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Rather than negotiating a quick settlement of a Securities and Exchange Commission complaint, a California-based technology management company has challenged the authority of the federal agency to enact a rule regulating the disclosure of information about the company’s finances. The company’s motion to dismiss the complaint is pending before Judge George B. Daniels in the Southern District of New York. Daniels heard oral arguments on the motion in March. The SEC created the rule, known as Regulation FD, in October 2000 to prevent executives from releasing important information about a company to select individuals or groups without also disclosing the same information to the public. It was designed to prevent analysts and institutional investors who have personal access to top executives from unfairly benefiting from information unavailable to the average investor. Siebel Systems, with the support of the U.S. Chamber of Commerce, is arguing in the Southern District that only Congress has the authority to promulgate such a policy. Additionally, they claim that the rule violates the company executives’ right to free speech under the First Amendment. The dispute is part of a larger battle against what business interests and their lawyers regard as overzealous prosecutions and expensive new regulations imposed in the wake of recent corporate scandals. The Siebel case is the first enforcement action brought under Regulation FD to proceed without a quick settlement. SEC FILES CHARGES When the SEC first charged Siebel for violating Regulation FD in November 2002, the company settled the dispute by paying $250,000 and agreed to prevent future violations. Last June, the SEC filed a second charge, this time accusing Siebel and its CFO, Kenneth Goldman and another executive, Mark Hanson, of violating the regulation again. Six months after the first settlement, Goldman allegedly told approximately six institutional investors at a dinner hosted by Morgan Stanley that Siebel expected to improve its performance by signing millions of dollars in new deals and mentioned other moves as well. He apparently repeated the information during a meeting with Alliance Capital Management, a mutual fund company. These statements made in a private setting, the commission charged, contradicted negative information disclosed by the company in public statements in preceding weeks, giving these listeners an unfair advantage. Alliance, according to the SEC, took advantage of this information. After the meeting with Alliance, the fund’s traders purchased 114,200 shares of Siebel stock, the SEC contended, and covered positions shorting Siebel. In other words, Alliance changed its investing approach with regard to Siebel solely because of what it learned at the private meeting with Siebel executives, the SEC charged. Other investors did not have the same opportunity, regulators argued. MOUNTING A DEFENSE Claiming the SEC’s charges were unsupportable, Siebel decided not to settle and filed a motion to dismiss. “In general, companies settle with the SEC even if there is a righteous defense,” said Steven Schatz, co-counsel to Siebel from the Palo Alto, Calif., office of Wilson Sonsini Goodrich & Rosati. In this case, Siebel “was convinced that it had not violated Reg. FD,” Schatz continued, and decided to go to court. The U.S. Chamber of Commerce joined the fight, filing an amicus brief in support of Siebel. The Chamber is leading an aggressive campaign against what it considers to be overzealous regulation of businesses. It lobbies policy makers and participates in selective lawsuits to push forth its agenda. It has repeatedly blasted the SEC for allegedly overstepping its authority in other areas in recent years. For instance, the business group has called for reforms in the implementation of the 2002 Sarbanes-Oxley Act to reduce the additional obligations the legislation placed on companies. More recently, it argued in federal court in Washington, D.C., that the SEC exceeded its authority in adding new regulations on the mutual fund industry. The commission added a host of requirements to mutual funds despite objections from the industry and the Chamber. The Chamber became interested in the Siebel case when it realized that it was the first opportunity to challenge Regulation FD in court, said Gary Orseck of Washington, D.C.-based Robbins, Russell, Englert, Orseck & Untereiner. His firm drafted the amicus brief submitted to Judge Daniels. THE DEFENSE Siebel and the Chamber made similar arguments to the court. “[T]he SEC’s promulgation of Regulation FD — a major policy decision with profound ramifications for the investment community — greatly exceeds statutory authority, and endows to an administrative agency the substantive policy choices traditionally reserved for Congress,” the Chamber’s lawyers wrote. This defense relied on arcane issues in administrative law questioning the scope and breadth of authority granted to agencies by Congress to promulgate rules and regulations arising from a statute. A government lawyer on the case, Treazure Johnson of the SEC, declined to comment. However, the SEC has countered in papers filed with the court that the statutes from which it derives its authority granted it the power to regulate the frequency and manner in which issuers release information to the public, namely through quarterly and annual reports, but also through other kinds of disclosures. FIRST AMENDMENT DEFENSE Siebel and the Chamber also argue that the regulation violates the First Amendment right to free speech. This was not the type of argument normally found in SEC enforcement actions. “This is a very novel regulation,” Orseck explained, “that’s why the challenge seems novel.” “At its essence, Regulation FD requires corporate executives either to share their material information with no one, so as to avoid triggering the disclosure requirement, or to share it with everyone,” the Chamber wrote to Judge Daniels. “The former result chills protected expression,” the brief continued, “the latter mandates unwanted speech.” The SEC has replied that the regulation does not limit the content of speech but merely its dissemination. The commission did not want to prevent executives from speaking freely, it only wanted them to share this information with the public at large rather than selected individuals, according to court filings.

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