A federal district court has handed the Securities and Exchange Commission its first defeat in Regulation FD enforcement. Yesterday, it dismissed the SEC's complaint alleging violation of Regulation FD and related inadequacy of disclosure controls and procedures (for permitting the FD violation and failing to file required Form 8-K) against Siebel Systems, Inc. SEC v. Siebel Systems, Inc., 2005 WL 2100269 (SDNY September 1, 2005).
Regulation FD
Regulation FD bans US public companies from selectively disclosing material nonpublic information to securities analysts, certain other market professionals or their security holders (where it is foreseeable that they will trade on such information). Regulation FD requires that an issuer making an “intentional” disclosure of material, nonpublic information to such persons do so in a manner that provides simultaneous disclosure to the general public. If a “non-intentional” selective disclosure of material information is made, the issuer must “promptly” (generally within 24 hours) make public disclosure.
Public disclosure under Regulation FD requires inclusion of information in a Form 8-K or dissemination by press release or other means of broad, non-exclusionary distribution to the public. Posting information on a company’s web site or announcing information at a meeting at which representatives of the press happen to be in attendance does not, by itself, constitute public disclosure under Regulation FD.
Siebel System’s Second Run-In
This was the second SEC enforcement action against Siebel Systems. The first action, brought in 2002, resulted in settlement and payment by Siebel of a $250,000 civil penalty. The second action, filed in 2004, arose from facts almost identical to the facts in the first action, but occurring about six months later. Siebel had previously made public statements painting a somewhat negative picture of near-term results, and the CEO and CFO made positive observations about the nonpublic order “pipeline” building in a subsequent private analyst-only conference. Siebel stock rose in heavy buying shortly after the analyst-only conference.
In dismissing the complaint, the court found that the subsequent private statements were sufficiently anticipated by the earlier public remarks that it could not conclude the subsequent remarks added materially to the "total mix," notwithstanding the market movement apparently triggered by those remarks. The court rebuked the SEC for parsing the previous public and subsequent private statements too closely and making conclusory allegations about the materiality of minor differences in what was said:
"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. . . Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made." (emphasis added)
The court noted that such an extreme approach was not dictated by Regulation FD and was not consistent with its underlying purpose of encouraging the free flow of information into the market, because it chills communication. In a footnote, however, the court reaffirmed that even where subsequent private statements are verbal equivalents to previous public statements, "tacit communications, such as a wink, nod, or a thumbs up or down gesture" may materially add to the total mix and give rise to a Regulation FD violation.
The court found that the alleged FD violation was the only real basis for the SEC's claim that Siebel violated Exchange Act Section 13(a) by failing to have adequate disclosure controls and procedures and dismissed those claims as well.
Conclusion
The SEC has stated that it has not yet decided whether to appeal this setback in its FD enforcement crusade. If not overturned, the decision may well blunt the aggressiveness of the SEC's enforcement program, requiring it to be more circumspect in choosing which companies to pursue when market movement or changes in analyst recommendations follow private conferences or meetings with analysts or investors.
Unfortunately, the opinion does not offer much clarity or guidance to executives and IR personnel facing the prospect of SEC enforcement if private clarification or elaboration of previous public disclosures generates market movement or changes analyst recommendations. Private conferences and meetings with analysts and investors remain a very tricky proposition, especially impromptu question-and-answer sessions. Predicting when a change in the way something is said may result in market reaction remains very difficult, and litigating against the SEC to the point of vindication in federal court may be a Pyrrhic victory.