SEC v - by Leslie Caton

SEC v - by Leslie Caton

HUMES FINAL.DOC 10/31/2006 10:10:20 AM SEC v. Siebel Systems, Inc.: Comment on the SEC’s Failed Enforcement of Regulation Fair Disclosure in Federal...

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SEC v. Siebel Systems, Inc.: Comment on the SEC’s Failed Enforcement of Regulation Fair Disclosure in Federal Court Adam Humes I. INTRODUCTION ........................................................................................................ 161 II. BACKGROUND: REGULATION FAIR DISCLOSURE ..................................................... 163 A. Reasons for Adopting Regulation Fair Disclosure ............................................. 163 B. Regulation FD and the Disclosure Process........................................................ 164 C. Material and Nonpublic Information ................................................................. 164 D. Complaints about Regulation FD....................................................................... 166 III. SEC V. SIEBEL SYSTEMS, INC..................................................................................... 166 A. Case Background................................................................................................ 166 1. April 2003 Communications with the Public ................................................. 166 2. Private Meetings of April 30 and the SEC Complaint ................................... 168 3. Siebel’s Motion to Dismiss ............................................................................ 168 B. Dismissing the Case............................................................................................ 169 C. The Substance of the SEC’s Complaint .............................................................. 171 IV. ANALYSIS ................................................................................................................ 173 A. The Second Circuit’s View of Rule 12(b)(6) ....................................................... 173 B. The Merits of the SEC’s Regulation FD Claim .................................................. 174 V. RECOMMENDATION ................................................................................................. 176 VI. CONCLUSION ........................................................................................................... 177 I. INTRODUCTION On April 30, 2003, two executives of Siebel Systems, Inc. 1 (“Siebel” or “Siebel Systems”), Chief Financial Officer Kenneth A. Goldman and Mark D. Hanson, head of Siebel’s investor relations, attended two private events in New York City. 2 During these

1. Siebel Systems, Inc. is a “leading seller of customer-relationship-management, software, which helps track sales and customer service contacts.” Mike Tarsala, Siebel Stock Rises after Analyst Dinner, CBS.MarketWatch.com, May 1, 2003, http://www.marketwatch.com. It also provides services and consulting related to its products. Id. 2. Complaint at 1, 4, SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694 (S.D.N.Y. 2005) (No. 04 Civ. 5130), 2004 WL 3142265.

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functions, the two men discussed the future prospects for their company’s growth. At the first event, Siebel’s officers attended a one-on-one meeting with Alliance, an institutional investor. 3 After the meeting, Goldman and Hanson attended a dinner hosted by Morgan Stanley. Attendance at this event required an invitation. The guest list included “approximately six institutional investors and a number of Morgan Stanley research and institutional sales personnel.” 4 The nature of these events led many observers to conclude that Siebel had selectively disclosed important information in order to bolster its standing with these members of the investment industry. The hosts of these private events determined who attended. Neither Siebel nor its hosts provided any access to the media or provisions for webcasting the proceedings. 5 Even though Siebel insisted that it had not conveyed any new information to attendees, media speculation to the contrary quickly arose. 6 The day after the private meetings, the price of Siebel stock rose nearly eight percent. 7 Additionally, the stock traded on volume of around twenty-five million shares, almost four times the level of the day before and twice its average volume of the previous fifty days. 8 Several attendees of the private meetings purchased Siebel stock. “[W]ithin roughly four trading hours after Goldman and Hanson met with Alliance representatives, Alliance converted its 108,200 share short position in Siebel stock into a 114,200 share long position[,] . . . a net change of 222,400 shares.” 9 Given this market activity, it appeared that the company’s executives had provided important information to its private hosts. With all the makings of a blatant violation of Regulation Fair Disclosure (“Regulation FD”), the Securities and Exchange Commission (“the SEC” or “the Commission”) began an investigation within two weeks of the incident. 10 This Comment discusses Regulation FD in the context of its first application in federal district court. Following an overview of Regulation FD in Part II, Part III analyzes the facts from which the SEC’s claim arose. Part III also discusses the basis for Siebel’s motion to dismiss the case and the SEC’s arguments in favor of continued litigation. After summarizing the district court’s opinion in SEC v. Siebel Systems, Inc., Part IV discusses the district court’s interpretation of Federal Rule of Civil Procedure 12(b)(6) and the effects of this interpretation. Finally, this Comment analyzes the district court’s dismissal of the case and the public policy that supports the district court’s decision.

3. Id. at 6. 4. Id. 5. Id. at 2. 6. Tarsala, supra note 1. 7. Stockhouse, http://stockhouse.com (enter “SEBL” into “Quote Search”; select “History”; enter “04/30/2003” into the field labeled “Jump to date”). 8. Id.; Tarsala, supra note 1. 9. Complaint, supra note 2, at 7. 10. Technology Brief—Siebel Systems, Inc.: SEC Questions Lead to Probe of Executive Statements, WALL ST. J., May 12, 2003, at A12. The SEC’s May 2003 investigation was not the first time the Commission suspected Siebel’s executives of failing to comply with Regulation Fair Disclosure. In late 2002, the SEC found that Siebel had violated the regulation on a previous occasion. In the Matter of Siebel Systems, Inc., Exchange Act Release No. 46896, 2002 WL 31643027 (Nov. 25, 2002).

