Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?

• Published date: 01 September 2022
• Author: KRISTIAN D. ALLEE,BRIAN J. BUSHEE,TYLER J. KLEPPE,ANDREW T. PIERCE
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/1475-679X.12423

DOI: 10.1111/1475-679X.12423

Journal of Accounting Research

Vol. 60 No. 4 September 2022

Printed in U.S.A.

Did the Siebel Systems Case Limit

the SEC’s Ability to Enforce

Regulation Fair Disclosure?

KRISTIAN D. ALLEE,∗BRIAN J. BUSHEE,†

TYLER J. KLEPPE,‡AND ANDREW T. PIERCE§

Received 20 August 2019; accepted 15 January 2022

ABSTRACT

We examine whether a shock to the enforceability of Regulation Fair Disclo-

sure (Reg FD) limited its ability to restrict the flow of private information

between managers and investors. Although prior work provides evidence that

Reg FD reduced managers’ selective disclosure of material information im-

mediately following its promulgation, we posit that private information flows

returned as a result of the Securities and Exchange Commission’s (SEC’s)

public enforcement failure in SECv.SiebelSystems,Inc.Using multiple settings,

we find consistent evidence suggesting that Siebel changed the cost–benefit

tradeoff for Reg FD compliance and effectively reversed the initial effects of

∗Walton College of Business, University of Arkansas; †The Wharton School, University of

Pennsylvania; ‡Gatton College of Business and Economics, University of Kentucky; §Alliance

Manchester Business School, University of Manchester

Accepted by Philip Berger.We thank an anonymous reviewer, Cory Cassell, and participants

at the 2019 BYU Accounting Research Symposium for helpful comments and suggestions. We

also thank Terrence Blackburne, John Kepler, Phil Quinn, and Dan Taylor for providing us

with data on undisclosed SEC investigations; Jefferson Duarte, Eddy Hu, and Lance Young

for providing us with AdjPIN estimates; Dawn Matsumoto for providing us with Bestcalls.com

conference call data; Isabel Wang for providing us with data on firms’ disclosure policies; and

SeekEdgar LLC for providing us with Item 7.01 8-K filings. Finally, we are grateful for the

funding of this research by the Walton College of Business, the Wharton School, the Gatton

College of Business and Economics, and the Alliance Manchester Business School. An online

appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-

of-accounting-research/online-supplements.

1235

© 2022 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1236 k. d. allee, b. j. bushee, t. j. kleppe, and a. t. pierce

the regulation. We also find that Siebel disrupted the equilibrium of selec-

tive disclosure activity, resulting in an unleveling effect among investors with

respect to private information advantages. Finally, we find that Siebel also had

real effects by altering managers’ capital structure decisions. Our findings run

counter to the prevailing “mosaic theory” and gradual learning explanations

for private information advantages in the extended post–Reg FD period and

highlight the importance of enforcement in achieving intended regulatory

outcomes.

JEL codes: G10, G14, G18, G30, G38, K20, K22, K42, M40, M41, M48

Keywords: Regulation Fair Disclosure; SEC enforcement; Siebel Systems;

institutional investors; selective disclosure; informed trading

1. Introduction

This paper examines whether an unsuccessful enforcement action by the

Securities and Exchange Commission (SEC) against Siebel Systems for a

potential Regulation Fair Disclosure (Reg FD) violation effectively reversed

the impact of Reg FD on selective disclosure. In October 2000, the SEC

introduced Reg FD to prohibit managers from selectively disclosing mate-

rial private information. Evidence shows that Reg FD was initially effective

in improving public disclosure and in reducing private information advan-

tages of investors and analysts (see Koch, Lefanowicz, and Robinson [2013]

for a review). Consequently, over 170 studies have included a Reg FD in-

dicator variable to capture changes in firms’ private information environ-

ments.1However, recent papers show private information advantages for

certain investors post–Reg FD, which they attribute to the “mosaic theory”

and/or gradual learning by market participants on how to navigate Reg FD

(e.g., Soltes [2014], Solomon and Soltes [2015], Bushee, Jung, and Miller

[2017], Bushee, Gerakos, and Lee [2018], Campbell, Twedt, and Whipple

[2021]).2

We posit that these observed post–Reg FD private information advan-

tages largely stem from the unsuccessful SEC enforcement action against

Siebel Systems (SEC v. Siebel Systems, Inc., 384 F. Supp. 2d 694, S.D.N.Y.

