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On June 29, 2004, the Securities and Exchange Commission (the "SEC") filed a civil action in Federal District Court against Siebel Systems, Inc. ("Siebel"), charging that Siebel violated Regulation FD and a prior SEC cease-and-desist order. Regulation FD prohibits issuers from selectively disclosing material nonpublic information to certain persons - including securities analysts, broker-dealers, investment advisers and institutional investors - before disclosing the same information to the public.

The SEC also charged Siebel with violating SEC Rule 13a-15, which requires issuers to maintain disclosure controls and procedures designed to ensure the proper handling of information that is required to be disclosed in reports filed or submitted under the Exchange Act, and to ensure that management has the information it needs to make timely disclosure decisions. This is the first SEC case charging a violation of Rule 13a-15 and is interesting in that it is brought in the context of Regulation FD and not financial statements or periodic reports.

In addition, the SEC charged two senior Siebel executives with aiding and abetting Siebel's violations - Kenneth A. Goldman, the company's chief financial officer, and Mark D. Hanson, a current officer and the company's former investor relations director.

A copy of the SEC release (No. 18766) and complaint can be found at http://www.sec.gov/litigation/litreleases/lr18766.htm.

Factual Background

Siebel I

On November 25, 2002, following an SEC investigation, the SEC issued an order finding that Siebel had violated Regulation FD by selectively disclosing material nonpublic information at an invitation-only investor conference in 2001. The SEC order required Siebel to cease and desist from committing or causing any future violations. Siebel settled the matter by agreeing to the cease-and-desist order but without admitting or denying the SEC's findings. As part of the settlement, Siebel also paid a $250,000 civil penalty. For more information regarding this earlier action, please see the legal update that we issued in November 2002, entitled SEC Announces First Regulation FD Actions.

Siebel II

The SEC's complaint in the latest action against Siebel alleges that, less than six months after the SEC's cease-and-desist order was issued, Goldman disclosed material nonpublic information during two private events he attended with Hanson in New York on April 30, 2003: a "one-on-one" meeting with an institutional investor; and an invitation-only dinner hosted by Morgan Stanley. The SEC charges that, at both the meeting and the dinner, Goldman made positive comments about Siebel's business activity levels and transaction pipeline that contrasted with negative public statements Siebel had made about its business in the three weeks leading up to the private meetings.

According to the SEC's complaint, based on Goldman's alleged private comments, an institutional investor converted its 108,200 share short position in Siebel stock into a 114,200 share long position - a net change of 222,400 shares - within approximately four trading hours after Goldman and Hanson met with the institutional investor. To support its allegations, the SEC points out in its complaint that on May 1, 2003, the day following the private meetings, Siebel's stock price closed approximately 8% higher than the prior day's close, and the trading volume was nearly twice the average daily volume. However, it is interesting to note that the substantial stock price change was not unusual for Siebel - during the prior year more than 30% of all trading days saw a daily price change of more than 5%, and almost 10% of all trading days saw a daily price change of 8% or more.

The SEC alleges that Hanson, who had been charged with Siebel's Regulation FD compliance, failed to prevent the selective disclosures, and that both Goldman and Hanson failed to cause Siebel to make a public disclosure the next trading day as required by Regulation FD. The SEC also alleges that Siebel failed to maintain disclosure controls and procedures designed to ensure the proper handling of information that is required to be disclosed in reports filed or submitted under the Exchange Act and to ensure that management has the information it needs to make timely disclosure decisions, including under Regulation FD.

Lessons to Learn

Although it is sometimes difficult to draw general conclusions from individual SEC actions, issuers can learn several lessons from the SEC's latest charges against Siebel, Goldman and Hanson:

1. Be Particularly Careful with Private Meetings.

Issuers should be particularly careful with statements made in private meetings, such as non-FD compliant conferences or one-on-one meetings. Issuers must ensure that such statements are consistent with what has been stated publicly previously or that contemporaneous public disclosure of the new statements is made in accordance with Regulation FD. The SEC complaint noted that Hanson "knew that private one-on-one meetings between an issuer and institutional investors or analysts posed serious risk under Regulation FD" and quoted part of an article prepared by Siebel's outside corporate counsel that Hanson had reviewed, which cautioned issuers to take particular care with the content of such private meetings.

