On September 1, 2005, the United Stated District Court for the Southern District of New York dismissed the Securities and Exchange Commission’s ("SEC") complaint against Siebel Systems, Inc. ("Siebel Systems") and its former CFO ("Goldman") and former head of investor relations ("Hanson"). It is unclear whether the SEC will appeal the decision. The SEC’s complaint had alleged (i) violations of an earlier Regulation FD cease and desist order by Siebel Systems, (ii) "aiding and abetting" violations by Goldman and Hanson with respect to Siebel Systems’ violation of Regulation FD, and (iii) violations by Siebel Systems, Goldman and Hanson of Rule 13a-15 relating to the maintenance of proper disclosure controls and procedures. While the decision appears to be a setback for the SEC’s enforcement efforts with respect to Regulation FD, it may not represent a significant Regulation FD legal precedent. The court’s reaction to the facts of the case and to what the court believed to be overzealous efforts to enforce Regulation FD clearly colored its decision.
In part, the SEC may have tried to take a harder line with Siebel Systems and the individual defendants because this case represented a second Regulation FD enforcement action against Siebel Systems. In its decision, the court criticized the SEC for what it characterized as "nitpicking" of the details of Siebel Systems’ discussions with investors. The court was not sympathetic to the SEC’s very narrow focus on the use of different verb tenses and sentence syntax used in statements made by Siebel Systems, Goldman and Hanson on different dates. In dismissing the SEC’s entire complaint, the court relied heavily on the SEC’s own comforting words when Regulation FD was adopted. At the time it adopted Regulation FD, the SEC emphasized that it would not, in its Regulation FD enforcement efforts, "second-guess close calls regarding … materiality" and that its "enforcement actions would only follow from an extreme departure from . . . reasonable care."
The court’s harsh criticism of the SEC’s promised "reasonableness" with regard to innocent Regulation FD errors can best be appreciated by several excerpts from the court’s opinion:
"The SEC scrutinized, at an extremely heightened level, every particular word . . . including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD. . . . [This] places an unreasonable burden on . . . 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 was never intended to be utilized in the manner attempted by the SEC under these circumstances."
"[Regulation FD] does not prohibit persons . . . from providing mere positive or negative characterizations, or their optimistic or pessimistic general impressions, based upon or drawn from material information available to the public . . . ."
"Applying Regulation FD in an overly aggressive manner cannot effectively encourage full and complete public disclosure of facts . . . relevant to investment decision making. [T]he enforcement of Regulation FD by excessively scrutinizing vague general statements has a potential chilling effect which can discourage, rather than encourage, public disclosure of material information."
In addition to criticizing the SEC for not living up to its prior comforting assurances about materiality judgments, the court rejected the SEC’s argument that the materiality of information discussed during private meetings could be deduced from the investors’ purchases of Siebel Systems stock immediately subsequent to the meetings. The court also noted that the mere fact that analysts might have considered private statements significant is not, standing alone, a basis to infer that Regulation FD was violated.
The tone of the court’s decision suggests that the court reached its conclusion to dismiss the case in its entirety because the court was particularly unhappy with the overzealous nature of the SEC’s prosecution in this particular fact situation. It is possible that the result might have been different if the SEC had relied more heavily on a different approach to the case such as focusing on evidence of the "materiality" of information discussed at the private meetings. For instance, the fact that all of the investors purchased stock the day after meeting with Goldman and Hanson and the fact that Siebel Systems’ stock rose by approximately 8% on the next trading day is at least strongly suggestive that the information disclosed was material. If the SEC had agreed that the disclosures were "non-intentional", the court might have been more sympathetic to an SEC argument that Siebel Systems had made "non-intentional" selective disclosures of material information, which would have required the filing of an Item 7.01 Form 8‑K by the opening of the next trading day.
It remains to be seen if the SEC will appeal this decision. One aspect of the court’s decision that is most notable is the conclusion that the subsequent stock purchases by the investors and the 8% stock price movement are not conclusive evidence of the "materiality" of what was said to the investors.
For the moment, the primary lesson to be learned from this second Siebel Systems SEC enforcement action is that, although companies can take some comfort from the SEC’s promise to not "second-guess" materiality judgments, companies should, nevertheless, monitor trading in their securities following private meetings because of the possible need for a "next trading day" Item 7.01 Form 8‑K filing for "non-intentional" Regulation FD violations.
Lessons to Be Relearned
In our July 2004 Corporate Law Bulletin, we listed some "Lessons to be Learned" from the Siebel Systems case when it was filed. Because we believe the outcome in this case was driven in large part by the court’s lack of patience with the SEC’s nitpicking claims and overzealous prosecution, these lessons bear repeating and relearning.
Although it is sometimes difficult to draw general conclusions from individual SEC enforcement actions, issuers can learn several lessons from the SEC’s now-dismissed charges against Siebel Systems, Goldman and Hanson:
1. Be Particularly Careful with Private Meetings.
Companies should be particularly careful with statements made in private meetings, such as non FD‑compliant conferences or one-on-one meetings. Companies 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 alleged 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 Systems’ 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 nature of the SEC’s allegations against Goldman and Hanson, although now dismissed, should serve to remind companies’ 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. The following were part of the SEC’s initial allegations:
The SEC also referred to the fact that Hanson, with the approval of [the Company’s] CEO, included Regulation FD compliance among his five weighted performance objectives. 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." A heavier weighting of regulatory compliance may be appropriate for a director of investor relations.
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, this alleged second Siebel Systems violation of Regulation FD was the first case in which the SEC also alleged a violation of Rule 13a-15, which requires that companies 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 the Company’s failure to file a Form 8-K (or otherwise publicly disseminate the information) was de facto proof of inadequate disclosure controls and procedures. These charges, although now dismissed, 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 are inadequate. For more information regarding the new Form 8-K disclosure requirements, which became 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.
4. To Comply with Regulation FD, It is Important to Obtain All of the Facts.The SEC’s complaint alleged that the Company’s general counsel and another person in the Company’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 the Company’s stock price after the private meetings. In Hanson’s case, the SEC alleged that he gave incomplete information to the general counsel about what had been said and, in Goldman’s case, the SEC alleged that he told the general counsel that he "only reiterated exactly what was stated in the earnings call." The SEC also noted in its complaint that there was no written record of what Goldman said at the investor dinner or in the one-on-one investor meetings. Accordingly, companies should consider whether, and in what manner it would be appropriate, to document statements made in private meetings. 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 "non-intentional" disclosures that might trigger the need to prepare an Item 7.01 Form 8‑K disclosure. See the legal update that we issued in October 2000, entitled Preventative Measures: Ways to Reduce the Risks Associated with Regulation FD.