* SEC warned Netflix it may face action over Facebook post
* CEO Hastings posted Netflix reaching 1 bln viewing hours
* Case may have less to do with number of Facebook followers
* SEC may focus on materiality, use of the Facebook page
By Aruna Viswanatha and Sarah N. Lynch
WASHINGTON, Dec 7 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
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
As evidence of materiality, the SEC could point to
statements Hastings made earlier in the year highlighting
milestones, including hours streamed, as metrics investors
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
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
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
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
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
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
"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
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
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.