2. The SEC Will Charge Individuals with Aiding and Abetting if They Fail to Take Steps to Prevent Violations.

The SEC's charges against Goldman and Hanson should serve to remind issuers' officers and other employees that they are at risk of being charged with aiding and abetting if they fail to take steps to prevent violations of SEC rules. To support its aiding and abetting charges against Hanson, the SEC made the following allegations:

• "Hanson, who was responsible for the Company's compliance with Regulation FD, acted knowingly or recklessly because he failed to take any precautions to ensure that Goldman did not disclose nonpublic information under circumstances where he knew that the disclosures would not be simultaneously disseminated to the public."
• "Following [the SEC's earlier Regulation FD charges against Siebel], the Company did little to improve its compliance with Regulation FD. Neither Hanson nor his investor relations staff received any formal training regarding Regulation FD. Nor did Hanson promulgate a formal Company policy regarding compliance with Regulation FD or implement additional safeguards to ensure that Siebel's senior officers did not disclose material nonpublic information in circumstances where such information would not be simultaneously disseminated to the public."
• "Following the [one-on-one meeting with the institutional investor], Hanson did not assess whether Goldman had disclosed material nonpublic information at the meeting, did not counsel Goldman not to disclose material nonpublic information about current business conditions, and made no effort to ensure that Goldman discussed only information that had already been publicly disclosed when he appeared at the Morgan Stanley dinner a few hours later."

The SEC also referred to the fact that Hanson, with the approval of Siebel's CEO, included Regulation FD compliance among his five weighted performance objectives for the first and second quarters of 2003. However, instead of viewing this fact as an indication that Hanson considered Regulation FD to be important, with curious logic the SEC alleged that Hanson's assignment of a 10% weighting to Regulation FD compliance indicated that "Hanson considered compliance with Regulation FD to be a low priority."

3. The Failure to File, or a Late Filing of, an SEC Report May Serve as the Basis for Rule 13a-15 Charges.

As noted above, Siebel II is the first case in which the SEC has alleged a violation of Rule 13a-15, which requires that issuers maintain disclosure controls and procedures designed to ensure the proper handling of information that is required to be disclosed in Exchange Act reports and to ensure that management has the information it needs to make timely disclosure decisions. The SEC charged that Siebel's failure to file the necessary Item 9 Form 8-K (or otherwise publicly disseminate the information required under Regulation FD) was de facto proof of inadequate disclosure controls and procedures. These charges underscore the need for companies to address seriously not only Regulation FD but also the new Form 8-K disclosure requirements, because a failure to file, or late filing of, a required Form 8-K may be the basis for allegations that the issuer's disclosure controls and procedures were inadequate. For more information regarding the new Form 8-K disclosure requirements, which become effective on August 23, 2004, please see the legal update that we issued in April 2004, entitled SEC Accelerates and Expands Reporting of Significant Events on Form 8-K. On July 22, 2004, we will be presenting free seminars in San Francisco and Palo Alto entitled Form 8-K: New Rules and Regulations. A webcast will be posted on our website for 90 days following the seminars for those unable to attend.

4. To Comply with Regulation FD, It is Important to Obtain All of the Facts.

The SEC's complaint notes that Siebel's general counsel and another person in Siebel's investor relations department made inquiries of Goldman and Hanson regarding the possible need to make Regulation FD disclosure in light of the movement of Siebel's stock price after the private meetings. In Hanson's case, he allegedly gave incomplete information to the general counsel about what had been said and, in Goldman's case, he allegedly told the general counsel that he "only reiterated exactly what was stated in the earnings call." The SEC also noted in its complaint that Siebel did not record or memorialize what Goldman said at the Morgan Stanley dinner or the one-on-one meeting. Accordingly, issuers should consider whether and in what manner it would be appropriate to document statements made in private meetings, given the particular circumstances. We have recommended in the past that, whenever possible, those speaking to analysts take a "bodyguard" - someone familiar with making determinations about materiality who will serve as a witness and listen for any nonintentional disclosures that might trigger the need to prepare a Regulation FD disclosure. See the legal update that we issued in October 2000, entitled Preventative Measures: Ways to Reduce the Risks Associated with Regulation FD.