Regulation FD after Siebel
Systems: No longer “the
hobgoblin of little minds”?
Securities Litigation
Bruce A. Ericson
[email protected]
Just short of its fifth birthday, Regulation FD got its first test in court, and the
SEC lost. It is fairly easy to say why the SEC lost1. But it is harder to say what
the loss means. The court’s decision seems to say that issuers who speak privately to analysts and other stock market insiders should not be penalized for
inconsistencies in tone and mood, so long as the hard facts imparted to the
private audience do not depart from the hard facts imparted to the public audience. While this decision may cause issuers to breathe a little easier, the line
between safe private statements and dangerous private statements remains
far from bright.
Regulation FD
Regulation FD (for “Fair Disclosure”) requires that any disclosure of material nonpublic information be made to the general public, rather than to selected market
insiders. If a senior official of an issuer discloses material nonpublic information to
an analyst or stock market insider or someone likely to trade, the information must
also be disclosed to the public — at the same time for intentional statements and
promptly for unintentional statements. Regulation FD was designed to deter “the
selective disclosure by issuers of material nonpublic information . . . .” 2 Unlike, for
example, Rule 10b-5 3, Regulation FD is not so much aimed at deterring falsehoods
as deterring the selective dissemination of the truth. The notion is that disseminating news to market insiders ahead of the general public allows the insiders to
play the public for chumps. This is said to be demoralizing for the general public,
or at least that portion of the general public who thought “they [were] on a level
playing field with market insiders” in the first place.4
[email protected] For more information
about us, please visit www.pillsburylaw.com.
To say that the promulgation of Regulation FD did not meet with universal acclaim
would be a considerable understatement. Rarely has a new SEC regulation met
with such vigorous and sustained criticism. Critics saw in Regulation FD everything
from an assault on free speech rights protected by the First Amendment, to a lawless act lacking any statutory basis, to a foolish act that would stifle the free flow
of information by causing issuers to say only “Mum’s the word.”
For all the furor, little enforcement activity followed the enactment of Regulation FD.
In the first four years of the regulation, the SEC brought only five proceedings, and
all five settled before they became public. Four resulted in sanctions—cease-anddesist orders and sometimes also money penalties.5 The fifth resulted in a public
“report of investigation,” which did not impose sanctions but was offered as a cautionary moral tale for those who might be tempted to stray too close to the line.6
Regulation FD after
Siebel Systems:
No longer “the
hobglobin of little
minds”?
“The SEC must have thought
that Siebel Systems would
be easy pickings. After all,
Siebel Systems was a ‘repeat
violator of Regulation FD,’
or so the SEC characterized
the company.”
The Siebel Systems Case
Not until 2004 did someone decide to stand and fight.
The conventional wisdom, of course, is that an issuer cannot fight the SEC. And so
when some issuer does, it conjures up images of a classic western such as High
Noon.7 The analogy, however, is a little shaky. As High Noon opens, Marshall Will
Kane (Gary Cooper), a man of few words but a spotless record, was about to hang
up his badge and marry Grace Kelly. Siebel Systems, in contrast, had previously
stipulated to a Regulation FD cease-and-desist order, 8 and nobody has ever
described its founder and chairman, Thomas Siebel, as a man of few words.9
The SEC must have thought that Siebel Systems would be easy pickings. After all,
Siebel Systems was a “repeat violator of Regulation FD,” or so the SEC characterized the company.10 But if the SEC thought this would be easy, it was in for a
surprise. For Siebel Systems, in addition to retaining some of the leading lights
of the securities defense bar, brought in Kathleen Sullivan, the former dean of the
Stanford Law School, to challenge Regulation FD itself on a variety of statutory
and constitutional grounds.
The trial judge, Judge George B. Daniels of the United States District Court for the
Southern District of New York, ultimately declined to reach those grounds, holding
instead that the company’s nonpublic statements were immaterial—or at least not
materially different than public statements that the company had made not long
before. The court ruled not after hearing evidence but on a motion to dismiss.
All the court had before it was the complaint itself, plus the full text of some public
disclosures that the SEC had quoted in the complaint.
Public Gloom, Private Optimism?
The case is easily stated. The Iraq war broke out in the first quarter of 2003.
Perhaps as a result Siebel Systems had a dreadful quarter, falling well short of the
guidance it had previously given. Siebel Systems spoke to this quarter and the next
quarter publicly on three occasions — April 4, 23 and 28, 2003—and then privately
on two more, both on April 30, 2003. The question presented was whether Siebel
Systems’ private statements (to Alliance Capital Management and Morgan Stanley,
both of which had the ear of institutional investors) were materially more cheery
than its public statements. To answer this question, one must examine all five
statements in some detail.
