts changed their quarterly projections.

Raytheon Selectively Disclosed Guidance Concerning Its Quarterly And Semiannual Earnings Distribution Generally And First Quarter Earnings in Particular.

12. Between mid-February and March 5, 2001, Caine conducted one-on-one calls with eleven of the thirteen sell-side analysts that covered Raytheon and whose estimates were part of the consensus estimate maintained by First Call. During most of the analyst calls, Caine discussed Raytheon's estimated quarterly and semiannual distribution of earnings for 2001. Most often, Caine disclosed that, in 2001, Raytheon expected the distribution of earnings among the quarters to follow the same seasonal pattern as in 2000, i.e., that Raytheon would generate one-third of its earnings in the first half of the year and two-thirds of its earnings in the second half of the year. Previously, each analyst had estimated that Raytheon's quarterly earnings distribution would be less seasonal in 2001 than it had been in 2000, i.e., that Raytheon would generate more than one-third of its 2001 earnings in the first half of the year. During or after the call, each analyst revised his or her earnings estimates to conform to Caine's disclosure by moving earnings from the first half of the year to the second half of the year, generally leaving total EPS for the year unchanged.

13. Caine also communicated more specific guidance concerning Raytheon's 2001 first quarter EPS by commenting on analysts' first quarter 2001 EPS and revenue estimates. Caine told one analyst, for example, that the analyst's 2001 first quarter EPS estimate was too high and not in compliance with Raytheon's guidance, even though Raytheon had provided no guidance. Caine told two other analysts that their first quarter 2001 revenue estimates for particular Raytheon divisions, including its largest division, were "aggressive" or "very aggressive." Similarly, Caine told one analyst "the business will be back-end loaded" when the analyst told Caine the analyst's 2001 first quarter revenue estimate. Each analyst receiving one of these disclosures modified their models by lowering their 2001 first quarter revenue and EPS estimates.

14. In one instance where an analyst was out of town, Caine made the selective disclosure to the analyst's assistant who, a week later, still had not lowered the firm's first quarter estimate. Caine sent the analyst an e-mail that repeated the earnings guidance: "When we spoke about your model, I think we said that you should expect our earnings profile to be about the same as it was in 2000 - that is, we generated about one-third of our EPS in the first half of the year. I notice that you're WAY above that." (Emphasis in original.)

Raytheon's Selective Disclosures Enabled Raytheon To Beat the Street's Consensus 2001 First Quarter EPS Estimate By One Penny

15. After their one-on-one conversations with Raytheon management, each analyst lowered his or her first and second quarter EPS estimates, and increased EPS in the second half of the year. Those analysts that had published their estimates on First Call prior to their one-on-one call submitted revised estimates to First Call. Those analysts who had not yet published estimates on First Call introduced quarterly EPS estimates on First Call containing the EPS numbers from their revised Raytheon model. Generally, analysts published First Call notes discussing or containing their revised Raytheon EPS estimates. On February 14, 2001, one analyst indicated in a First Call report that the analyst had revised the analyst's 2001 quarterly earnings profile based on a discussion with Raytheon management. In addition, in at least two instances, analysts communicated directly with their firm's sales force to discuss their revised Raytheon EPS estimates. The following chart summarizes how the analysts changed their Raytheon first quarter 2001 EPS estimates after their one-on-one conversations with Caine:

Firm	Pre-Conversation First Quarter EPS Estimate	Post-Conversation First Quarter EPS Estimate	Change
A	.34	.26	(.08)
B	.28	.25	(.03)
C	.27	.25	(.02)
D	.30	.27	(.03)
E	.29	.26	(.03)
F	.34	.25	(.09)
G	.33	.25	(.08)
H	.35	.25	(.10)
I	.28	.25	(.03)
J	.32	.28	(.04)
K	.28	.27	(.01)
Average	.31	.26	(.05)

16. By March 12, 2001, the Street's 2001 first quarter EPS consensus estimate had dropped from $0.31 to $0.27, a penny below Raytheon's internal forecast. The Street's $0.27 first quarter EPS consensus remained unchanged until Raytheon reported first quarter EPS of $0.28 in April 2001. In a publicly available conference call moderated by Caine discussing Raytheon's first quarter results, Raytheon stated that it was "pleased to report another quarter of progress toward our goal of restoring your confidence in our company. This quarter represents the fifth straight quarter we have met or exceeded our commitments to you."