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II. BACKGROUND: REGULATION FAIR DISCLOSURE

A. Reasons for Adopting Regulation Fair Disclosure As Chairman of the SEC for over seven and a half years, Arthur Levitt presided over one of the strongest bull markets in American history. Levitt realized that individual investors, drawn by the potential gains offered by rising stock prices, “were buying stocks as never before.” 11 The Chairman argued that he made the concerns of small individual investors his “passion.” 12 If this statement is true, Regulation FD must stand as “the crowning achievement” 13 during Levitt’s tenure. The SEC adopted Regulation FD to combat selective disclosure by issuers of public securities. 14 Under this practice, issuers disclose “important nonpublic information . . . to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.” 15 Selective disclosures had long occurred during private meetings between large shareholders, analysts, and top managers. In the 1990s, however, executives increasingly used conference calls with analysts and institutional investors to relay information regarding quarterly earnings, acquisitions, and other important events that might impact a company’s stock price. 16 Since such calls often only included analysts and large stockholders, small investors could not act on information given during these calls within an effective time period. 17 Through Regulation FD, the SEC sought to “level [the] playing field” for individual investors by ensuring that they had the opportunity to obtain important information regarding public companies within the same timeframe as large investors and institutions. 18 Thus, the SEC hoped Regulation FD would restore investor confidence 19 and force analysts to apply their skills in evaluating a company, instead of simply repeating information that companies selectively disclosed to them. 20 Also, the Commission designed Regulation FD to end a practice by some corporate managers of using material, nonpublic information “as a commodity to be used to gain or maintain favor with particular analysts or investors.” 21 Levitt labeled the SEC’s efforts towards 11. ARTHUR LEVITT WITH PAULA DWYER, TAKE ON THE STREET 7 (2002). 12. Id. 13. Farewell Fair Disclosure?, ECONOMIST, Feb. 10-16, 2001, at 73. 14. Regulation FD adopts the definition of “issuer” contained within the Securities Exchange Act of 1934 as “one that has a class of securities registered under [15 U.S.C. § 78l]” or that “is required to file reports under [15 U.S.C. § 78o(d)].” 17 C.F.R. § 243.101(b) (2005). 15. Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,716 (Aug. 24, 2000) (to be codified at 17 C.F.R. pts. 240, 243, 249). 16. Randall Smith, Conference Calls to Big Investors Often Leave Little Guys Hung Up, WALL ST. J., June 21, 1995, at C1. 17. Id. (stating that conference calls provided advantages to large institutional investors, who often acted on information from these calls the very minute executives provided it, whereas small investors were “lucky if they [got] to read about what ha[d] been said in the next day’s newspaper”). 18. Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,716. 19. Id. 20. Id. at 51,722. 21. Id. at 51,716. The SEC also intended for Regulation FD to stop the inverse of this practice, whereby top managers stopped leaking material information to analysts who took negative or pessimistic views towards a company’s prospects for growth and earnings. Id. at 51,716-17.

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stopping the flow of information to privileged parties as nothing short of an “experiment in democracy.” 22 B. Regulation FD and the Disclosure Process Regulation Fair Disclosure (“Regulation FD”) applies to situations where “an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer” 23 to brokers, dealers, investment advisers, investment companies, and those associated or affiliated with these people, 24 as well as securities holders, where “it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.” 25 When an issuer discloses material, nonpublic information to one of these listed groups, the issuer must publicly disclose the information. 26 The timing of a company’s required disclosure differs, depending on whether the issuer or its agent revealed the information intentionally or unintentionally. When an issuer discloses information intentionally to one of the listed groups, the issuer must simultaneously disclose that information to the public. 27 For unintentional disclosures, the issuer must “promptly” make a public disclosure. 28 Regulation FD gives decision-makers great discretion to decide the best way to make a required public disclosure. 29 An issuer can satisfy its public disclosure duty by either filing a Form 8-K or by issuing a press release through a popular press service. 30 In order to reduce some executives’ tendency to disclose material, nonpublic information during invitation-only conference calls, the Commission suggested that companies use webcasting to allow interested small investors to receive important information at the same time as securities professionals. 31 C. Material and Nonpublic Information Regulation FD does not define what constitutes material, nonpublic information. Instead, the SEC stated that Regulation FD’s use of “material” and “nonpublic” conforms to existing case law definitions. 32 Specifically, the SEC adopted the definition of materiality from TSC Industries, Inc. v. Northway, Inc., where the Supreme Court stated that information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision and that such information must “significantly alter[] the ‘total mix’ of information made available” to

22. LEVITT WITH DWYER, supra note 11, at 103. 23. 17 C.F.R. § 243.100(a) (2005). 24. 17 C.F.R. § 243.100(b)(1)(i-iii). 25. 17 C.F.R. § 243.100(b)(1)(iv). 26. 17 C.F.R. § 243.100(a). 27. 17 C.F.R. § 243.100(a)(1). 28. 17 C.F.R. § 243.100(a)(2). 29. Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,723 (Aug. 24, 2000). 30. Id. (stating that an issuer can discharge its duty to publicly disclose information by filing a Form 8-K or by “[disseminating] information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public”). 31. See id. at 51,724. 32. See id. at 51,721.

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the reasonable investor. 33 Additionally, the Commission defined nonpublic information as that which “has not been disseminated in a manner making it available to investors generally.” 34 The Commission chose these more flexible definitions at the expense of increased certainty for issuers. 35 The SEC did not leave issuers bereft of all guidance, however. In addition to case law guidance, the Commission outlined several types of information that might typically constitute material evidence, depending on an issuer’s particular situation. These types include: (1) Earnings information; (2) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (3) new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract); (4) changes in control or in management; (5) change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report; (6) events regarding the issuer’s securities—e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities; and (7) bankruptcies or receiverships. 36 Given Regulation FD’s focus on material, nonpublic information, private meetings between executives and institutional investors have become very risky endeavors. The SEC explicitly stated that during private meetings with analysts, an issuer official who provides guidance concerning earnings estimates “takes on a high degree of risk under Regulation FD.” 37 Although Regulation FD did not ban private meetings altogether, 38 meetings where issuers convey information to a select group can raise the “mosaic” problem. Specifically, an issuer does not disclose material information when he or she reveals information that is immaterial when viewed in isolation. 39 In this situation, the immaterial information merely allows an analyst to “complete a ‘mosaic’ of information that, taken together, is material.” 40 Thus, the analyst is rewarded for his or her skill and efforts. However, an issuer does disclose material information if the issuer takes material information, dissects the information into immaterial pieces, and then relays the information to an analyst. 41 33. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 34. Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,721 (citing SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 854 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969); In re Investors Mgmt. Co., 44 S.E.C. 633, 643 (1971)). 35. Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,721. 36. Id. (emphasis added). 37. Id. 38. For a skeptical view of private meetings after Regulation FD, see Farewell Fair Disclosure?, ECONOMIST, Feb. 10-16, 2001, at 73 (raising two compelling questions regarding private meetings: “[f]irst, why would an elite group of overworked analysts bother to attend a meeting at which a reasonable person would not learn anything he was likely to want to know? Second, why should attendance be restricted, if the information was not material?”). 39. Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,722. 40. Id. (“The focus of Regulation FD is on whether the issuer discloses material nonpublic information, not on whether an analyst, through some combination of persistence, knowledge, and insight, regards as material information whose significance is not apparent to the reasonable investor.” (emphasis added)). 41. Id. at 51,721.