April 4, 2003: Siebel Systems issued an earnings warning, announcing that its firstquarter results would fall short of previous guidance and attributing the shortfall to
“deals that slipped.” In a conference call the same day, Chairman Siebel added,
“there is clearly less business activity right now than there was three months ago.”11
April 23, 2003: Siebel Systems issued its earnings release for the first quarter and
gave guidance for the second quarter. For the first quarter, Siebel Systems reported
total revenue of $333 million and licensing revenues of $112 million (the case
focuses on licensing revenues). Turning to the second quarter, it forecast license
revenues of between $120 million and $140 million. In a conference call, Chairman
Siebel addressed both quarters. He described the first quarter as “tough,” adding
that certain deals “didn’t get signed. . . .due to basically uncertainty and war and
disease and everything that’s going on around the world that’s kind of yucky right
now’. . . .” 12 Asked about the second quarter guidance, he said several things. He
repeated the forecast of licensing revenues of between $120 million and $140 million. He offered a soft prediction that some deals of over $5 million would be
signed. He explained that in every quarter roughly 45% to 55% of Siebel Systems’
business came from new customers. He declined to say exactly how much of the
projected increase in second quarter licensing revenues would result from deals
that had slipped into the second quarter from the first, as opposed to genuinely
“new” business.13 But he did say, “the economic situation is really very uncertain
out there . . . we are not in the expansive stage of the business cycle yet.”14
2
April 28, 2003: Chairman Siebel spoke at a Deutsche Bank conference carried over
the Internet. He again said that the first quarter had been “tough,” and this time he
referenced three of the Four Horsemen of the Apocalypse: “With war, with famine,
with disease, I mean it’s like the apocalypse out there.” 15 Mixing metaphors (and literary sources) a bit, he disagreed with an assessment in Business Week that “it’s
all happy days are here again. I don’t see anything in the market to indicate that’s
true.” 16 Reiterating the prediction that licensing revenues would increase 7% to
25% over the first quarter, he added, “The war ending, that’s a good thing. That
hurt, that war.” 17
“The court made some fairly
tart references to what it
evidently saw as selective
quotations in aid of a case
alleging selective disclosure.”
April 30, 2003: Siebel Systems’ CFO, Kenneth Goldman, accompanied by another
executive, Mark Hanson, spoke at separate meetings to Alliance and Morgan
Stanley. Goldman said four things with which the SEC took issue: (1) some $5 million deals are in the pipeline; (2) new deals are coming back into the pipeline; (3)
the sales pipeline is “growing” or “building”; and (4) “activity levels” are “good”
or “better.” 18 Overall, said the SEC, Goldman’s assessment was “significantly more
positive or upbeat,” whereas Chairman Siebel had described an “apocalyptic
economic environment . . . .” 19 The SEC did not allege that any of Goldman’s
statements were false; instead, it alleged that Goldman’s statements were materially different than Siebel’s statements and were not publicly disclosed.
May 1, 2003: Siebel Systems’ stock, which had closed at $8.66 on April 30, rose
$0.68, to $9.34 (roughly an 8% increase). Trading volume was nearly double the
average trading volume for the preceding 12 months. After its meeting with
Goldman, Alliance went from a net short position to a net long position. And two
of the people who attended the Morgan Stanley dinner bought Siebel Systems
stock the next morning. By midday, investors and analysts were calling Siebel
Systems’ Investor Relations department, trying to confirm rumors of what had
been said in New York the previous day. 20
The Parties’ Arguments
The constitutional and statutory arguments apart, the parties’ tactics followed
customary paths:
The SEC urged the court to focus on the overall tenor of the remarks. The public
remarks, said the SEC, forecast doom and gloom of almost biblical proportions.
In contrast, the private remarks featured cheerier “body language” and factual
statements that the licensing business had improved. Deconstructing the defendants’ words, the SEC argued that the public remarks were conditional and
forward-looking, whereas the private remarks were unconditional statements
of fact. And the SEC emphasized the stock market’s reaction to leakage of the
private remarks.21
The defendants urged the court to focus on the factual components of the four
pieces of allegedly nonpublic material information disclosed on April 30 and compare them with the factual components of the earlier public remarks. The defendants also asked the court to take judicial notice of the full transcripts of the public
remarks, which they then juxtaposed with what they characterized as the complaint’s sometimes selective reading of those remarks. The defendant also argued
that the private remarks amounted to puffing—general statements of corporate
optimism on which no reasonable investor would rely. 22
The Court’s Decision
The court first turned to the defendants’ request for judicial notice, which it granted
after a more extensive discussion of the issue of judicial notice than this issue
usually receives in securities cases.23 The SEC objected fairly strenuously to consideration of the conference call transcripts, a tactic that seems (in hindsight) to have
boomeranged: The court made some fairly tart references to what it evidently saw
as selective quotations in aid of a case alleging selective disclosure.
