In a stunning loss for the U.S. Securities and Exchange Commission, the U.S. District Court for the Southern District of New York dismissed the SEC's suit against Siebel Systems, Inc., alleging violations of Regulation FD in connection with two private meetings with institutional investors. The SEC had alleged that "significantly more positive and upbeat" statements by Siebel's CFO communicated material, nonpublic information regarding Siebel's performance that materially contrasted with earlier company public statements that indicated "an apocalyptic economic environment." In rejecting the SEC's allegations, the court criticized the Commission's overly-aggressive enforcement of Regulation FD.

In determining whether the CFO's statements violated Regulation FD, the court found that the private statements conveyed the same substantive information as that in the public statements, so that Regulation FD was not violated. The court noted that Regulation FD was not intended to be used in the way that the SEC had in this case. In particular, the SEC had scrutinized, at an extremely heightened level, each particular word used in the CFO's statement, including verb tense and the general syntax of each sentence. The court stated that no support for such an approach could be found in Regulation FD itself, and, in fact, the SEC proposing and adopting releases for Regulation FD had cautioned against any "chilling effect" on disclosure of information. Moreover, the court stated that 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 court also dismissed the SEC's claim that Siebel violated the disclosure controls and procedures provisions in Section 13(a) of the Exchange Act and Rule 13a-15 thereunder on the basis that the SEC had not provided particular factual allegations pertaining to inadequate disclosure controls and procedures.

Because the court dismissed the case based on the SEC's failure to allege a cognizable cause of action under Regulation FD, the court declined to address the constitutional and statutory authority challenges raised by Siebel. These arguments had been addressed in amicus curiae briefs filed by the U.S. Chamber of Commerce and a group of law professors.

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