17. Raytheon contacted the two remaining sell-side analysts whose estimates were included in the Street's consensus but was unable to schedule one-on-one calls with them before a news service reported that analysts were reducing their first quarter earnings estimates after receiving one-on-one calls from Caine. After the story appeared, Raytheon stopped the one-on-one calls. Unlike the analysts who received selective disclosures from Raytheon during the first quarter, the two sell-side analysts who did not have private conversations with Raytheon maintained the same quarterly EPS estimate throughout the quarter. One of those analysts maintained a first quarter 2001 EPS estimate of $0.27, and the other maintained a first quarter 2001 EPS estimate of $0.35.

18. On February 26 and 28, 2001, Caine had conversations with a sell-side analyst covering Raytheon. As with Caine's other conversations with sell-side analysts, after the conversations, the analyst lowered the analyst's first and second quarter EPS estimates and raised the analyst's third and fourth quarter EPS estimates.

19. On the morning of March 1, 2001, before issuing a First Call Note, that sell-side analyst participated in the firm's "morning call" in which analysts convey information they feel should be of interest to the firm's institutional sales force. In the morning call, the analyst discussed three items relating to Raytheon: (1) that the analyst was lowering the analyst's first quarter EPS estimate from $0.28 (already below the Street's consensus) to $0.25 (the lowest on the Street); (2) that Raytheon's first quarter cash flow may be worse than the Street then realized; and (3) that the analyst believed, based on publicly available information, that Washington Group, due to its deteriorating financial condition, may seek remuneration from Raytheon for claims relating to the purchase of Raytheon's engineering and construction business ("RENC").

20. After hearing the analyst's March 1, 2001 morning call, the firm's sales force sent e-mails to institutional customers regarding the morning call. For example, one e-mail sent from the firm's sales force to its institutional clients contained a section labeled "HIGHLIGHTS" stating, in part, "RTN has problems in qtr, stock at risk." (Emphasis in original.) Another e-mail from the firm's sales force stated "Short idea. Cutting 1Q$.28 to $.25 (low on street), with downward bias. $1.66 2001. Cash flow for 1Q will be lower than expected. CF neg in 1Q to $700-$800MM. Recent deal: RENC problems. Washington Group bought and are now on `credit watch.' (Emphasis in original.) They wrote down $700MM. Could seek some form of compensation relief from Raytheon. Expect stock to high $20s." That day, recipients of e-mails concerning Raytheon from the firm's sales force sold more than 2 million shares of Raytheon stock.

21. After the March 1, 2001 morning call, the price of Raytheon B stock fell approximately 6%, from $32.80 to $30.84, and the price of Raytheon A stock fell approximately 3%, from $31.30 to $30.50.

D. APPLICABLE LAW

22. Regulation FD prohibits certain issuers from selectively disclosing material nonpublic information to securities professionals. In particular, Rule 100(a) of Regulation FD provides that whenever an issuer, or a person acting on an issuer's behalf, discloses material nonpublic information to securities industry professionals, or holders of the issuer's securities who may trade on the basis of the information, the issuer must make public disclosure of that same information (1) simultaneously for intentional disclosures or (2) promptly for non-intentional disclosures. See Regulation FD, 17 C.F.R. §243.100 (2001).

