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It turns out that companies do have to worry about Regulation FD after all. Ever since the Securities and Exchange Commission issued this directive on fair disclosure more than two years ago, it’s been on the agency’s back burner. As a result, most companies weren’t overly concerned with it. That all changed in late November, when the SEC brought enforcement actions against four corporations for actual and alleged violations of Regulation FD. The rule forbids businesses from disclosing market-moving information to analysts and fund managers without releasing it to the public. The Raytheon Co., Siebel Systems Inc., and the Secure Computing Corp. were the targets of cease-and-desist actions that were settled with the companies neither admitting nor denying guilt. Siebel alone agreed to pay a $250,000 fine. The SEC also filed an investigative report against Motorola Inc., but declined to take formal action against the company. Regulation FD was a pet project of former SEC Chairman Arthur Levitt. It was passed in August 2000 over the fierce opposition of Wall Street, and went into effect the following October. After that, however, the agency said little, promising that companies need not harbor “excessive fear of enforcement.” The SEC’s recent actions, though, signal that it hasn’t forgotten about the rule. According to agency official Wayne Carlin, “When we become aware of a violation of Reg FD, we will treat it as we treat violations of any other rule, and enforce it vigorously.” Carlin heads the SEC’s New York-based Northeast Regional Office, which handled the investigations of Motorola and Raytheon. Edward Fleischman, a former SEC commissioner who is now senior counsel in the New York office of London’s Linklaters, believes that the recent enforcement actions send a more ominous message. He says that previously, he would have told the four companies not to worry whether they might have made a suspect disclosure. “[But] from this day forward,” Fleischman says, “my advice is, ‘Don’t talk without a script, answer no questions not in the script, and don’t talk to anyone unless you’re on the air.’ “ GOOD FAITH HELPS Three of the cases � against Raytheon, Motorola, and Siebel � involved the company’s private disclosure of upcoming profit information that differed from public reports. In the fourth case, officials at Secure Computing privately released information about a new contract to a few institutional investors or to analysts in one-on-one conversations. The SEC went easy on Motorola because it found that the company sought and followed the advice of in-house counsel “in good faith” � although, as it turned out, the advice was wrong. In February 2001, Schaumburg, Ill.-based Motorola publicly announced “significant weaknesses” in sales and orders. Later, after seeing that analysts were still overstating expected earnings, the company, after consulting with its lawyer, privately informed analysts that sales in fact were down by 25 percent. Carlin says the decision not to prosecute Motorola reflects two ideas. “The commission is saying it’s a good thing for companies to seek legal advice on questions of Reg FD compliance, and if you do so in good faith, it provides a lot of protection,” he says. “At the same time, if you fail to reveal all the relevant facts to your lawyer or you don’t follow your lawyer’s advice, having sought his advice is not going to cut any ice,” Carlin says. “It’s not a free pass.” The other case out of the New York office, against the military equipment manufacturer Raytheon, involved the selective disclosure in February 2001 of quarterly and semiannual earnings guidance. The SEC found it significant that the disclosures, which were made in one-on-one conversations with sell-side analysts, caused the analysts to revise their estimates for the Lexington, Mass.-based company. In contrast, two analysts who did not talk to Raytheon kept the same quarterly estimates. In its case against San Mateo, Calif.-based Siebel, the SEC said the company’s chief executive “made positive comments about the company’s business” at an invitation-only Goldman Sachs technology conference in November 2001. The same day, the company’s stock rose 20 percent on double the average volume. The chief executive allegedly disclosed that the company was optimistic because business was returning to normal, in contrast with earlier public statements about the tough market the company faced. The fourth case, against San Jose-based Secure Computing, accused the software company of privately leaking information to two fund managers about a new contract. As rumors of the deal spread, both the volume and price of its stock rose sharply, yet the company did not issue a press release until the next day, according to the SEC. For the companies themselves, the cease-and-desist orders are largely symbolic, since only Siebel is paying a fine, and a relatively minor one at that. But as symbols go, Carlin maintains, “it’s a pretty big deal.” This article was distributed by the American Lawyer Media News Service. Tamara Loomis is a contributing writer to Corporate Counsel magazine.

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