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These situations feature the type of unclear standards that likely worried securities professionals when the SEC adopted Regulation FD. D. Complaints about Regulation FD Institutional investors and securities professionals certainly would have preferred an explicit definition of materiality. This concern was largely due to the fact that issuers often disclosed information to analysts on the spot, such as during question and answer sessions, with little or no time to consult attorneys in order to determine materiality. Under Regulation FD, when officials meet privately with analysts and shareholders, they need to resolve issues of materiality the moment analysts and investors pose questions. Many felt that this would cause Regulation FD—intended to increase the flow of information to investors—ultimately to “chill” corporate speech, since companies might find it easier to avoid Regulation FD penalties by reducing their communication generally. 42 A number of commentators also predicted that companies would incur high costs from liabilities and compliance associated with Regulation FD. 43 Some critics have alleged that Regulation FD reduces the amount of available information on a corporation, which makes securities markets more inefficient. 44 Others argue that the vague definition of materiality amounts to a constitutional violation. 45 III. SEC V. SIEBEL SYSTEMS, INC. A. Case Background 1. April 2003 Communications with the Public In April 2003, Siebel executives conducted conference calls with analysts to discuss worrying first quarter results. Like other technology companies, declining economic conditions caused some of Siebel’s sales to slip, as customers apparently delayed purchases in light of poor economic conditions and the war in Iraq, which began toward the end of the first quarter of 2003. 46 This decline in sales left investors feeling uncertain

42. Id. at 51,718 n.17 (citing the concerns of parties affected by Regulation FD, such as the Securities Industry Association, the Association for Investment Management and Research, Merrill Lynch, and the New York City Bar Association). 43. The SEC countered that simultaneous disclosure of conference calls, mostly through webcasts, would not cost much and that the SEC crafted Regulation FD so that it could only support enforcement actions by the SEC (assuming the SEC could prove reckless or knowing conduct), not private litigation. Id. at 51,718. 44. Scott Russell, The Death of the Efficient Capital Market Hypothesis and the Birth of Herd Behavior, 82 B.U. L. REV. 527 (2002); Brian K. Barry, The Securities and Exchange Commission’s Regulation Fair Disclosure: Parity of Information or Parody of Information?, 56 U. MIAMI L. REV. 645, 664 (2002) (arguing that Regulation FD “contributed to the decline” of the economy that started around 2000). 45. Nicholas Kappas, A Question of Materiality: Why the Securities and Exchange Commission’s Regulation Fair Disclosure is Unconstitutionally Vague, 45 N.Y.L. SCH. L. REV. 651 (2002). However, since the SEC adopted the Supreme Court’s exact definition of materiality, as established for purposes of other securities regulations, this argument seems to take issue mostly with the Court’s precedents. 46. Carrie Kirby, Siebel Blames ‘Yucky’ Economy for Profit Drop, SAN FRANCISCO CHRON., Apr. 24,

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about Siebel’s sales pipeline. 47 Like other software firms, Siebel’s “transaction pipeline is a leading indicator of . . . financial performance.” 48 In three public statements made during April 2003, Siebel sought to address investors’ concerns over the company’s performance in the midst of declining economic conditions. On these three occasions, Siebel communicated through the media or through webcast conference calls in a manner that satisfied the Regulation FD requirements. On April 4, Siebel warned investors that it would miss first quarter revenue projections. 49 Executives also informed investors that it had not yet closed a number of important deals it had expected to finalize before the end of the first quarter. 50 Thus, initial communications from Siebel indicated that the company had missed its projections. The health of the company’s transaction pipeline remained uncertain. On April 23, Siebel’s statements to investors confirmed the picture portrayed on April 4 of a disappointing first quarter. The company now expected a ninety-three percent drop in profits from the first quarter of 2002. 51 Executives for Siebel told investors that the health of the overall economy would dictate whether Siebel would grow in the coming quarters. They stated that “[i]f the economy expands in the second quarter or the third or the fourth, Siebel Systems will grow significantly. If the economy does not expand, Siebel Systems will not grow significantly during that period.” 52 Siebel maintained that it would have attained its quarterly projection, but for deals that “fell through” into the second quarter. 53 In the April 23 press release and conference call, Siebel gave some figures that helped quantify the deals that had slipped into the second quarter. 54 If these deals were not reflected in the first quarter income statement only because Siebel had finished the deal in the second quarter, investors would have had a different picture of Siebel’s condition than if the company no longer expected these contracts to materialize at any point in the near future. Responding to a question during the conference call regarding the company’s transaction pipeline, CEO Tom Siebel stated that: [o]ur guidance and license revenue for the quarter is [in the] 120 to 140 million range. I think we’ll see a lot of small deals. We’ll see some medium deals. 2003, at B3. 47. Siebel Systems Reports Preliminary Revenue and Earnings for the Quarter Ended March 31, 2003, BUS. WIRE, Apr. 4, 2003. 48. Complaint, supra note 2, at 5 (“For shareholders or potential investors, information concerning the status of the Company’s pipeline . . . and the activity levels of the sales force . . . is important to making an investment decision because such information is an indicator of the Company’s ability to generate revenue . . . . ”). 49. Dennis Calafghan, Siebel Warns of Revenue Shortfall, EWEEK, Apr. 7, 2003 (indicating that total revenue would be approximately ninety-one percent of Siebel’s January estimate while license revenue would amount to about eighty-seven percent of its quarterly projection). 50. Complaint, supra note 2, at 5 (using the term “slipped” to refer to deals that do not close before quarter’s end, contrary to the company’s expectations). 51. Kirby, supra note 46, SAN FRANCISCO CHRON., Apr. 24, 2003, at B3. 52. Id.; see also Siebel Still Dragged Down by the Economy, EWEEK, Apr. 24, 2003 (quoting CEO Tom Siebel, who stated that “[c]learly, our biggest competitor is the economy”) [hereinafter Siebel Dragged Down]. 53. Siebel Dragged Down, supra note 52. 54. Memorandum of Points and Authorities in Support of Defendants’ Motion to Dismiss the Complaint at 7, SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694 (S.D.N.Y. 2005) (No. 04 CV 5130), 2004 WL 3142264 [hereinafter Motion to Dismiss].

