When the Securities and Exchange Commission recently charged Siebel Systems with violating Regulation Fair Disclosure, the maker of business software enjoyed a couple of dubious firsts.
For example, it was the first company to be charged for a Reg. FD violation for the second time.
In addition, the Commission charged Siebel with violating Exchange Act Rule 13a-15, which requires issuers to maintain disclosure controls and procedures and to ensure that management has the information it needs to make timely disclosure decisions.
“This is the first Commission case charging a violation of this rule,” the Commission added in its complaint.
It is also the first company to challenge Reg. FD charges brought against it.
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.
Goldman
The SEC also charges Chief Financial Officer Kenneth A. Goldman and Mark D. 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.
Hanson
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.
“Pretty Nervy”
Siebel, however, is not happy with the SEC’s actions and said it plans to fight them.
Noting in a press release that it has been engaged for over a year in an ongoing dialogue with the SEC regarding their allegations, it added, “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.”
“This is pretty nervy,” says one lawyer, who asked not to be named in case Siebel were a client of his firm.
“Basically, they’re saying this is a non-case. They are saying the SEC does not have the evidence it needs to establish a Reg. FD violation.”
Why is Siebel deploying this strategy? Obviously, it doesn’t believe it broke the law. And, remember, it claims “an extensive” internal review concluded it committed no wrongdoing.
It also may not feel it has much to lose. One lawyer points out one likely outcome would result in the company being hit with an injunction, the company promising not to violate Reg FD again and it agreeing to pay a civil penalty. “So, they can gamble on this,” the lawyer adds. “How good of a gamble this is depends upon the facts of the case.”
Latham
However, the company also may feel the SEC is asking for too much in a settlement, says John Latham, partner in securities litigation and capital markets for the Atlanta law firm, Alston and Bird. “It [the SEC] is probably not amused by the second violation,” he adds.
“The SEC limits how much it will negotiate if it feels it has a strong case,” adds Richard Langan, head of the corporate practice for the law firm, Nixon Peabody LLP.
Another reason Siebel could be fighting the charges is because in this case two individuals were named as well as the company. So, there is more at stake for these executives to fully clear their names.
“The impact on the individuals [and their careers] would be significant if they agreed to the violations,” Latham adds.
Adds another lawyer: “An injunction on these guys also doesn’t look good on their resume. So, they are probably determined to make sure the company doesn’t settle either.”
Langan
However, at the end of the day, Nixon Peabody’s Langan doesn’t think the SEC would have brought the case if it weren’t very convinced it had the evidence. “There have not been a lot of Reg FD cases,” he adds. “It’s a relatively new regulation. At the time it was adopted, a lot of practitioners and companies were concerned the SEC would use it as a tool to apply frequently. In practice, though, in enforcing Reg. FD, it has been fairly circumspect and applied it in only strong cases.”
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