Grocers assailed for refusing to disclose secret revenue pact.

In their zeal to maintain an advantage in a six-week-old labor dispute, have the major grocery chains run askew of federal securities laws?

The Securities and Exchange Commission won't comment, but some high-profile securities attorneys say that the failure to broadly disclose a revenue-sharing pact by the parent companies of Ralphs, Pavilions, Albertsons and Vons appears to skirt disclosure requirements that have been on the books since 1934.

As reported in the Business Journal last week, the three firms reached a secret "pain-sharing agreement" sometime before unionized workers went on strike Oct. 10 at Safeway Inc.'s Vons stores and were locked out of Kroger Co.'s Ralphs and Pavilions stores and Albertsons Inc. stores the next day.

Under the pact, the chains agreed to share revenues if one or more were targeted by a labor action and the others weren't. When the United Food and Commercial Workers pulled their pickets from Ralphs on Oct. 31--an attempt to disrupt the grocers' unity and increase pressure on Albertsons and Safeway--Ralphs already had the revenue-sharing agreement in place.

Such arrangements are legal under federal labor laws, but questions surround their uneven disclosure. While the grocery chains have said nothing about the agreement to the public or to the union, Safeway has disclosed its existence privately to several securities analysts. Such information could be used to reassure investors in Safeway and Albertson's, whose still-picketed stores in Southern California have drawn sparse business compared with Ralph's.

"The sharing of profits has to be disclosed," said Gerald Bolts, a partner with L.A.-based Bryan Cave LLP and a former regional administrator of the SEC. "Shareholders and investors need to have that information. Failure to do so would be a violation of the anti-fraud provisions of the (1934) Securities Act."

Bolts, who now represents public companies, broker-dealers and investment firms, added that securities laws would apply even if the revenue sharing would not have a significant, or "material," impact on company results. That's because the laws are also designed to help investors make informed decisions, he said.

Stakes rising

The question of revenue sharing becomes even more crucial as stores enter the holiday season, their busiest time of the year. "A reasonably prudent investor who is seeing an influx of business to Ralph's would say that now is a good time to buy Kroger stock," said Jeff Winked, a Century City employee-rights lawyer familiar with securities laws.

"Once it comes to light that Ralph's is giving away revenues, the investment looks far less attractive," Winked added. "To me, if the existence of a pact would alter one's investment decision, it's material and should have been disclosed under the securities laws."

As of late last week, the grocery stores and the union representing 70,000 striking workers were still stalemated. Three days of talks between the two sides with federal mediator Peter Hurtle were suspended on Nov. 12.

Last week, spokespersons for Vons and Kroger made the chains' first public disclosure of the existence of the revenue-sharing agreement.

"All I can tell you is that, yes, there is an agreement and I can't provide any details about it at this time," Kroger's director of corporate communications, Gary Rhodes, told the Business Journal. "I can't comment beyond that at this point."

Sandra Calderon, a spokeswoman for Vons, defended the revenue-sharing agreement's legality but did not address questions about its disclosure.

Albertson's spokeswoman Stacie Sevenfold said the chain "(has) and will fully comply with all requirements within the appropriate timeframe."

A lawyer for Ralph's said he did not believe any violations had occurred.

"I don't know anything about securities law but I have no reason to believe (the pact) should have been revealed to anyone," said Timothy Ryan, a partner in the L.A. office of Morrison & Forester LLP.

Since the union pulled its pickets from Ralph's, Kroger shares have risen by 5 percent, to close at $18.17 as of Nov. 20. Safeway shares have fallen 3.8 percent to $20.30 and Albertson's were up less than one-half a percentage point, to $20.15.

John Hein, the SEC's deputy director of public affairs, would not say way whether the commission is looking into the matter and refused to discuss the grocery chains specifically. In general, he said, securities laws "require public companies to disclose material information, which is defined as what the reasonable investor needs to know in order to make an informed decision about an investment."

The law has been amended several times over the years, most recently with the Sarbanes-Oxley Act, which was approved in July 2002 to add teeth to existing statutes. In addition, the SEC has beefed up regulations barring public companies from making selective disclosures to certain brokers or analysts.

As a result, many companies have taken steps to limit the information they share with analysts that isn't being disseminated to the general public. In the case of the grocers' revenue-sharing agreement, "I think you should make a press release because it's hard to know who all the analysts and brokers are," Bolts said.

Incidental disclosure

The chains did not go out of their way to alert Wall Street analysts of the revenue-sharing pact. A.G. Edwards Inc. research analyst Jack Russo said he learned of the agreement within the last couple of weeks--long after the pact was adopted--after he questioned why the union had pulled its picket lines off of Ralph's.

"We were wondering about the whole episode and why they were picking on Safeway," Russo said. "We essentially called Safeway and asked them. They came back and said it really doesn't matter because we're sharing anyway. I was a little surprised but I think it's a pretty smart move."

Not all analysts believe the chains are required to disclose the revenue sharing pact to the general public, because the impact in a regional dispute isn't significant enough to affect the parent companies' stock values.

"What is generally released (even to) investors is news that has important financial implications," said Mark Hugh Sam, an equities analyst for Chicago-based stock researcher Morningstar Inc. "(It) is not necessarily something they had to (reveal)."

UFCW officials have suspected for months that a revenue sharing agreement was in place. But they acknowledged they had no proof because they could not persuade employers to hand over their collective bargaining agreement.

Late last week, the union had launched an investigation into whether any federal laws were violated regarding disclosure or antitrust issues, said Joe Paller, a partner with L.A.-based Gilbert & Sackman, which represents several UFCW locals.

Last month, the union also filed a complaint with the National Labor Relations Board alleging unfair labor practices on behalf of the chains.

"During the negotiations, we made it a point to ask for that information and it fell on deaf ears," said Rick Icaza, president of UFCW's Local 770. "They gave us different excuses every time but they never gave us a rationale for not disclosing that information."

The exact date the revenue-sharing agreement was reached is not known, only that it was before the strike and lockout began. That might have been too late for the companies to include the disclosure in their most recent quarterly 10Q filings made in September and October, or their annual 10K reports, which come out once each year.

But companies can also file an 8K report for special interim events that might have a material impact on earnings. (A rule of thumb for "material" is a 10 percent increase or decrease.)

(Two weeks ago, Albertson's suspended its earnings guidance for the duration of the year, citing uncertainties related to the strike.)

"If something very important happens in between those formal periodic filings, you file an 8K," said Jeffrey Davidson, partner with L.A.-based Kirkland & Ellis LLP. "Companies generally are obligated to disclose in a timely manner anything that might have a material impact on their financial position."