* Netflix says gets Wells notice from SEC
* CEO Hastings says information posted was not "material"
* Netflix shares drop 1.4 pct in after-hours trade
By Ronald Grover and Sue Zeidler
SAN FRANCISCO, Dec 6 Netflix Inc 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 post, in a case
that raises questions about how public companies communicate on
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"
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
"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.