SAN FRANCISCO Netflix Inc (NFLX.O) said on Thursday securities regulators warned they may bring civil action against the company and its chief executive for violating public disclosure rules with a Facebook (FB.O) post, in a case that raises questions about how public companies communicate on social media.
The high-profile Silicon Valley CEO, Reed Hastings, dismissed the contention and said he did not believe the Facebook post was "material" information.
Hastings wrote in the post on the company's public Facebook page on July 3: "Netflix monthly viewing exceeded 1 billion hours for the first time ever in June." The post was accessible to the more than 244,000 subscribers to the page.
Netflix received what is known as a Wells Notice from the U.S. Securities and Exchange Commission, which means the SEC staff will recommend the full commission pursue either a cease-and-desist action and/or a civil injunction against Netflix and Hastings over the alleged violation.
Netflix may have run afoul of the SEC's Regulation FD, adopted in 2000, which requires public companies to make full and fair public disclosure of material non-public information.
"We think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers," Hastings said on Thursday in a letter. He also said that he did not believe the Facebook posting was "material" information.
The SEC believes that figure is material information that should have been disclosed in a press release or regulatory filing, according to Hastings' letter.
"We remain optimistic this can be cleared up quickly through the SEC's review process," said Hastings in the public letter to shareholders that the online video streaming company submitted alongside a regulatory filing citing the receipt of the "Wells Notice" from the SEC.
Netflix's stock jumped from $67.85 a share on July 2, the day before Hastings' post, to $81.72 on July 5. On July 25 its stock fell 22 percent to $60.28 when the company reported second-quarter earnings fell from $68.2 million a year earlier to $6.2 million this year.
"It's totally disingenuous to say that his statement wasn't material when the stock went from under $70 a share to more than $80 and the only data point was that post," said Wedbush Securities analyst Michael Pachter.
REGULATORY GREY AREAS?
But legal and securities experts say the fast-changing world of social media leaves room for regulatory grey areas.
"The evolution of social media presents the SEC with some very interesting regulatory challenges. But if they're worried about social media, there are ways for them to address that without threatening to sue Reed Hastings. They should have a rulemaking where they can ventilate these issues," said Joseph Grundfest, former SEC commissioner and Stanford Law School professor.
"This situation has nothing to do with the problems that Regulation FD was designed to address."
Joseph Marrow, an attorney at the Waltham, Massachusetts law firm Morse Barnes-Brown Pendleton, said there are conflicting views on what constitutes disclosure in circumstances like this, also noting the rules are not settled in this area.
"I would not suggest companies publish material non-public information on Facebook and Twitter without discussing it before with in-house counsel. Companies are putting together social media policies," he said.
"If Netflix doesn't have a policy, I bet they will have one very soon," he said, adding the issue was unlikely to be serious enough to threaten Hastings' position as CEO of Netflix, but could result in some type of financial penalty for the company.
Netflix shares fell 1.4 percent to $85 in after-hours trading on Thursday. (Reporting by Ronald Grover and Sue Zeidler in Los Angeles Additional reporting by Alexei Oreskovic and Alistair Barr in San Francisco; Editing by Dan Grebler, Phil Berlowitz and Muralikumar Anantharaman)