Publicly, Siebel Systems and its chief executive were delivering gloom to investors. First quarter 2003 earnings were falling short due...

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Publicly, Siebel Systems and its chief executive were delivering gloom to investors. First quarter 2003 earnings were falling short due to a slowdown in the software company’s licensing deals, which it blamed on war, disease and famine.

“It’s like the Apocalypse out there,” Tom Siebel, then chief executive of the world’s largest maker of customer-service software, said April 28, 2003.

Two days later, the company’s chief financial officer sounded rather chipper. Licensing deals, including one for $5 million, were in the “growing” pipeline, CFO Kenneth Goldman told a few investors and analysts, first in a private meeting with Alliance Capital Management and then at a Morgan Stanley-sponsored dinner. The company didn’t tell other investors.

It used to happen all the time on Wall Street that executives gave important company news to a favored few. The anointed ones got a head start in buying or selling, while everyone else guessed at the moving share prices and tried to catch up.

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The unfairness prompted the Securities and Exchange Commission to ban selective disclosure in 2000 with a new rule called Regulation Fair Disclosure.

“We can’t have a level playing field, a system of honest disclosure in which all investors find out roughly the same information at the same time” without the rule, said John Coffee Jr., a securities-law professor at Columbia University.

Executives aren’t supposed to be handing out important company news to brokerages and favored investors without telling the whole world, either beforehand or within 24 hours.

Even with the rule, the private meetings continue, as the Siebel case shows. But did Siebel, based in San Mateo, Calif., violate Regulation Fair Disclosure?

The SEC says yes, Siebel says no. A judge in Manhattan last week heard both sides argue in the first court challenge to what’s known as Regulation FD.

At the least, the case can help define the line not to be crossed in private meetings. At the most, it could decide whether the rule is constitutional.

Siebel and the U.S. Chamber of Commerce asked the judge to throw out the regulation as a violation of free speech and an unauthorized power grab by the SEC. Twenty-two of the nation’s best-known securities-law professors, led by Coffee, entered the fray with a brief saying the regulation’s clearly constitutional and sorely needed.

Perhaps the harder question is the more immediate one for U.S. District Judge George Daniels: Did Siebel executives violate Regulation FD?

“If you dismiss it on the facts, you avoid all the constitutional questions,” Kathleen Sullivan, former law-school dean at Stanford University, argued for Siebel. She now heads Quinn Emanuel Urquhart Oliver & Hedge’s appellate practice in California.

“Nothing in the allegation suggests what the CFO said in private was different from what the CEO said” in public, at least not in any significant way, argued Sullivan.

Regulation FD does, in fact, allow inconsistent statements.

It doesn’t allow executives to give investors, analysts or traders nonpublic information if there’s “a substantial likelihood” that a “reasonable shareholder would consider it important in making an investment decision,” according to the SEC.

That’s a line Siebel executives didn’t cross, argued Sullivan.

For all his gloom, Tom Siebel said in an open conference call he expected several licensing deals for the new quarter. “I suspect we’ll see some greater than 5” million, he said.

Daniels said there’s a vast difference between saying “I expect to hit the lottery” and “I did hit the lottery.”

And yet, when it was the SEC’s turn to argue, the judge did a turnaround.

“I’m not sure how you can ‘suspect’ you have $5 million deals in the pipeline unless you know there are $5 million deals in the pipeline,” he said.

Nor was Daniels satisfied with SEC lawyer Treasure Johnson’s other claims that executives said one thing publicly and another privately.

A “growing” pipeline is not quantifiable and therefore not a “fact” to be considered, Daniels said. To say openly that business is bad and quietly that it’s pretty good is no violation, the judge told the SEC lawyer.

The fact that it took 30 minutes for the SEC lawyer and the judge to try to separate fact from generalization showed how hard it is to apply Regulation FD, and how little difference there was between Siebel’s public and private statements, Sullivan argued when it was her turn again.

“You can dismiss this case right now,” she told Daniels.

This is the second time the SEC accused Siebel of violating the rule. The first time the company settled for $250,000 in 2002 and an agreement that a second violation would bring a stiffer punishment.

SEC Commissioner Harvey Goldschmid, who helped write Regulation FD when he was general counsel to the SEC, declined to discuss specifics of the Siebel case.

Speaking generally, he said “close judgment calls” on whether a statement is relevant to investment decisions would not violate Regulation FD.

“It must be reckless, meaning an extreme departure from ordinary care before you can be liable,” Goldschmid said.