WASHINGTON (Reuters) - A U.S. regulatory probe of Netflix Inc over disclosures made on its chief executive's Facebook page could prove an important test of whether a rule designed to prevent leaks to analysts can translate to the social media age.
The movie and TV
streaming service revealed on Thursday that it may face action from the
Securities and Exchange Commission if the agency determines the comments
from CEO Reed Hastings violate a rule that requires information to be disclosed to investors at the same time.
Hastings' Facebook
page had more than 200,000 subscribers, including reporters and
analysts, when he told them on July 3 that the company had hit 1 billion
hours viewed in June.
But the case may not hinge on whether or not his page qualifies as a public dissemination.
Instead, it may come down to two other issues.
One, whether the information was material to investors.
And two, if it was
material, whether investors knew that Hastings' Facebook page was a
venue to release important company news.
As evidence of materiality, the SEC
could point to statements Hastings made earlier in the year
highlighting milestones, including hours streamed, as metrics investors
should watch.
But the company contends the July 3 comments were not
material. It says that the company posted a blog entry a few weeks
earlier that said the company was approaching that milestone.Also, Netflix General Counsel David Hyman testified before a U.S. House of Representatives committee on June 27, and said at the beginning of his testimony that Netflix "delivers close to a billion hours of streaming movies and TV shows to its consumers every month."
Such prior disclosure could hurt any SEC case. "Whether what he said is materially different from what the company has already disseminated, that may be a real challenge for the commission to maintain that position in court," said former SEC lawyer Eugene Goldman who is now with McDermott Will & Emery.
But movements of
the company's stock price could bolster an SEC case if the agency can
prove the stock jumped on the news. Netflix attributed the jump in its
stock price to a positive analyst report released the night prior to
Hastings' Facebook post.
The stock closed at $67.85 on July 2, and opened one
percent higher the next day at $68.49, on a positive report from
Citigroup.
The stock closed at $72.04 on July 3, a six percent jump that would be unusual from an analyst report alone.
'LIVING IN THE REAL WORLD'The second issue of whether Hastings' Facebook page was a known source of material company news goes to the heart of whether the SEC's rules - and its interpretation of them - are outdated.
SEC adopted the
rule at issue, Regulation Fair Disclosure, or Reg FD, in 2000 over
concerns that companies were meeting with small groups of analysts or institutional investors and disclosing material information to them.
The concern was
that "shortly after these types of meetings, trading would take place on
the basis of such information," Goldman said. "This seems a lot
different from that."
The new potential action raises questions about whether
the rule was designed to address disclosures like the one made by
Hastings.
"There's a huge
divide between CEOs living in the real world and the financial industry,
which lives behind regulatory walls. Reg FD is built for the old way of
communicating from behind these walls," said Howard Lindzon, a hedge
fund manager and founder and CEO of StockTwits, a social network for
traders and investors to share real-time ideas and information about
stocks.
Reg FD does not delve into the use of social media for disclosing information to investors. But the SEC issued guidance on the subject in August 2008.
That guidance states that companies can use websites to
disclose information as long as they are a "recognized channel of
distribution."
To determine that
threshold, the SEC lists factors companies should weigh, including
whether their site is "posted and accessible" and also whether "the
company has made investors and the markets aware that it will post
important information" on the website.
Netflix may have hurt itself on this point, if the SEC is able to prove that the information was material.
Hastings
acknowledged in a blog posting on Thursday that the company does not
"use Facebook and other social media to get material information to
investors."
The SEC is likely to home in on that comment as it continues its case against the company.
But Elon Musk, the
CEO of Tesla Motors who has posted company-related developments on his
Twitter feed, said it is hard to believe that the SEC could consider a
CEO's Facebook post to be a narrow release. He noted that reporters
regularly follow companies' and executives' social media posts.
"To consider a
press release to be a more public venue than a Facebook or Twitter
account where someone is followed by hundreds of thousands of people,
including the press themselves, is simply untrue," Musk said in an
email.
SEC wrestles with Internet age in Netflix case
This article
SEC wrestles with Internet age in Netflix case
can be opened in url
https://newserathletics.blogspot.com/2012/12/sec-wrestles-with-internet-age-in.html
SEC wrestles with Internet age in Netflix case