Federal Court Dismisses SEC Complaint Alleging Violation of FD by Siebel Systems

In the last three years, the SEC has brought several high-profile actions under Regulation FD.  Two of those actions involved Siebel Systems, Inc.  On Thursday, the United States District Court for the Southern District of New York agreed with Siebel and granted its motion to dismiss the SEC’s compliant.  The court noted that the SEC’s nitpicking and “excessively scrutinizing vague general comments has a potential chilling effect [on] disclosure of material information.”  In particular, the court held that the statements relied upon by the SEC failed to support its allegation that Siebel disclosed material nonpublic information.

While addressing an invitation-only technology conference for analysts, Siebel made a series of private comments to the effect that business was returning to normal.   These comments were made within a few weeks of statements by the company that, according to the SEC, indicated that the company’s outlook was negative.  In support of its allegations, the SEC also relied on significant purchases of Siebel stock made by some of the attendees at the conference shortly after the private statements.  These purchases caused Siebel’s stock price to increase significantly.  In reviewing the entire text of the relevant remarks, the court found that the private statements were not materially different than the public remarks. 

In dismissing the complaint, the court examined the proposing and adopting release of Regulation FD and concluded that Regulation FD did not require company spokespersons to be “linguistic experts” that are required to scrutinize every particular word used, including “the tense of verbs and the general syntax of each sentence.”  In addition, the court concluded that, although the private statements were not literally a word-for-word recitation of prior disclosure, as long as they did not add, contradict or significantly alter the available public information, Regulation FD could not be violated.  In reaching its conclusion, the court discussed, at some length, the need for Regulation FD to provide the public with a broad flow of relevant information and noted that recognizing a standard by which companies must have communications “examined by a lexicologist to ensure that the proposed statement discloses” the exact same information would not further this purpose.

With regard to the significant increase in Siebel’s stock price following the private statements, the court noted that, while stock movement is a relevant fact to determine materiality, “the mere fact that analysts might have considered [the] private statements significant is not, standing alone, a basis to infer that Regulation FD was violated.”  

Although this decision emphasizes that a violation of Regulation FD should not be based on second-guessing close calls on materiality but only found in those cases that represent an extreme departure from reasonable standards of materiality, Regulation FD will continue to be a source of uncertainty until further court decisions or SEC proceedings are decided.   This decision, however, does provide public companies with some comfort that their public statements need not be a verbatim repetition of previous disclosure to avoid enforcement actions as long as such statements are reasonably consistent with what has been previously disclosed.

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