A Federal court in New York rebuked the SEC on September 1st when it dismissed the SEC's lawsuit alleging that Siebel Systems, Inc. violated Regulation FD, a rule providing for "fair disclosure" to investors (SEC v Siebel Systems, Inc., S.D.N.Y., No. 04CV5130 (GBD), September 1, 2005).
Regulation FD requires public companies to disclose information to the public in ways that avoid "selective disclosure", prohibiting public companies from saying one thing in a press release, for example, only to give out different information to analysts or investors. While the rule has an admirable intent, it can be very difficult for corporate officers to apply. Corporate officers routinely have conversations with analysts and key investors and cannot simply repeat the text of press releases in those conversations. The practical implications of the rule have proven difficult to implement and represent an ongoing concern for corporate law practitioners.
Siebel was the first company charged by the SEC under Regulation FD in 2003. It settled those charges, but when the SEC brought a second action in June 2004 it decided to fight back.
The SEC's complaint alleged that Siebel had disclosed material non-public information during private dinners with institutional investors. The SEC alleged that by disclosing that Siebel's business activity levels were "good" and "better" and that its sales were "growing" and "building", the CFO implied that the company's business was improving. The SEC claimed that this information was significantly different from public statements made by the company's CEO in shareholder conference calls, where he had allegedly emphasized negative aspects of the business.
According to the SEC, institutional investors who attended the the private dinners interpreted the statements as a signal of improving fortunes and communicated this to clients, leading to a jump in Siebel's stock price. The SEC argued that this market reaction proved the materiality of the information.
What made the SEC's charges especially problematic for corporate counsel was the vagueness of the language at issue in the Siebel case. If corporate insiders cannot have conversations with outsiders in which they say that business is "good" or "better" and "growing" or "building", how can they say anything at all? Corporate spokespersons would be required to record all of their conversations and then post transcriptions on the company's website to avoid the potential for inconsistent disclosure. Such an outcomes would have been unreasonable, of course, but would have seemed inevitable if the SEC had its way.
In its opinion, granting Siebel's motion to dismiss, the Court held that the SEC's approach put an unreasonable burden on companies, requiring a level of linguistic sensitvity that is inappropriate. The judge wrote "Regulation FD was never intended to be utilized in the manner attempted by the SEC under these circumstances." The Court stated that "excessively scrutinizing vague general comments has a potential chilling effect which can discourage, rather than encourage, public disclosure of material information."