SEC threat to prosecute Netflix boss over update on Facebook

Regulator may take action after viewing figures announced by social media

Nikhil Kumar
Saturday 08 December 2012 01:00

Netflix and its chief executive, Reed Hastings, are facing the threat of civil action from Wall Street regulators after the Silicon Valley boss used Facebook to publish an update on the video streaming website's viewing figures.

In a case that could have far-reaching implications about how companies use social-media outlets such as Facebook and, increasingly, Twitter, the US Securities and Exchange Commission put Netflix and Mr Hastings on notice about potential action stemming from a July Facebook post which the regulator says violated rules that prohibit selective disclosure of company information.

Mr Hastings has hit back by saying that "posting to over 200,000 people is very public".

The now controversial, 43-word post was uploaded on 3 July. In a first for the website, Netflix members had clocked up more than 1 billion viewing hours in June – and Mr Hastings wanted to beat the drum about the record, so went to Facebook, where 200,000-plus people subscribe to updates on his page, which is open to anyone to view.

"Netflix monthly viewing exceeded 1 billion hours for the first time ever in June," he crowed.

However, the company did not issue a press release or lodge a regulatory filing with the Securities and Exchange Commission (SEC) that would have been made public for Wall Street investors, which is the way US companies normally comply with the country's so-called Regulation Fair Disclosure.

This rule requires that firms announce important information to all investors at the same time to ensure a fair market in the shares.

The same day as the Facebook post, Netflix shares jumped from under $70 a piece on 2 July to above $80, an upward movement that, Mr Hastings says, was already in motion before his post, thanks to "a positive Citigroup research report the evening before."

He challenges the SEC's suggestion that disclosure contained information that would have called for a more formal method of dissemination.

"The fact of 1 billion hours of viewing in June was not 'material' to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month," he said in another Facebook post this week.

SEC staffers, though, think he should indeed have gone down a more formal avenue and served a Wells Notice on him and Netflix warning it may file charges or seek a cease-and-desist order. The notices are in effect a warning that the regulators plan to recommend action but provide recipients with a chance to object.

"We think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers," Mr Hastings said in his latest post, which this time was also filed with the SEC.

The case has reanimated discussion about social media and they way it impacts companies and regulations.

"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," Joseph Grandest, a Stanford Law School professor and former SEC commissioner, said. "They should have a rulemaking where they can ventilate these issues."

The view was echoed by others, who said some of the norms about corporate transparency were out of date.

"The SEC rules are 12 years old and in the technology world, that might as well have been in the last century," Santa Clara University law professor Stephen Diamond told Bloomberg.

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