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SEC probing ChoicePointstock sales

ChoicePoint shares fell sharply Friday  on news the Securities and Exchange Commission is investigating stock sales by top executives, including CEO Derek Smith, before the company disclosed a breach in its massive consumer database.
/ Source: The Associated Press

The Securities and Exchange Commission is investigating stock sales by the two top executives of ChoicePoint Inc., the embattled data broker said Friday. The company also said it is strictly limiting its sale of consumer information to small businesses after the disclosure of a security breach that allowed criminals to gain access to its massive database.

ChoicePoint shares tumbled on the dual announcements from the Alpharetta, Ga.-based company.

The SEC probe involves sales of stock by chief executive Derek Smith and president Douglas Curling for a $16.6 million profit in the months after the company learned its database had been breached but before the information was made public.

ChoicePoint’s stock had dropped about 10 percent since the personal information breach at the data collector was announced Feb. 15. ChoicePoint shares fell another 6.5 percent Friday.

Corporate governance experts say the pattern and timing of the trading by Smith and Curling raise questions, while ChoicePoint has said the trading was prearranged under a plan approved by the company’s board.

In an AP interview last week, Smith said “we voluntarily found the breach (in October) and notified law enforcement.” He said Friday that he didn’t mean to include himself in that reference.

Smith said the decision to strictly limit information sales to small businesses follows “the response of consumers who have made it clear to us that they do not approve of sensitive personal data being used without a direct benefit to them.”

ChoicePoint said small businesses would be permitted to purchase its data only in limited cases such as where the products support federal, state or local government purposes. It said the company would no longer include Social Security numbers in the sales.

ChoicePoint’s 17,000 small business customers accounted for about 5 percent of annual revenue of $900 million.

Last month, ChoicePoint said it was notifying about 145,000 Americans that their Social Security numbers and other personal information may have been viewed by criminals posing as legitimate ChoicePoint customers. The company said Friday that the number of potentially affected customers may increase, but it doesn’t believe the increase will be substantial.

ChoicePoint has said repeatedly it learned of the breach in October, but delayed disclosing it because it said California authorities had asked it to keep quiet to protect the fraud investigation. It said in a detailed explanation Friday that it first learned of the possibility of fraud on Sept. 27. A similar breach involving 7,000 to 10,000 ChoicePoint records occurred in 2002.

ChoicePoint said the SEC has notified the company that it is conducting an informal inquiry of the stock sales as well as the circumstances surrounding the possible theft of people’s identities in connection with the breach of its database. The stock sales occurred between November and February.

ChoicePoint said it will cooperate with the probe and “provide requested information and documents to the SEC.”

The company also said in a lengthy regulatory filing that the Federal Trade Commission is conducting an inquiry into its compliance with federal laws governing consumer information security and related issues.

The FTC has asked for information and documents regarding ChoicePoint’s customer credentialing process and the recent incident in Los Angeles involving a Nigerian man who was accused of committing fraud using consumer information from the company’s database.

The company said it is a defendant in several lawsuits and complaints arising from the breach. It said it could not estimate the financial impact on the company of the customer fraud and related events.

It wasn’t immediately clear how many customers the decision on small businesses affects. ChoicePoint said Feb. 21 when it decided to rescreen 17,000 small business customers that that action affected 5 percent of its annual revenue of $900 million.

In Friday’s regulatory filing, it said that because it will no longer sell information to small businesses, it expects a decline in core revenue this year of $15 million to $20 million.