3
Regulation FD after
Siebel Systems:
No longer “the
hobglobin of little
minds”?
Turning to Regulation FD itself, the court noted the absence of any bright lines, the
difficulty of defining materiality and the SEC’s own concerns (expressed when the
regulation was adopted) that too-aggressive application of the regulation would
have a chilling effect on corporate disclosure.24 The court noted that the SEC’s
former Director of Enforcement had promised not “‘to second-guess close calls
regarding the materiality of a potential disclosure,’” adding that the type of information imparted by Goldman was not hard numbers or other information of the type
identified by the SEC as likely to be material. 25
The court then adopted the analytic framework suggested by the defendants,
focusing on the four allegedly new things that Goldman said at the April 30 meetings. The court took particular issue with the SEC’s construction of the statement
about $5 million deals in the pipeline. Both Chairman Siebel and CFO Goldman had
mentioned $5 million deals, but in different ways, the SEC had argued. Goldman
had spoken “in the present tense” whereas Siebel had spoken “in the future tense”.26
The court rejected this kind of reasoning:
“It would appear that in examining publicly and privately
disclosed information, the
SEC has scrutinized, at an
extremely heightened level,
every particular word used in
the statement, including the
tense of verbs and the general
syntax of each sentence. No
support for such an approach
can be found in Regulation FD
itself, or in the Proposing and
Adopting Releases.”
“It would appear that in examining publicly and privately disclosed information, the
SEC has scrutinized, at an extremely heightened level, every particular word used
in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in
the Proposing and Adopting Releases. Such an approach places an unreasonable
burden on a company’s 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 does not require that corporate officials only utter verbatim statements that were previously publicly made. In Kennecott Copper Corp. v.
Curtiss-Wright Corp., 584 F.2d 1195 (2d Cir. 1978), which concerned the adequacy
of a proxy disclosure, the Second Circuit advised that, in analyzing the disclosure
of material statements, “nit-picking should not become the name of the game. . . .
There is no requirement that a material fact be expressed in certain words or in a
certain form of language. Fair accuracy, not perfection, is the appropriate standard.” Kennecott Copper Corp., 584 F.2d at 1200 (quotation marks and citations
omitted). To require a more demanding standard, in the context of Regulation FD,
could compel companies to discontinue any spontaneous communications so that
the content of any intended communication may be examined by a lexicologist to
ensure that the proposed statement discloses the exact information in the same
form as was publicly disclosed. If Regulation FD is applied in such a manner, the
very purpose of the regulation, i.e., to provide the public with a broad flow of relevant investment information, would be thwarted.” 27
The court saw no more merit in the SEC’s contentions about new deals in the
pipeline and a “growing” or “building” pipeline. The company had publicly projected an increase in licensing revenues for the second quarter. The company had
publicly stated that each quarter 45% to 55% of the business is with new customers. The court said these facts told the reasonable investor that the sales
pipeline was “growing” and “building”; “[h]ence Mr. Goldman’s private wording,
to that effect, added nothing to the total mix of information publicly available.” 28
The SEC had argued that Chairman Siebel’s forecast for the second quarter was
expressly conditioned by the performance of the economy, whereas CFO
Goldman’s statements were not. The court found this argument unpersuasive:
“It would be an unusual rule, indeed, to require that forecasts must repeatedly be
accompanied by a warning that company performance might be affected by an
improving or worsening economy.” And, given that Siebel Systems had said this
once, and publicly, the court saw no need for Siebel Systems to repeat it. 29
The court also rejected the SEC’s argument that the May 1 increase in the price of
Siebel Systems’ stock proved that the private remarks were material. While such a
stock price movement is “relevant,” it could not “change the nature or content of
4
Mr. Goldman’s statements,” and the SEC itself, in promulgating Regulation FD, had
said, “Regulation FD will not be implicated where an issuer discloses immaterial
information whose significance is discerned by the analyst.” 30
Finally, the court declined to rule on defendants’ arguments about puffing and their
constitutional challenges to Regulation FD itself. 31
Whither Regulation FD?
