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SEC Loses 'Fair Disclosure' Case Against Siebel Systems

The Securities and Exchange Commission has lost its first contested action over the agency's fair-disclosure rule, or Regulation FD, against Siebel Systems and two of its top officers for allegedly releasing positive information about the business-software company to only a few institutional investors.

Regulation FD was enacted in October 2000 to prevent corporations from disclosing market-moving information to analysts prior to its dissemination to the investing public. The rule was designed to level the playing field between analysts and investors; however, critics of Regulation FD said it would have a chilling effect on communication in the marketplace.

In the suit filed in Manhattan federal court, the SEC said Siebel Systems, CFO Kenneth Goldman and Senior Vice President Mark Hanson violated Regulation FD through remarks made by the CFO at an invitation-only dinner for large investors April 30, 2003.

The agency alleged that Goldman made upbeat statements about the software company's prospects and pending sales that materially contrasted with public statements made by CEO Thomas Siebel earlier that month.

Among other statements, Goldman said sales were building and that there were a few $5 million deals in the pipeline. The SEC contended that these comments were qualitatively different from those of the CEO, who had tied the company's performance to the state of the economy.

Further, the SEC said the company failed to file the required form disclosing the release of materially nonpublic information within 24 hours. The agency asserted that defendant Hanson was responsible for this oversight.

In its motion to dismiss, Siebel Systems asserted the statements Goldman made at the April dinner were immaterial because the company had already released the disputed information.

It also argued that the SEC had exceeded its authority in enacting Regulation FD, as it was constitutionally suspect and infringed on First Amendment rights. The U.S. Chamber of Commerce filed an amicus brief supporting this position.

However, U.S. District Judge George B. Daniels of the Southern District of New York focused on the materiality of the alleged violation. He explained that materiality is not defined in Regulation FD but that courts have interpreted the concept as covering information that a reasonable investor would consider important in making investment decisions.

"The statements relied upon in the complaint cannot support a conclusion that material information privately provided by Mr. Goldman was unavailable to the public," Judge Daniels wrote.

While the SEC had selectively cited isolated portions of Siebel's public statements in its pleadings, the judge examined the full content of those statements in coming to his conclusion that the agency had failed to demonstrate any violation of Regulation FD.

The defendant's statement regarding the existence of $5 million deals for the second quarter of 2003 was "equivalent in substance" to the information the CEO previously released, Judge Daniels said.

The judge said he was not persuaded by the SEC's argument that Goldman's comments were in the present tense while the CEO's statements had been about future earnings.

"Such an approach places an unreasonable burden on a company's management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD," the judge wrote.

This standard would make companies discontinue any spontaneous communication and inhibit the flow of information into the marketplace, the judge reasoned.

Judge Daniels said he was also not persuaded that Goldman's statements amounted to new information disseminated to investors because the CFO did not condition his comments on the performance of the economy, as the CEO had previously done.

In dismissing the action, Judge Daniels said, "It would be an unusual rule, indeed, to require that forecasts must repeatedly be accompanied by a warning that company performance might be affected by an improving or worsening economy."


Securities and Exchange Commission v. Siebel Systems Inc. et al., No. 04-5130, 2005 WL 2100269 (S.D.N.Y. Sept. 1, 2005).

Courtesy of Phyllis Skupien, Esq. of Andrews Publications.

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