23. One of the primary purposes of Regulation FD was to prohibit the issuer practice of selectively providing guidance to securities analysts regarding earnings forecasts. In the adopting release for Regulation FD, the Commission explained:

One common situation that raises special concerns about selective disclosure has been the practice of securities analysts seeking "guidance" from issuers regarding earnings forecasts. When an issuer official engages in a private discussion with an analyst who is seeking guidance about earnings estimates, he or she takes on a high degree of risk under Regulation FD. If the issuer official communicates selectively to the analyst nonpublic information that the company's anticipated earnings will be higher than, lower than, or even the same as what analysts have been forecasting, the issuer likely will have violated Regulation FD. This is true whether the information about earnings is communicated expressly or through indirect "guidance," the meaning of which is apparent though implied.

Final Rule: Selective Disclosure and Insider Trading, Exchange Act Release No. 34-43154, 65 Fed. Reg. 51,716, 51,721 (Aug. 15, 2000) ("Adopting Release").

Materiality

24. Regulation FD applies the definition of "materiality" established by existing case law. Id. Information is material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or if the information would significantly alter the total mix of available information. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). A fact may be material even if it would not have changed an investor's ultimate investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

25. Raytheon's disclosures to analysts were material, by reason of (1) the subject matter of the information, i.e., earnings guidance, (2) Caine's conduct in reaching out to each analyst to deliver the same message, (3) the consistent reaction of the analysts to lower their first quarter estimates after receiving Raytheon's guidance, (4) the decision of two analysts to announce the lowering of their first quarter estimates in calls to their firms' sales forces, and (5) the e-mails sent by one firm's sale's force following an analyst call discussing the firm's reduced estimate. Because these factors establish materiality, the Commission need not reach the issue of whether the trading and price decline in Raytheon stock on March 1, 2001 was attributable to Raytheon's earnings disclosures.

Non-Public

26. Information is nonpublic if it has not been disseminated in a manner making it available to investors generally. See, e.g., SEC v. Mayhew, 121 F.3d 44, 49 (2d Cir. 1997).

27. Here, the earnings information that Raytheon selectively disclosed was nonpublic. At no time before or during the first quarter of 2001 did Raytheon publicly disclose any guidance regarding its first quarter EPS or its 2001 quarterly earnings distribution. In particular, Raytheon never publicly disclosed that one-third of its earnings would occur in the first half of 2001 and that Raytheon's 2001 semiannual distribution of earnings would be similar to that of 2000. In addition, Raytheon had never publicly disclosed any guidance concerning anticipated first quarter earnings or revenues for particular business units. Therefore, Raytheon's communications to analysts that their revenue projections for business units were "high," "aggressive," or "very aggressive," revealed nonpublic information.

Raytheon Failed To Make a Simultaneous Public Disclosure.

28. Rule 100 of Regulation FD requires issuers to make a public disclosure simultaneously when an issuer discloses material nonpublic information intentionally, and promptly when an issuer discloses material nonpublic information non-intentionally. Under Rule 101(a) of Regulation FD, a selective disclosure is "intentional" when the person making the disclosure knows, or is reckless in not knowing, that the information being communicated is both material and nonpublic. 17 C.F.R. §243.101(a). Because the disclosures were "intentional," Raytheon was required to make a simultaneous public disclosure. Here, Raytheon made no public disclosure of the earnings information it disclosed selectively to the analysts.

E. CONCLUSIONS

29. As described in Section III, Raytheon violated Section 13(a) of the Exchange Act and Regulation FD.

30. As described in Section III, Caine was a cause of Raytheon's violations of Section 13(a) of the Exchange Act and Regulation FD.

IV.

In view of the foregoing, the Commission finds that it is appropriate to impose the sanctions specified in the Offers of Settlement submitted by Raytheon and Caine.

Accordingly, IT IS ORDERED that:

A. Raytheon cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act or Regulation FD; and

B. Caine cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violations and any future violations of Section 13(a) of the Exchange Act or Regulation FD.

By the Commission (Commissioner Campos dissenting as to the lack of a penalty).

Jonathan G. Katz
Secretary

http://www.sec.gov/litigation/admin/34-46897.htm