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We’ll see a number of deals over a million dollars. And I suspect we’ll see some greater than five [million dollars]. 55 2. Private Meetings of April 30 and the SEC Complaint The Security and Exchange Commission’s complaint stated that disparities existed between Siebel’s public statements in April 2004 and those made at the private meetings of April 30. 56 The Commission also alleged that Siebel had disclosed new, material information during the private meetings, to which the general public had no access. 57 The SEC asserted that before April 30, Siebel had not “quantif[ied] the deals that slipped, . . . describe[d] the status of the company’s pipeline . . . [or] characterize[d] the Company’s activity levels.” 58 Instead, the SEC alleged, the company had only conditioned its future performance on the success of the overall economy. 59 The Commission stated that Siebel presented new material qualitative information to private audiences on April 30. In particular, the SEC claimed that during the private events, Siebel’s Chief Financial Officer, Kenneth Goldman, informed attendants that its transaction pipeline was “growing” from new deals and that the company’s “activity levels were ‘better.’” 60 The SEC argued that these descriptions of the company’s business activity materially differed from public statements made by Siebel executives earlier in the month, especially from those statements that conditioned the company’s performance on the health of the economy. According to the Commission, “[b]ased on [Siebel’s public disclosures], the total mix of information available to investors was that Siebel’s business had performed poorly in the first quarter and would improve in the second quarter only if the economy improved.” 61 3. Siebel’s Motion to Dismiss Siebel Systems based its motion to dismiss on four arguments. First, it argued that the facts themselves did not amount to a violation of Regulation FD. 62 Second, the Company alleged that the SEC “lacked statutory authority to promulgate Regulation FD . . . .” 63 Third, Siebel argued that Regulation FD infringed “corporate speech in violation of the First Amendment of the United States Constitution.” 64 Finally, it argued that Regulation FD violates the Due Process Clause of the Fifth Amendment because it is unconstitutionally vague. 65 In arguing that it did not violate Regulation FD, Siebel stated that its

55. Id. at 8 (emphasis added). 56. Complaint, supra note 2, at 7. 57. Id. at 2. 58. Id. at 6. 59. Id. at 5. 60. Id. at 7. 61. SEC’s Opposition to Motion to Dismiss the Complaint at 10, SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694 (S.D.N.Y. 2005) (No. 04 CV 5130), 2004 WL 3142264 [hereinafter SEC’s Opposition]. 62. Motion to Dismiss, supra note 54, at 2. 63. Id. 64. Id. 65. Id.

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communications during private meetings only included a mix of immaterial and material information that it had already disclosed to the public. Siebel did not deny that its executives had provided information regarding the company’s transaction pipeline. However, the company stated that it had already relayed this same information to the public on April 23, 2003. 66 In the Commission’s opposition to Siebel’s motion to dismiss, the SEC stated that Siebel’s statements at the private events “materially contrasted with the Company’s prior public statements . . . .” 67 This argument rested on the fact that in describing Siebel’s transaction pipeline on April 23, CEO Tom Siebel stated that “[w]e’ll see a number of deals over a million dollars. And I suspect we’ll see some greater than five [million dollars].” 68 The SEC argued that the material difference between this statement and that given to attendees at the private events was that Siebel did not use the future tense to describe the transactional pipeline at the private events. 69 According to the SEC, Siebel described its pipeline at the private events of April 30 by stating “that there were some $5 million deals in Siebel’s pipeline.” 70 In countering Siebel’s assertion that these phrases amounted to the same information, the SEC argued that the “use of the future tense and the word ‘suspect’ demonstrates that his statements were not fact but rather were forward-looking. In contrast, [Siebel’s statements at the private events] were in the present tense and constituted a factual statement of what the Company was seeing in its pipeline.” 71 Siebel also argued in its motion to dismiss that executives did not disclose material, nonpublic information when they stated, at the private meetings, that the pipeline was growing and that activity levels were improving. 72 The Company argued “[t]he only reasonable inference to be drawn from [its statements earlier in April] was that the Company’s pipeline was improving,” since the Company had publicly disclosed that it “expected its license revenue to improve from $112 million to somewhere between $120 and $140 million.” 73 Siebel similarly contended that its comments that activity levels were “good” or “better” than the first quarter of 2003 were “the only meaningful conclusion one could draw from the Company’s public statements that it expected substantial revenue increases.” 74 Siebel also argued, in the alternative, that even if it had not previously disclosed these statements regarding its pipeline and activity levels, its comments at the private events amounted to nothing more than “mere general statements of corporate optimism that lack the specificity required to establish materiality.” 75 B. Dismissing the Case The SEC’s complaint, when viewed in isolation, appeared to constitute a violation of 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

See supra Part III.A.1. SEC’s Opposition, supra note 61, at 8. Id. (emphasis added). Id. Complaint, supra note 2, at 7 (emphasis added). SEC’s Opposition, supra note 61, at 8 n.4. Motion to Dismiss, supra note 54, at 9. Id. Id. Id.

