S.E.C. Warns Netflix Over a Post on Facebook

S.E.C. Warns Netflix Over a Post on Facebook

Reed Hastings, the chief executive of Netflix, congratulated his team for a job well done in early July. On his public Facebook page, he crowed about the one billion hours of video that subscribers watched the previous month. The message was just 43 words.

Now, Netflix and its chief may be in deep trouble for that brief post.

On Thursday, Netflix disclosed that the Securities and Exchange Commission was considering taking action against the company and Mr. Hastings for its Facebook communication. The agency, in a so-called Wells notice, warned that it may file civil claims or seek a cease-and-desist order.

The S.E.C. is concerned that the post violated the Regulation Fair Disclosure rule, commonly known as Reg FD, which requires a company to announce information that is material to its business to all investors at the same time.

A Wells notice signaled that investigators planned to recommend charges against a company or executive. But recipients have a chance to object, and in some instances, the agency will close the case without taking action.

The move by the S.E.C. comes at a difficult time for Netflix, which has been trying to regain its footing after a series of setbacks. The company’s plan to cleave its movie-rental service into online streaming and mail delivery of DVDs led to a subscriber revolt last year. In October, the activist investor Carl C. Icahn took a 10 percent stake in the company, though he hasn’t outlined his plans.

Shares in Netflix were down 1.3 percent in after-hours trading on Thursday, at $ 85.02.

“We remain optimistic this can be cleared up quickly through the S.E.C.’s review process,” Mr. Hastings wrote on Facebook, a post that was filed with regulators.
A spokesman for Netflix declined to comment beyond Mr. Hastings’s post. A spokesman for the S.E.C. declined to comment.

On July 3, Mr. Hastings dashed out a quick Facebook post to his more than 200,000 followers. In it, he gave kudos to Netflix’s chief content officer, Ted Sarandos, about hitting a major milestone.

“When House of Cards and Arrested Development debut, we’ll blow these records away,” Mr. Hastings wrote, referring to the two television programs. “Keep going, Ted, we need even more!” Mr. Hastings seemed to mention the viewership statistics only in passing.

In the usual social media fashion, the post was forwarded by his followers. Bloggers picked up on it. Media reports cited it.

Regulation Fair Disclosure is intended to prevent the selective release of important information to some investors, depriving others of knowledge that would affect a company’s stock. A pharmaceutical company, for instance, can’t restrict news about a government investigation into one of its drugs to only a handful of shareholders.

Since the S.E.C. adopted the rule 12 years ago, companies have generally made announcements through news releases or regulatory filings. But the interpretation of that rule may be changing in an age of blogs, Facebook and Twitter.

Technology companies, in particular, tend to eschew news releases for all but the biggest announcements, instead sharing information on any number of Web outlets. The rule already allows for some exceptions, including information that is disclosed via news articles.

Mr. Hastings’s main defense is likely to be that the age of social media has redefined the concept of public disclosure. His Facebook feed is public, and the information was disseminated by his followers and the media.

It’s also possible that Netflix did not view the information as material. Mr. Hastings noted that on June 4, a Netflix vice president wrote on the corporate blog that subscribers “are enjoying nearly a billion hours per month of movies and TV shows” from the service. While Netflix’s stock rose on July 3, it was already getting a boost from a positive analyst note published the night before, Mr. Hastings wrote in Thursday’s post.

“We use blogging and social media, including Facebook, to communicate effectively with the public and our members,” Mr. Hastings wrote on Thursday.


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