Reading Siebel Systems, one is struck by how “soft” the allegedly material nonpublic information actually was, and how the presentation of “hard” facts did not
vary between the public audiences and the private. The only “hard” numbers
bandied about—the second quarter licensing revenue forecast of $120 million to
$140 million—never changed. While tenses and syntax wandered—as they have a
way of doing unless one is reading from a script—the dollars and cents did not.
“Reading Siebel Systems, one
is struck by how ‘soft’ the
allegedly material non-public
information actually was, and
how the presentation of ‘hard’
facts did not vary between the
public audiences and the
private …. While tenses and
syntax wandered—as they
have a way of doing unless
one is reading from a script—
the dollars and cents did not.”
But having said that, the “soft” information did vary: Chairman Siebel was gloomy,
whereas CFO Goldman was upbeat. If mood matters, it would be hard to argue
that the differences between the two men were not material.
So what was the court saying? It was saying two things, at least.
First, the court was not pleased by the SEC’s rather selective presentation of what
Messrs. Siebel and Goldman actually had said. Hindsight is 20/20, and one is
reluctant to second-guess other lawyers’ tactical decisions, but in hindsight the
SEC’s vigorous fight to keep the trial court from reviewing the conference-call transcripts looks ill-advised.
Second, the court thought that the SEC was nit-picking matters of word-choice
and phrasing—in effect, demanding that corporate spokespersons speak from a
script, lest spontaneity lead directly to liability. Particularly in the context where the
facts had not changed, the court was reluctant to penalize differences in the way
people express themselves about matters open to interpretation, as opposed to
matters of hard fact.
The court may also have been sensitive to the fact that the gloomy interpretation
came from one person, whereas the cheerier interpretation came from another. It is
difficult enough for any of us to speak with perfect consistency, but ever so much
more difficult when two or more people are doing the speaking. Thomas Siebel is a
colorful person who has been speaking out publicly on many topics (including the
securities laws) for many years. Kenneth Goldman is, well, a CFO. 32 It might be difficult for any of us to follow Mr. Siebel to the podium without creating a somewhat
different impression.
In short, the court seems to agree with Ralph Waldo Emerson that, at least when it
comes to soft information and matters of interpretation, “[a] foolish consistency is
the hobgoblin of little minds . . . .” 33 The court saw no virtue in penalizing corporate
spokesmen for differences in expression that were as much stylistic and linguistic
as substantive.
How much comfort can issuers take from this decision? Not much, I would suggest. It is, of course, merely one data point, the view of one judge, and one should
not mistake the first word on any subject for the last. Beyond that, Siebel Systems
presented to an unusual extent a case in which there were no inconsistencies, even
minor, in the presentation of hard facts. Other people who speak privately to stock
market professionals may not be so lucky.
For most issuers, materiality will remain a murky concept, difficult to apply during
the give-and-take of an analyst’s interview. (Unless your audience looks positively
bored, you may be flirting with materiality.) And therefore for many issuers, one-onones with analysts (and particularly telephone calls un-chaperoned by the head of
Investor Relations or whoever else deals with Regulation FD compliance) will be
something to avoid. Siebel Systems may make the SEC a little more reluctant to
bring marginal cases, but for most issuers it should not change the rules of
engagement at all.
5
Regulation FD after
Siebel Systems:
No longer “the
hobglobin of little
minds”?
10
11
Citations
1
SEC v. Siebel Systems, Inc., 384 F. Supp. 2d
694 (S.D.N.Y. Sept. 1, 2005).
2
See Final Rule: Selective Disclosure and Insider
Trading, 65 Fed. Reg. 51716 (Aug. 24, 2000).
Reg. FD itself is codified at 17 C.F.R. §§
243.100-243.103.
3
17 C.F.R. § 240.10b-5.
4
65 Fed. Reg. at 51716.
5
Secure Computing Corp., Exchange Act Rel.
No. 46895 (Nov. 25, 2002); Siebel Systems,
Inc., Exchange Act Rel. No. 46896 and Lit. Rel.
No. 17860 (Nov. 25, 2002); Raytheon Co.,
Exchange Act Rel. No. 46897 (Nov. 25, 2002);
Schering-Plough Corp., Exchange Act Rel. No.
48461 and Lit. Rel. No. 18330 (Sept. 9, 2003).
The money penalties ranged from a low of zero
(Secure Computing and Raytheon) to a high of
$1 million for the issuer and $50,000 for the
issuer’s former chairman and CEO (ScheringPlough). Siebel Systems agreed to a money
penalty of $250,000. Lit. Rel. No. 17860. In
March 2005, the SEC brought and settled a fifth
proceeding, in which it obtained a cease-anddesist order, plus a penalty of $350,000 against
the company and $50,000 against the CEO.