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Regulation FD. Considering only the information set out in the SEC’s original complaint, but not the information stated in Siebel’s motion to dismiss or the SEC’s response to that motion, it seemed that Siebel violated Regulation FD, since the SEC made it appear that Siebel had not previously quantified the state of its transaction pipeline. 76 Only after considering Siebel’s motion to dismiss and Siebel’s public communications generally does it become apparent that the Company had provided some numbers concerning its pipeline and sales activity and that the SEC’s claim on this point turns on verb tense, not disparities between public and private information. 77 The district court found that Siebel had not violated Regulation FD, even though it viewed the complaint in a light most favorable to the SEC. 78 To reach this conclusion, the district court interpreted Federal Rule of Civil Procedure 12(b)(6) 79 to permit the court to view materials beyond those included in a complaint. 80 As a starting consideration of Rule 12(b)(6), a “court must accept as true the factual allegations in the complaint . . . and draw all reasonable inferences in favor of the plaintiff.” 81 Federal courts within the Second Circuit, such as the federal district court for the Southern District of New York, where the SEC filed suit against Siebel, approved of the position that a federal court should not allow a Rule 12(b)(6) dismissal “unless it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief.” 82 If the Second Circuit’s view of Rule 12(b)(6) had not extended any further than these formulations, the SEC would have likely overcome Siebel’s motion to dismiss. In particular circumstances, however, the Second Circuit considers materials beyond the complaint to decide a Rule 12(b)(6) motion. Under this rule, a “district court must limit itself to a consideration of the facts alleged on the face of the complaint and to any documents attached as exhibits or incorporated by reference.” 83 By the time of Siebel Systems, Inc., the Second Circuit had adopted a view of Rule 12(b)(6) that allows a court to consider the “full contents” of a document “deemed ‘integral’ to the complaint ‘despite the fact that the complaint contains only limited quotation from that document.’”84

76. Complaint, supra note 2, at 6; see SEC’s Opposition, supra note 61, at 8. 77. See Motion to Dismiss, supra note 54, at 8. 78. SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694, 710 (S.D.N.Y. 2005). 79. FED. R. CIV. P. 12(b)(6) (allowing parties against whom another party has asserted a “claim, counterclaim, cross-claim, or third-party claim” to dismiss such an action through a motion that states that the other party has failed “to state a claim upon which relief can be granted”). 80. Siebel, 384 F. Supp. 2d at 699-700. 81. Bolt Elec., Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir. 1995). 82. Hoover v. Ronwin, 466 U.S. 558, 587 (1984) (Stevens, J., dissenting), cited with approval in Courtenay Commc’ns, Corp. v. Hall, 334 F.3d 210, 213 (2d Cir. 2003); Desiderio v. Nat. Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 202 (2d Cir. 1999); Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). This Comment does not attempt to analyze other circuit courts’ views of Federal Rule of Civil Procedure 12(b)(6). Instead, the Background and Analysis focuses only on cases within the Second Circuit, since precedents from this circuit formed the basis of the district court’s analysis in SEC v. Siebel Systems, Inc. 83. Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989) (emphasis added). 84. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. 1996) (citing I. Meyer Pincus and Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991)). Even though Cosmas supported the proposition that a district court could consider documents incorporated by reference, it disagreed with San Leandro’s view of what constitutes an integral document. See Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989) (holding that the district court incorrectly considered information from a

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C. The Substance of the SEC’s Complaint Considering the Second Circuit’s view of motions to dismiss, the district court in Siebel Systems had the tools to look well beyond the face of the SEC’s complaint. The SEC had quoted from most, if not all, of Siebel’s public communications in April 2003, so the district court could refer to a month of Siebel’s public statements from which it could find errors in the SEC’s contentions. Considering the direct contradictions between the SEC’s complaint and Siebel’s motion to dismiss, it is unsurprising that the district court found that “the SEC selectively [cited]” from Siebel’s public statements. 85 As a result, the district court found that: [s]ince the SEC relied on the non-disclosure in the public statements, as an integral component in the framing of its complaint, the full content of the statements [made during April 2003], as oppose[d] to the limited portions the SEC selectively decided to include in the complaint, is properly considered by the Court. 86 After the district court reviewed the full text from Siebel’s April 2003 public communications, the court employed a variety of legal and policy arguments to find that none of the alleged April 30 disclosures violated Regulation FD. The court reasoned that in adopting Regulation FD, the SEC struck a delicate balance between preventing selective disclosure and reducing corporate speech. 87 In adopting Regulation FD, the SEC intended that materiality would include “giving guidance or express warnings to analysts or selected investors about important upcoming earnings or sales figures . . . .” 88 However, the court recognized that even the SEC did not think that “more generalized background information” would likely be material under Regulation FD. 89 The district court found that none of the SEC’s complaints constituted a claim from which relief could be granted. 90 The court found that the information conveyed in the alleged violations of Regulation FD had already been conveyed to the public, either explicitly or through strong implication. 91 As a result, the district court ruled that Siebel’s statements to private investors on April 30 did not add “to the total mix of information publicly available.” 92 First, the district court found that in light of other communications by Siebel in April 2003, its executives had already publicly disclosed “the existence of five million dollar deals in the company’s pipeline for the second quarter” before the private meetings on company’s annual report and its 10K when the pleader had not attached these documents to the complaint and had not incorporated these documents by reference, even though an amended complaint contained short quotations from the documents). 85. SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694, 700 (S.D.N.Y. 2005). 86. Id. at 701. 87. Id. at 701-02. 88. Selective Disclosure and Insider Trading, 64 Fed. Reg. 72,590, 72,595 (proposed Dec. 28, 1999). 89. Id., cited in SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694, 701 (S.D.N.Y. 2005). 90. Siebel, 384 F. Supp. 2d at 701 (listing the SEC’s claims for violations of Regulation FD as: “(1) that there were some five million dollar deals in the company’s pipeline for the second quarter of 2003; (2) that new deals were coming into the sales pipeline; (3) that the company’s sales pipeline was ‘growing’ or ‘building’; and (4) that the company’s sales or business activity levels were ‘good’ or ‘better’”). 91. Id. at 704. 92. Id. at 706.

