Netflix says CEO's Facebook post triggered SEC action

A sign is shown at the headquarters of Netflix in Los Gatos, California September 20, 2011. REUTERS/Robert Galbraith

A sign is shown at the headquarters of Netflix in Los Gatos, California September 20, 2011.

Credit: Reuters/Robert Galbraith

By Ronald Grover and Sue Zeidler

SAN FRANCISCO | Thu Dec 6, 2012 9:10pm EST

(Reuters) - Netflix Inc said the SEC sent it a "Wells Notice" warning it the agency may bring a civil action against the company and Chief Executive Reed Hastings because it said he violated public disclosure rules with a Facebook post, a contention dismissed by Hastings on Thursday.

"Netflix monthly viewing exceeded 1 billion hours for the first time ever in June," Hastings wrote in the post on the company's public Facebook page on July 3 which was accessible to the more than 244,000 subscribers to the page.

The SEC adopted Regulation FD 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 U.S. Securities and Exchange Commission.

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," said Wedbush Securities analyst Michael Pachter, "and the only data point was that post."

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, noting the rules are not settled in this area and a lot of companies are proceeding with caution and setting up policies.

"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.

The Wells Notice 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 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 and Phil Berlowitz)

By Staff 12/06/2012 13:10:00