FlowServe Corp., Exchange Act Rel. No. 51427
and Lit. Rel. No. 19154 (March 24, 2005).
6
Report of Investigation of Motorola, Inc.,
Exchange Act Release No. 46898 (Nov. 25,
2002).
7
United Artists, 1952.
8
See fn. 5 above.
9
Whether Larry Ellison is to be compared to
Grace Kelly we leave to others. (Shortly after
the decision came down, Siebel Systems
announced that it would be acquired by
Ellison’s Oracle Corp.)
Plaintiff Securities and Exchange Commission’s
Opposition to Motion to Dismiss the Complaint,
dated Oct. 26, 2004, 2004 WL 3142263, at 7
(“SEC Opp.”). Siebel Systems protested this
characterization, noting that it had not admitted
any wrongdoing in settling the prior proceeding.
Reply in Support of Defendants’ Motion to
Dismiss the Complaint, Nov. 12, 2004, 2004 WL
3142266, at 4 (“Reply”).
Complaint dated June 29, 2004, 2004 WL
3142265, ¶ 33 (“Compl.”).
12
Compl. ¶¶ 35-36.
13
Memorandum of Points and Authorities in
Support of Defendants’ Motion to Dismiss the
Complaint, dated Sept. 14, 2004, 2004 WL
3142264, at 5 (“Open Memo.”). These remarks
came from a transcript of the conference call
offered as part of defendants’ request for
judicial notice; they do not appear in the
Complaint, which emphasizes Chairman
Siebel’s refusal to answer the question directly.
14
Compl. ¶ 35.
15
Compl. ¶ 37. The Fourth Horseman is Death.
Revelation 6:1-8.
16
Compl. ¶ 37.
17
Open Memo. at 6. The Complaint omits this
remark.
18
Compl. ¶¶ 43, 48; Open Memo. at 8-9.
19
Compl. ¶ 49. Morgan Stanley told certain customers that its “analyst’s take” on the dinner
was “the body language was positive . . . the
pipeline building and expected to grow . . . .”
Compl. ¶ 52.
20
Compl. ¶¶ 44-47, 53-56.
21
SEC Opp. at 7-16.
22
Open Memo. at 3-10. In response to the puffing
argument, the SEC argued that puffing is a
defense to the allegation that someone has said
something false and therefore not a defense to
an allegation that a defendant has said something true and factual, but said it selectively.
SEC Opp. at 14-16.
23
Siebel Systems, 384 F. Supp. 2d at 699-701.
24
Siebel Systems, 384 F. Supp. 2d at 701-04.
25
Siebel Systems, 384 F. Supp. 2d at 701-04,
708.
26
Siebel Systems, 384 F. Supp. 2d at 704
(emphasis in original).
27
Siebel Systems, 384 F. Supp. 2d at 704-05.
28
Siebel Systems, 384 F. Supp. 2d at 705-06.
29
Siebel Systems, 384 F. Supp. 2d at 707-08 &
n.14.
30
Siebel Systems, 384 F. Supp. 2d at 707 (the
second quotation is from the Final Rule, 65
Fed. Reg. 51716, at 51722). While this is not
mentioned in the opinion, the court may have
been influenced by evidence that the price of
Siebel Systems stock regularly increased or
decreased by $0.68 or more a day—the amount
it moved on May 1—and had done so “in
roughly one out of five trading days during the
prior year.” Reply at 5.
31
Siebel Systems, 384 F. Supp. 2d at 709 &
nn.15-16.
32
“We can see how this must have arisen,’ commented David Bradshaw, analyst with research
firm Ovum. ‘Tom Siebel's investor calls were
always entertaining, because, if the news was
good, he would be on top of the world and
ready to take all comers, but if the news was
bad, he would be down in the dumps with the
sky falling in on him. The latter would have
been his mood on the call in April 2003. Ken
Goldman, on the other hand, would have a
more even approach in his discussion of the
same information.” Special Report: Siebel beats
off SEC in disclosure suit, CMC—InsightExec,
Sept. 7, 2005, available at
www.insightexec.com.
33
Ralph Waldo Emerson, “Self-Reliance,” in
Essays, First Series (1841), quoted in John
Bartlett, Familiar Quotations 431 (16th ed.
1992). Emerson completed his thought thusly:
“ . . . adored by little statesmen and philosophers and divines. With consistency a great
soul has simply nothing to do.”
© Copyright 2005—The M&A Lawyer, All Rights Reserved. Printed from The M&A Lawyer, “Regulation FD after Siebel Systems:
No Longer ‘the hobgoblin of little minds’?” on November/December 2005, Volume 9 No. 6