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Securities & Exchange Commission v. Siebel Systems, Inc.

District Court, S.D. New York
384 F. Supp. 2d 694 (2005)
ELI5:

Rule of Law:

Qualitative statements that are the substantive equivalent of prior, detailed public disclosures do not constitute selective disclosure of material nonpublic information under Regulation FD. The standard for disclosure is fair accuracy, not verbatim repetition or perfection.


Facts:

  • In a series of public conference calls in April 2003, Siebel Systems, Inc.'s Chairman, Thomas Siebel, stated that first-quarter results were poor but projected higher revenues for the second quarter.
  • Thomas Siebel publicly disclosed that the second-quarter forecast was based on the company's sales pipeline, which he expected would include deals from new customers and some deals greater than five million dollars.
  • During these public calls, Thomas Siebel characterized the overall economy negatively and linked the company's performance to economic conditions, while declining to specify the portion of new business contributing to the Q2 forecast.
  • On April 30, 2003, Siebel Systems's CFO, Kenneth Goldman, spoke at two private events attended by institutional investors.
  • At these private events, Goldman described the company's business activity as "good" or "better," stated the sales pipeline was "building" or "growing" with new deals, and noted "there were some $5 million deals in Siebel's pipeline."
  • Immediately following Goldman's private comments, several attendees or their associates made substantial purchases of Siebel Systems stock.

Procedural Posture:

  • The Securities and Exchange Commission (SEC) commenced an action against Siebel Systems, Inc., its CFO Kenneth Goldman, and its Senior VP Mark Hanson in the United States District Court for the Southern District of New York.
  • The SEC's complaint charged the defendants with violating Regulation FD (Fair Disclosure).
  • The defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6).
  • Defendants argued that the statements at issue were neither material nor nonpublic.

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Issue:

Does a corporate officer's private disclosure of generalized, positive characterizations of business activity violate Regulation FD when the substance of those remarks is consistent with prior, detailed quantitative and qualitative public disclosures?


Opinions:

Majority - Daniels, District Judge.

No, a corporate officer's private disclosure of generalized, positive characterizations of business activity does not violate Regulation FD when the substance of those remarks is consistent with prior public disclosures. The court found that Kenneth Goldman's private statements were substantively equivalent to the information previously made public by Thomas Siebel. The public had already been informed that the company projected higher second-quarter revenues based on an analysis of its sales pipeline, which contained large deals and new business. Goldman's qualitative descriptions such as "good," "better," and "growing" were merely generalized labels for the quantitative data and specific forecasts already in the public domain; they did not alter the 'total mix' of information available to a reasonable investor. The court rejected the SEC's hyper-technical, "nit-picking" approach of scrutinizing verb tenses and minor phrasings, stating that Regulation FD requires "fair accuracy, not perfection." Applying Regulation FD so aggressively would create a chilling effect on corporate communications, undermining the regulation's goal of promoting information flow.



Analysis:

This decision significantly circumscribed the SEC's early enforcement of Regulation FD by establishing that private communications do not need to be a verbatim recitation of public statements. It clarified that generalized or qualitative remarks that are substantively consistent with existing public data are not 'material' new disclosures. The court's rejection of the SEC's 'nit-picking' approach provided crucial guidance and a degree of protection for corporate executives, ensuring Regulation FD would not become a 'trap for the unwary.' This ruling helped define the boundaries of permissible private discussions with analysts and investors, promoting a more holistic analysis of the 'total mix' of information rather than a myopic focus on individual words.

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