Siebel Systems agreed to settle a federal charge that it had violated a Securities and Exchange Commission regulation prohibiting companies from selectively disclosing information to favored Wall Street analysts before releasing the news to ordinary investors.
The agreement with the San Mateo software company marked the first litigation brought to enforce Regulation FD (for Fair Disclosure), which was adopted in August 2000 in order to ensure the public equal access to important investment information.
The SEC also announced Monday the settlement of administrative proceedings against Secure Computing, a San Jose security-software maker, and Raytheon, a Lexington, Mass., defense contractor.
All three companies agreed to cease and desist from any future violations of Regulation FD without admitting or denying any wrongdoing. Siebel Systems also agreed to pay a civil penalty of $250,000.
“They are trying to send a message that SEC is serious about enforcing the Regulation FD,” said Gordy Davidson, chairman of Fenwick & West, a Silicon Valley law firm that emphasizes its technology practice.
The three cases illustrate how broadly Regulation FD has affected the way companies communicate with investors. Before it was adopted, analysts generally relied on private conversations with executives to form an opinion about a company’s financial prospects. Analysts at larger, more prestigious firms often received special guidance.
“These cases, and Raytheon in particular, describe the kind of conduct that Regulation FD was supposed to prevent,” said Mark Schonfeld, associate regional director of the SEC’s Northeast Regional Office.
According to SEC documents, Raytheon Chief Financial Officer Franklyn Caine called individual analysts following a February 2001 earnings call to let them know their estimates for first-quarter earnings were “too high” or “very aggressive.”
After speaking with Caine, who was named as a party in the SEC action, analysts lowered their estimates, enabling Raytheon to beat the consensus estimate by a penny a share when it announced financial results three months later.
Regulators said Motorola avoided becoming the subject of a similar action because the company’s in-house legal counsel told a senior executive it was OK to telephone selected analysts.
In the case involving Secure Computing, Chief Executive John McNulty told selected analysts about a deal the company had made to bundle its software with products made by Cisco Systems before it issued a press release, according to SEC documents which named McNulty as a party.
Though regulators determined the initial disclosure was accidental, McNulty continued to talk about the deal with still more analysts as his employees prepared a press release, said Robert Mitchell, assistant district administrator of the San Francisco District Office. “That was a particular problem for them,” Mitchell said.
CEO not named
Tom Siebel, CEO of Siebel Systems, was not named in the action brought against his company, though it concerned statements he made during a Goldman Sachs technology conference in November 2001.
On a public earnings call three weeks before the conference, Siebel had spoken pessimistically about “an exceptionally soft market” and a tough business environment. But a few days before the conference, the company’s director of investor relations told a Goldman Sachs analyst that business was looking up. When Siebel struck an optimistic tone during his 10 a.m. presentation, the company’s stock took off. It closed more than 16 percent above the previous day’s close.
According to SEC documents, attendees at the conference began trading the stock even before Siebel finished speaking, and Goldman Sachs was the most active firm trading Siebel Systems stock that day.
A company press release Monday said Siebel’s remarks “were deemed to be in violation of Regulation FD because the presentation was not Webcast or otherwise simultaneously broadcast to the general public.” The company said Siebel did not know the conference was not being transmitted on the Internet.
“This is a great reminder to management teams everywhere that they better be careful what they say in question-and-answer sessions and in breakout sessions at conferences,” said Patrick Walravens, an analyst at JMP Securities.