TheCorporateCounsel.net

September 6, 2005

Federal Court Finds Siebel Did Not Violate Regulation FD

Last Thursday, on a summary judgment motion, Judge Daniels of the United States District Court for the Southern District of New York dismissed the SEC’s Regulation FD lawsuit against Siebel Systems and two of its officers. This is the first federal court to interpret Regulation FD. Here is a copy of the court opinion.

Back in July 2004, the SEC filed charged Siebel Systems with its second violation of Regulation FD. The SEC also charged Siebel Systems’ CFO and IR Director with criminally aiding and abetting the company’s violation due to their role in disclosing “material, nonpublic information” about the sales pipeline during two separate private meetings with members of the investment community.

The disclosures were alleged to be materially different from prior public statements made by the company in analyst conference calls and at a conference. In his opinion, Judge Daniels disagreed with the SEC’s conclusion that the CFO’s private statements were either material or non-public, a narrow conclusion that is limited to the facts alleged in this case – and the Judge was not happy with the way that the SEC parsed “every particular word used in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in the Proposing and Adopting Releases. 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 should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements.”

The Judge refused to address some broader challenges to Regulation FD, such as whether it violated the First Amendment – and he dismissed the SEC’s allegation regarding inadequate disclosure controls and procedures saying that the complaint had not cited sufficient facts to support this cause of action (other than the claimed violation of Regulation FD). It is not yet known whether the SEC will appeal the case.

What Does the Siebel Case Mean?

First of all, it’s important to remember that Regulation FD remains a valid rule – and the SEC likely will continue to look for instances of selective disclosure. The best way to avoid a Regulation FD problem is to limit private discussions of material information and to keep any such discussions entirely consistent with what was already said publicly. Judge Daniels even acknowledged that Regulation FD could be violated by non-verbal communications. For example, tacit communications such as a wink, nod, or a thumbs-up or -down gesture can trigger a violation.

On the other hand, Judge Daniels strongly suggests that courts are not going to use Regulation FD as a trap for the unwary. In particular, it is unlikely that the courts are not going to second-guess close calls about the materiality of oral disclosure. The Judge noted that the SEC itself has publicly commented that in order for an incorrect assessment of materiality to violate Regulation FD, the conclusion must represent an extreme departure from standards of reasonable care – note that the standard of care may be higher for written disclosure or for prepared remarks compared to spontaneous speech, such as in a Q&A session.

Stan Keller notes that this is an important decision that brings Regulation FD back to where it was supposed to be – and holds the SEC to the promises that were made as to its application. In his opinion, Judge Daniels sends a clear message that enforcement of Regulation FD should occur only in clear cases, as the SEC signaled when the rule was adopted. We will hear more from Stan on this topic soon – and we have posted some law firm memos analyzing the case in our “Regulation FD” Practice Area.

SEC Provides Hurricane Katrina Relief

To help those in need, the SEC has established both telephone and e-mail hotlines to provide immediate responses to questions or to hear from those that want to advise the SEC of their needs, such as relief from the SEC’s reporting and delivery mandates. In fact, the SEC plans to consult with public companies based in the disaster area, to ensure that its mandates do not interfere with any response and recovery.

If you have such a need, telephone calls should be directed to (202) 551-3300 – and e-mail should be directed to cfhotline@sec.gov