Siebel Systems Inc has won a landmark case against the Securities and Exchange Commission, which had accused the company of breaking disclosure rules. The ruling may loosen lips all over Wall Street.
Siebel said yesterday that a New York District Court judge had dismissed the SEC’s claims that two of the software company’s executives tipped off financial analysts that business was doing better than expected in April 2003.
According to Siebel, the judge said in his ruling that the SEC’s interpretation of Regulation FD was too broad and too unreasonable to be enforced.
FD, for Fair Disclosure, bars executives from giving market-moving financial information to financial analysts likely to act on it before disclosing it to shareholders and the public at large.
The judge said the SEC’s interpretation 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 according to Siebel.
The company said the ruling completely vindicated it and the two accused executives, CFO Mark Hanson and director of investor relations Ken Goldman, of any wrongdoing.
The SEC claimed in a June 2004 lawsuit that Goldman gave upbeat outlooks on Siebel’s sales pipeline during private meetings with Morgan Stanley and Alliance Capital Management in New York in April 2003.
At the same time, the SEC claimed, public investors were only aware of less-positive outlooks from the company. The SEC alleged Siebel’s former director of investor relations Mark Hanson failed to prevent the alleged disclosures.
Goldman stated that Siebel’s activity levels were ‘better,’ that new deals were coming back into the pipeline, and that the pipeline was now ‘growing’, the SEC claimed. Goldman also disclosed that there were some $5m deals in Siebel’s pipeline.
Following the meeting, Siebel shares jumped 8%, as rumors circulated that business was better than usual. Alliance converted its short position in Siebel to a long one, adding a net of 222,400 shares.
It was the second time Siebel, which was the first company the SEC ever fined for violating FD, had been accused. The company paid $250,000 in 2002 following upbeat remarks Tom Siebel made at an exclusive Goldman Sachs conference.
The latest ruling has important implications for all US public companies and the investing public. The judge, according to Siebel, chastised the SEC for over-aggressive enforcement of the regulation and said FD does not give adequate guidance to companies.
Applying Regulation FD in an overly aggressive manner cannot encourage full and complete public disclosure of facts reasonably deemed relevant to investment decision making, the judge wrote.
The judge, George Daniels, did not rule on the constitutionality of FD. Siebel had argued that its very existence violated the First Amendment, which guarantees the freedom of speech.