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April 30. 93 The district court also dismissed the SEC’s counterargument that Siebel issued its earlier statements about the five million dollar deals in the future tense, and reserved the present tense for private audiences. 94 The court found that in scrutinizing Siebel’s statements “at an extremely heightened level,” the SEC attempted to apply Regulation FD in a manner that undermined the regulation’s purpose of “provid[ing] the public with a broad flow of relevant investment information . . . .” 95 Overall, the district court found that “Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made.” 96 Second, the district court found that Siebel had publicly disclosed information indicating that the company’s new deals were causing its pipeline to grow. 97 Citing the transcript from Siebel’s April 23 conference call, the court noted that Thomas Siebel told investors that every quarter, Siebel conducts “between 45 and 55 percent” of its business with new customers. 98 From this statement, the district court found that Siebel had already publicly disclosed the fact that new deals were entering its pipeline. 99 Third, the district court found that Siebel’s “description of the pipeline as ‘growing’ or ‘building’” did not provide previously undisclosed material information. 100 During its April 23 conference call, Siebel said that based on its analysis of the pipeline, it expected license revenues and total revenues to grow during the second quarter. 101 The court found that, “[b]ased on this information, a reasonable investor would be aware that the sales pipeline was ‘growing’ and ‘building.’” 102 Fourth, the district court found that the statements of Siebel’s Chief Financial Officer Kenneth A. Goldman—“that the activity levels were ‘good’ or ‘better’”—had already been disclosed earlier in the month when Siebel “publicly reported that it anticipated a future increase in the company’s performance.” 103 Thus, the court found that the words “good” and “better,” while only communicated during the private meetings, merely described “underlying quantitative information provided publicly by Siebel Systems.” 104 Along with dismissing the SEC’s four main arguments, the district court rejected the other assertions made by the SEC. The district court concluded that the stock activity that occurred the day after Siebel’s private meetings did not sufficiently prove a violation of Regulation FD, absent disclosure of material nonpublic information. 105 Additionally, the 93. Id. at 704. 94. Id. 95. Siebel, 384 F. Supp. 2d at 704-05. 96. Id. 97. Id. at 704. 98. Id. at 705. 99. Id.. 100. Siebel, 384 F. Supp. 2d at 705. 101. Id. at 705-06. 102. Id. at 706. 103. Id. 104. Id. 105. Siebel, 384 F. Supp. 2d at 707 (citing United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991), for the proposition that “[a]lthough stock movement is a relevant factor to be considered in making the determination as to materiality, it is not, however, a sufficient factor alone to establish materiality,” and explaining unusual trading levels were due to analysts who “considered Mr. Goldman’s private statements significant”).

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district court was not persuaded by the SEC’s arguments that prior to the private meetings, Siebel had strictly conditioned its performance on the economy. The court found further support for its decision to dismiss the SEC’s case when it determined that the statements in question did not “[fall] squarely within the seven enumerated categories, listed by the SEC, in the Adopting Release, as being more likely to be considered material.” 106 Overall, the court found the SEC’s arguments strange, considering that Regulation FD does not require an issuer to “repeat material information which has already been previously publicly proclaimed.” 107 IV. ANALYSIS A. The Second Circuit’s View of Rule 12(b)(6) The Second Circuit’s view of Rule 12(b)(6) produces efficient results when the interpretation is viewed in light of underlying policy considerations. The main reason for precluding a court “from considering documents outside the complaint is . . . [a] plaintiff’s lack of notice. Where a plaintiff has actual notice of the documents and has utilized them in framing the complaint, the underlying rationale for precluding review of the documents no longer exists.” 108 One can imagine situations where the Second Circuit’s view of 12(b)(6) could dispose of legitimate claims. For instance, a defendant may be able to create the impression that a plaintiff has selectively cited from documents, even though further discovery might prove that the contradictory evidence within the document is actually false. This interpretation of Rule 12(b)(6) probably achieves maximum efficiency, with minimum side effects, when courts use it in cases involving claims such as Regulation FD and securities fraud. In these types of cases, the factual background is comprised largely of written records and public accounts from which the fact finder’s decision turns on the timing and nature of information released to the public. 109 Additionally, a district court judge presumably has relatively easy access to such public materials as newspaper accounts and SEC filings. The court in Siebel Systems did not necessarily limit this view of Rule 12(b)(6) only

106. Siebel, 384 F. Supp. 2d at 708. For a list of the seven enumerated categories deemed likely to be material, see supra Part II.C. (citing Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,721 (Aug. 24, 2000)). 107. Siebel, 384 F. Supp. 2d at 708. 108. Id. at 700. 109. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. 1996) (stating that plaintiffs’ claim that defendant had committed securities fraud arose from “allegedly actionable statements” that “were culled from press releases, wire service reports, newspaper articles, and annual company reports”). For various instances where the Second Circuit has allowed the district court to review entire documents, on a 12(b)(6) motion, after the plaintiff incorporated them by reference, see Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir. 1985) (stating this interpretation where the complaint alleged securities fraud); Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (applying the interpretation where plaintiffs alleged fraud, breach of contract, and breach of fiduciary duty after defendants acquired control of a corporation founded by one of the plaintiffs); and Int’l Audiotext Network, Inc. v. Am. Tel. and Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (applying this rule where the complaint alleged violations of the Sherman Antitrust Act).

