• Update on Enforcement of Regulation FD - Securities and Exchange Commission v. Seibel Systems, Inc., et. al.
  • October 10, 2005
  • Law Firm: Dinsmore & Shohl LLP - Cincinnati Office
  • On August 31, 2005, the U.S. District Court for the Southern District of New York dismissed the Security Exchange Commission's ("SEC's") complaint against Siebel Systems, Inc. ("Siebel"), and two of its officers, for a violation of Regulation FD. The SEC had brought charges under Regulation FD against Siebel for selectively disclosing private information that could affect the purchase and sale of its securities. In dismissing the case, the court stated, "Regulation FD was never intended to be utilized in the manner attempted by the SEC under these circumstances."

    Regulation FD

    Regulation FD prohibits publicly traded issuers from making private disclosures to brokers, dealers, investment advisers, investment companies, analysts or any others who may foreseeably use the information to trade in the issuer's stock. If an issuer, or any person acting on their behalf, makes such a private disclosure, the issuer must immediately release the information publicly (via a press release, an 8-K, or other approved means). Regulation FD only applies to material, non-public pieces of information. In this context, information is deemed material if "there is a substantial likelihood that a reasonable shareholder would consider it important' in making an investment decision." The SEC has enumerated seven categories of information that, while not always material, have a higher probability of being material:

    (1) Earnings information; (2) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (3) new products or discoveries, or developments regarding customers or supplies (e.g., the acquisition or loss of a contract); (4) changes in control or in management; (5) change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report; (6) events regarding the issuer's securities (e.g., defaults, calls of securities for redemptions, repurchase plans, stock splits or changes in rights of security holders); and (7) bankruptcies and receiverships.

    Information is non-public if it has not been "disseminated in a manner sufficient to ensure its availability to the investing public."

    SEC's Claim against Siebel

    The SEC's allegations against Siebel were founded on four statements made by their Chief Financial Officer, and one of their Senior Vice Presidents, in private meetings with institutional investors. The statements generally connoted that Siebel's business was doing well, specifically that their contracts, sales pipeline and business activity levels were growing. The SEC claimed that the information divulged in these statements was materially different from the information that Siebel had released publicly, arguing that the new, positive statements contrasted with information previously disclosed to the investing public - i.e., that Siebel's business had performed poorly in the first quarter, and would improve in the second quarter only if the economy improved.

    Court's Decision

    In granting Siebel's motion to dismiss the SEC's complaint, in its entirety, the Court held that the four statements by Siebel's management did not substantively differ from the "total mix of information" available to the general investing public. The Court ruled that Siebel had not released material, non-public information, and therefore had not violated Regulation FD and its disclosure requirements.

    In reaching this conclusion, the Court stated that "Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made." The Court held that the four allegedly offensive statements did not constitute new information because the information available to the general public provided a "sufficient factual basis for a reasonable investor to conclude that business was improving." Although the private statements contained more specificity than the information available to the public, and used present rather than the future tense to describe Siebel's improving prospects, the Court found that scrutinizing such small differences "places an unreasonable burden on a company's management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD."

    Implications to be Drawn from the Decision

    The SEC has yet to announce whether it will appeal the Court's decision to the Second Circuit Court of Appeals. Although this decision, if it is upheld, may somewhat dissuade the SEC from challenging seemingly innocuous private comments made by company officials, it does not provide much guidance in the realm of what private statements are permissible without immediate public disclosure. As always, taking great caution in speaking privately to analysts, shareholders and potential investors remains the best strategy.

    For a complete text of the court's opinion, see 2005 U.S. Dist. LEXIS 18795.