Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, September 08, 2005

Siebel judgement good news for IRO's

The SEC’s second prosecution in 2004 of the US software business Siebel sent shock waves through many IRO’s of companies listed in the US, and subject to Regulation FD. These same IRO’s will be mightily relieved at the judgement of Judge George B. Daniels of the Southern District of New York on August 31, 2005 which dismissed the lawsuit.

This second prosecution was brought by the SEC, who alleged that Siebel Systems' CFO Kenneth Goldman, in 2 one-on-one’s with investors in 2003, provided price sensitive information that was subsequently used for trading by several of those in attendance. The SEC also charged Siebel Systems' Mark Hanson, in charge of investor relations, for violation of his company duty to maintain adequate disclosure controls to ensure compliance with Reg FD. All six causes of action were dismissed.

The case raises key issues of what – and is not – material. Judge Daniels concluded the four statements Mr. Goldman made at the investor meetings were not materially different from what had been previously disclosed by the company and did not alter the total mix of information available to the reasonable investor. Moreover, he said, "Regulation FD was never intended to be utilized in the manner attempted by the SEC under these circumstances." He also criticized the SEC's use of the regulation "in an overly aggressive manner."

The Judge confirmed that "Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made." To demand otherwise would potentially mean that executives become overly cautious in communicating with analysts or selected investors especially in unrehearsed question-and-answer sessions, and responses to unsolicited inquiries.

Judge Daniels said, "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."

The sixth claim by the SEC was that Siebel had maintained inadequate controls and procedures. This claim was also dismissed, since the information provided was not deemed to be price sensitive. This judgement therefore should not be read as meaning that companies do not have to maintain proper controls and procedures.

Does this mean that Reg FD is fundamentally flawed and can safely be ignored by IRO’s? Absolutely not, but it does mean that IRO’s can communicate without worrying that the SEC will be watching over their shoulders at every nuance of language.


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