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to securities fraud cases or cases with factual inquiries that depend heavily on the contents of public statements, even though it mostly cited securities fraud cases. 110 As a result, the Second Circuit could apply this interpretation of Rule 12(b)(6) to any case in which the claimant’s allegations depend on selections from documents not attached to the complaint and the document from which the claimant cites is readily available to the court. Although this can include a wide variety of cases beyond securities law and regulations, courts will apply the interpretation in cases of alleged securities violations where pleaders do not attach documents to which they have cited, when those citations are integral to the allegations. 111 Specifically, when the SEC files a complaint in the Second Circuit alleging a violation of Regulation FD, a natural first defense against a claim that the party failed to disclose public information that it disclosed in a private setting would be to comb all the documents cited by the SEC that are integral to the claim to find material statements that undermine the complaint. B. The Merits of the SEC’s Regulation FD Claim Analyzing the full text of the materials cited by the SEC shows that the SEC’s case amounted to arguments based on the fact that (1) there were discrepancies in the verb tense used by Siebel between public and private audiences, and (2) Siebel reserved certain positive adjectives to describe the company’s status at the private events. In rejecting both of these arguments, the district court applied Regulation FD in a manner that should ensure its future application to the most egregious violations without imposing extreme burdens on issuers. For instance, if the SEC would have succeeded in its argument based on verb tense, compliance costs would swell. Corporate officials would be unwise to speak privately without a script, as the slightest slip of the tongue could expose the company to liability from the SEC. This increased exposure would probably severely restrict private question and answer sessions. Although the end of private question and answer sessions might reduce selective disclosures, it seems unrealistic to try to limit private communication to a one-way format where company officials speak to a private audience without deviating from a script. Additionally, the existence of the mosaic issue under Regulation FD indicates that private questioning can be a legitimate tool for gathering information that, when viewed in isolation, is immaterial, and combining it with an analyst’s existing information to create material information. 112 Finally, limiting discussions between companies, analysts, and institutional investors would heighten the concerns of those who find that Regulation FD reduces the flow of information or is an unconstitutional regulation. 113 If the SEC had succeeded in its second line of argument—that Siebel released new information to private investors by stating qualitatively what it clearly indicated in 110. Siebel, 384 F. Supp. 2d at 700 (citing San Leandro Emergency Med. Group Profit Sharing Plan, 75 F.3d at 808; I. Meyer Pincus and Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991)). Citing these cases may be more indicative of the district court’s desire to link this rule to cases with similar legal and factual characteristics. 111. See Siebel, 384 F. Supp. 2d at 700 (“Review of the entire public statement at issue is particularly appropriate where the issue is the absence of material nonpublic information within the statement.”). 112. See Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,721-22 (Aug. 24, 2000). 113. See supra Part II.D.

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previous statements and quantitative data—the district court would have imposed Regulation FD too stringently on companies and would have coddled individual investors. Although much of Regulation FD’s justification derives from concerns for the individual, small investor, 114 ownership of individual stocks should carry a mixture of rights and responsibilities. The rights include “selection of individual stocks and engagement in the process of corporate governance,” 115 as well as receiving dividend payments and the ability to speculate on individual companies. Since direct ownership carries these rights, while indirect investing does not, it seems incorrect to say that small investors would be better off using institutional investors, who could closely monitor individual companies on their behalf. Some individual investors find the right of direct ownership too important to leave to others. For the sake of this class of investors, it seems proper that Regulation FD exists. If policymakers want to create an ownership society, forming policies that protect those who seek the full benefits of ownership is proper policy. These individual investors must, however, come to terms with the nuances and realities of investing. The court in Siebel Systems understood this risk and struck a balanced approach between protecting individual investors and allowing companies to operate without excessive regulation. A company should not be responsible for drawing all inferences for investors. When Siebel stated that new deals always make up about half its quarterly business and that second quarter numbers would be higher than the first quarter’s, it would have been inappropriate to punish the company for saying privately that new deals were entering the pipeline and sales were growing. The private statements were the logical conclusions of the earlier public statements. In this sense, the district court correctly refused to translate suspicious facts into overly restrictive legal rules. Certainly, many of the facts surrounding this case give the impression of impropriety. In particular, the stock activity following the meetings and the trading by attendees raises many suspicions. Although a court can look at subsequent actions by those who receive information when it decides whether information is material, without more evidence of selective disclosure, these actions should not constitute a violation of Regulation FD. The facts from Siebel Systems illustrate a situation where disclosing immaterial information can give the appearance of selective disclosure. In late April 2003, Siebel’s executives did not attend the private events in New York by chance. The meetings with Alliance and Morgan Stanley were part of “a three-day ‘marketing’ effort in which [Kenneth] Goldman and [Mark] Hanson met privately with numerous institutional investors.” 116 The breakdown of Hanson’s job priorities for the first and second quarter of 2003 as head of investor relations, which read as follows, reflects the purpose of their meetings: [Hanson’s job was] to obtain upgraded analyst ratings (30%); to have institutional investors “significantly increase their holdings” (30%); to “enhance Siebel’s position in the investment community” (20%); to “establish Investor Relations as an organization that is known as a great place to work” 114. See Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,716. 115. John C. Bogle, Individual Stockholder, R.I.P., WALL ST. J., Oct. 3, 2005, at A16. 116. Complaint, supra note 2, at 6.

