Thursday, September 1, 2005
Judge George Daniels of the U.S. District Court for the Southern District of New York dismissed the SEC's law suit accusing Siebel Systems, Inc. of violating the fair disclosure rules (Regulation FD) for failure to state a claim (opinion here). The Commission accused the company of making selective disclosure to participants at an industry conference that was not otherwise publicly available when the company's CFO stated that its business was "good" and "better" and its order pipeline was "building" and "growing." Judge Daniels rejected the SEC's position that these statements disclosed information not otherwise publicly available to investors. As an initial matter, the judge considered the entirety of the company's public statements, and not just selective portions as the SEC said should be done because those were the only statements included in its complaint.
The judge went on to criticize the SEC's parsing of the language of the company's statements, noting that "the SEC has scrutinized, at an extremely heightened level, every particular word used in a statement, including the tense of the verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD . . . Such an approach places an unreasonable burden on a company's management and spokespersons to become linguistic experts . . . ." In determining whether a Regulation FD violation has occurred, Judge Daniels summarized the test: "As long as the private statement conveys the same material information that the public statement publicly conveyed, Regulation FD is not implicated, and hence no greater form of disclosure, pursuant to the regulation, is required." It sure sounds like a common sense test, looking at the information publicly available and whether the substance is reflected in the private statements, and not just whether the words used are identical or can be sliced and diced to show a modest difference. The SEC's suit is the first major test of the scope of Regulation FD, so while the provision and the opinion do not set forth simple rules, Judge Daniels has signaled that the regulation should be understood within the context of a market in which a great deal of information is available to investors rather than viewing the statements in a vacuum. (ph)