1Weper formed a comprehensive literature review of all studies published in top accounting

and finance journals that cite Reg FD from 2010 to the date of this draft (specifically, Journal

of Accounting Research,Journal of Accounting and Economics,The Accounting Review,Contemporary

Accounting Research,Review of Accounting Studies,Accounting, Organizations and Society,The Journal

of Finance,Journal of Financial Economics,The Review of Financial Studies,Journal of Financial and

Quantitative Analysis,andManagement Science). We identified 171 papers that either assume a

homogenous information environment post–Reg FD or rely on Reg FD as an exogenous shock

without considering the possible effect of the Siebel Systems case. Our study therefore has the

potential to provide legitimate and consequential belief revision regarding the post–Reg FD

information environment (Maines, Salamon, and Sprinkle [2006]).

2Reg FD permits investors and analysts to privately ask questions of managers to elicit infor-

mation that is valuable only in combination with their broader set of private information (i.e.,

as part of an information “mosaic”) (Cooley Godward [2000], SEC [2000]).

siebel systems case and reg fd enforcement1237

2005; hereafter Siebel) that subsequently limited the SEC’s ability to enforce

Reg FD. The Siebel case in 2005 was the first instance in which the SEC

pursued a Reg FD civil action and was largely based on indirect evidence

that Siebel Systems violated Reg FD. The district court judge dismissed

the SEC’s charges with such force that legal commentators described it

as a “public scolding” of the SEC (Fisch [2013]). In the court decision,

Judge George B. Daniels argued that the SEC was applying Reg FD in an

“overly aggressive manner” and that this aggressive enforcement approach

provides no clear guidance for companies to comply with the regulation

(Daniels [2005]). Legal scholars broadly viewed the SEC’s failure in Siebel

as a major obstacle to future Reg FD enforcement as the decision estab-

lished an unfavorable precedent for the SEC (Solomon [2005]).3There-

fore, managers likely perceived a lower probability of Reg FD enforcement

and related noncompliance costs following Siebel and thus reassessed their

willingness to engage in private communications with some investors.

We provide evidence on whether the Siebel decision effectively reversed

the initial effects of Reg FD by extending three influential studies into the

post–Siebel period: (1) the Ke, Petroni, and Yu [2008] finding that Reg FD

reduced transient investors’ ability to sell stock before breaks in earnings

strings; (2) the Bhojraj, Cho, and Yehuda [2012] finding that Reg FD re-

duced investors’ stock-picking abilities; and (3) the Petacchi [2015] find-

ing that Reg FD had real effects by altering firms’ capital structures. We

provide further evidence on whether Siebel is the mechanism driving our

results (rather than the mosaic theory or gradual learning) by examin-

ing cross-sectional differences based on private disclosure incentives (i.e.,

closed versus open pre–Reg FD conference calls), on private access to man-

agers (i.e., investor conference attendance), and on managers’ preferences

for selective disclosure (i.e., large versus small investors). Finally, we exam-

ine changes in suspect trading activity leading up to corporate disclosures

before and after Siebel. Consistent evidence across this body of tests sup-

ports our assertion that Siebel changed the cost–benefit tradeoff for Reg FD

compliance across a number of disclosure settings and outcomes.

First, we replicate and extend the work of Ke, Petroni, and Yu [2008],

hereafter KPY, who find that Reg FD significantly reduced the ability of

transient institutional investors to trade in advance of significant declines

in earnings performance. In the pre–Reg FD period, Ke and Petroni [2004]

find abnormal selling by transient institutions in the quarter prior to “bad

3Prior to Siebel, the SEC pursued six enforcement actions related to Reg FD violations and

all of them resulted in negotiated settlements. Following Siebel, the SEC did not bring another

Reg FD enforcement action until 2007 and only initiated two enforcement actions in the four

years following, neither resulting in significant penalties (Bengtzen [2017]). Moreover, Siebel

is the only instance in which a Reg FD enforcement action concluded in civil court (Bengtzen

[2017]), which has significant implications for post–Siebel Reg FD enforcement as the ruling

sets a precedent for future Reg FD cases. Under the U.S. legal doctrine of stare decisis,only

court holdings, not settlements, establish precedent for future litigation (Walker [2016]).