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(10%); and . . . to “fully comply with Regulation FD” (10%). 117 Given this job description, it is unsurprising that Hanson and Goldman met privately with institutional investors and their selected guests. Cultivating relationships with institutional investors and analysts comprised sixty percent of Hanson’s job. Since Hanson convinced Alliance and individuals to change their position on Siebel’s stock, without any indication that he or Goldman disclosed any new material information to the private attendees, he merely succeeded in performing a large part of his job, without noticeably violating any securities regulations. Assuming that no one from Siebel violated Regulation FD, two factors, working in conjunction, could have caused the heavy trading that followed Siebel’s private meetings. First, at least some attendees may have felt that they had received new material information. Second, media reports of an improper disclosure the night before, coupled with the trading activities of attendees who either believed they received previously undisclosed material information or who were genuinely persuaded by the comments of Siebel’s executives, could have caused the heavy trading. Under these conditions, Siebel would not be liable under Regulation FD. V. RECOMMENDATION Courts should continue to use the Second Circuit’s interpretation of Rule 12(b)(6) and expand its use to other areas where parties selectively cite from documents in order to state claims that would not otherwise be legally recognized. Of course, this interpretation makes the most sense in contexts where courts and parties who move to dismiss a case have easy access to the cited documents. This interpretation reflects a public policy consideration: that courts should not have to sit idle when a plaintiff develops a claim “by extracting an isolated statement from a document and placing it in the complaint, even though if the statement were examined in the full context of the document, it would be clear that the statement” does not support such a claim. 118 The Second Circuit’s view of Rule 12(b)(6) has the positive effect of allowing district courts to dispose of baseless claims without any further litigation. With this interpretation, “[a] plaintiff cannot prevent the Court from examining [the contents of referenced documents] simply by failing to attach the documents to the complaint, or even by failing to explicitly cite to them in the complaint.” 119 Also, this interpretation may have the added benefit of deterring some spurious claims from ever entering the courts. For example, a claimant whose attorney has knowledge of this interpretation may decline to file suit if his claims rely on selective citation of documents. Regulation FD should not apply to situations like that in Siebel Systems. Instead, the Regulation and its enforcement should be reserved for more egregious violations. For

117. Id. at 4. Note that the SEC took issue with the fact that the head of Siebel’s investor relations only allocated ten percent of his time to complying with a single regulation, Regulation FD. Yet because ten percent of a top manager’s time is a substantial amount, this undermines the SEC’s argument that compliance is easy and inexpensive. This rings even more true if compliance really only requires the company to release important statements to the press and to webcast conference calls, as indicated in the Adopting Release. Supra note 30 and accompanying text. 118. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). 119. SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694, 700 (S.D.N.Y. 2005).

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instance, if Siebel had truly never quantified its sales pipeline before the private meetings, enforcement would have been proper. Enforcement would also have been justified if the company had issued its same public statements throughout April 2003, but then told private audiences that it now believed the pipeline was shrinking and that activity levels were bad or getting worse. The setback in Siebel Systems may not have deterred the SEC’s enforcement of Regulation FD. In fact, after the SEC decided not to file an appeal in Siebel Systems, it stated that the decision did not disrupt its commitment to enforcing Regulation FD. 120 The SEC noted that, at the time, it had “at least half a dozen” investigations into possible infractions of Regulation FD. 121 In the near term, the SEC should target possible violations that involve information that fits into one of the seven categories of information listed in the Adopting Release as examples of material information. 122 Assuming that the Commission learns from its mistakes in Siebel Systems, and does not selectively cite information in its future Regulation FD complaints, these enforcement actions could test whether Regulation FD violates any constitutional provisions or exceeds the SEC’s statutory authority to regulate securities. If courts receive cases they cannot dismiss on the facts alone, they may rule on the merits of a company’s statutory and constitutional defenses. Such rulings could provide greater guidance to future enforcement. VI. CONCLUSION The long-term impact of SEC v. Siebel Systems, Inc. is relatively mild. 123 The district court did not find that Regulation FD violates the Constitution by limiting free speech or by imposing materiality and nonpublic standards that are unconstitutionally vague. Similarly, the court did not find that Regulation FD exceeded the SEC’s statutory grant of authority. Instead, the court decided the case entirely on its facts, by finding that the facts contained in the SEC’s complaint, taken in conjunction with information contained in documents to which the SEC cited, did not constitute a legally recognizable claim. If the district court had reached the opposite decision, and found that the complaint plus the documents cited by the SEC equaled an illegal disclosure under Regulation FD, the impact would have been much more significant, as it would have likely alarmed the business community and confirmed fears that Regulation FD would actually result in small investors receiving less information from companies in which they own stock. In this sense, the district court’s decision stands as a refusal to use suspicious looking facts, which gave the appearance of impropriety, to make a bad legal rule, which could have severely restricted communications from corporations. The SEC must have sensed the futility of the arguments it made in Siebel Systems, as it allowed the deadline for

120. Phyllis Plitch, SEC Won’t Appeal Siebel Ruling, WALL ST. J., Nov. 4, 2005, at C4. 121. Id. 122. See supra Part II.C. 123. See Deborah Solomon, Court Favors Siebel in SEC’s Regulation-FD Suit, WALL ST. J., Sept. 2, 2005, at A2 (citing securities lawyers, who stated that the “dismissal could prompt the SEC to take a more cautious approach in enforcing the rule,” but recognizing that the district court “declined to rule on the SEC's authority to adopt the rule or its constitutionality”).

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appealing the district court’s judgment on Siebel’s motion to dismiss to lapse. 124 Since the district court’s dismissal rests entirely on a unique set a facts, but does not disturb the legal underpinnings of Regulation FD, the dismissal probably only altered the types of cases that the SEC will attempt to enforce.

124. See Plitch, supra note 120.