Siebel And SEC In Regulation Fair Disclosure Showdown

Siebel Systems has called on the Securities and Exchange Commission to drop charges that it violated Regulation Fair Disclosure for a second time.

In a court filing last week, the software company not only denies that it violated the four-year old rule, it questions its legality.

“The Commission conveniently ignores the U.S. Supreme Court’s admonition that a selective disclosure rule—like Regulation FD—must have ‘explicit’ Congressional authorization,” Siebel states in its brief.

It also asserts that it violates the First Amendment, which covers the right to truthful speech, and lacks the clarity required in the Fifth Amendment, which ensures “both fair warning and the prevention of arbitrary and discriminatory enforcement.”

Multiple Offender

Siebel is the first company to be accused by the SEC of violating Reg. FD for the second time. It is also the first company to fight the charges.

Back in November 2002, the Commission settled charges that Siebel violated Reg. FD, requiring Siebel to cease and desist from committing or causing any future violations. Siebel settled that matter without admitting or denying the Commission's findings and agreed to pay a $250,000 civil penalty.

The latest SEC action charges Siebel with violating that cease-and-desist order just six months after the order was issued.

The SEC also charges Chief Financial Officer Kenneth Goldman and Mark Hanson, a current senior officer and the company's former investor relations director, with aiding and abetting Siebel's violations. It alleges that 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 Commission charges that, at both the meeting and the dinner, Goldman made positive comments about the company's business activity levels and transaction pipeline that materially contrasted with negative public statements Siebel made about its business in the preceding several weeks.

According to the complaint, based on Goldman's comments in the April 30 meeting, 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. On May 1, 2003, the day following the private meetings, the company's stock price closed approximately 8 percent higher than the prior day's close, and the trading volume was nearly twice the average daily volume for the preceding year.

The Commission alleges that Hanson, who had been put in charge of Siebel's Reg. FD compliance, failed to prevent the selective disclosures, and that both Hanson and Goldman failed to cause Siebel to make a public disclosure the next day. The complaint 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 publicly filed reports.

“The Commission is seeking an order commanding Siebel to comply with the Commission's cease-and-desist order, permanent injunctions and civil penalties against all defendants, and other equitable relief to ensure that Siebel adopts adequate Regulation FD,” it added at the time.

Defense, And Counter-Attack

Noting in a press release at the time that it has been engaged for over a year in an ongoing dialogue with the SEC regarding their allegations, Siebel stated that, “After an extensive internal review, the company concluded that no violation of Regulation FD occurred. Additionally, despite the company's repeated requests, the SEC has not provided any credible evidence that the company believes supports the SEC's allegations. The company believes it has meritorious defenses to the lawsuit and is prepared to pursue resolution of this matter through the normal course of civil litigation.”

In its brief filed last week, the company argued that the SEC’s fundamental flaw is that all of the information contained in the four statements that Goldman was said to have made had been previously disclosed by the company “or is simply not material under any reasonable definition of that term.”

Siebel also argues that Reg. FD bears no relationship to a rule requiring updates of registration statements. In addition, it asserts that the rule is inconsistent with the legislative history.

But, perhaps the most intriguing argument advanced by Siebel is that Reg. FD violates First Amendment protection for free speech. It insists that the Commission seeks to escape the force of this argument by asserting that Reg. FD is merely a content-neutral regulation of the manner in which corporate officers speak, or alternatively, a mere regulation of commercial speech, and that for these reasons it is subject to less than strict judicial scrutiny. “Both of these arguments fail,” Siebel states.

Rather, “there is no doubt” Reg. FD is content-based, it counters. “Only speech that consists of ‘material nonpublic information’ is governed by the regulation,” it adds.

Materiality Standard

In its brief filed in late October, the SEC dismisses the defense Siebel has repeatedly advanced. “By disputing the materiality of the disclosures, and asking the court to make a factual determination that the company’s prior public statements communicated the same information that the SEC contends was first disclosed in private meetings on April 30, 2003,” Siebel improperly asks the court to adjudicate facts on a motion to dismiss, the SEC wrote.

It adds the only issue properly before the Court is the legal sufficiency of the alleged facts. And on this score, the SEC asserts Goldman disclosed in private meetings material information that the recipients sought, underscored by the fact that the analysts then traded on the information.

The SEC also defends its authority to promulgate Reg. FD under the Securities Exchange Act of 1934 to require current disclosures by corporate issuers. It also claims the arguments that the regulation violates the First and Fifth Amendments “fail.”

“With respect to the First Amendment argument, Regulation FD is not content-based; rather it regulates the manner in which disclosures of important corporate information are made to the investing public and therefore serves a compelling governmental interest in as narrow a fashion as possible,” it adds.

It also says it doesn’t violate the Fifth Amendment, adding, “The materiality standard that Defendants challenge is the same standard that has been applied by the Federal courts for 30 years in both the civil and criminal enforcement contexts as well as in private litigation.”

So, where does this go next? The SEC said it won’t comment.

Calls to Siebel were not returned.

This one is far from over, and we’ll keep subscribers abreast of developments. Related documents and coverage, including related court filings, are available in the box above, right.