February 2013 Bar Bulletin
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February 2013 Bar Bulletin

The Gray Area of Securities Law

By Chris Pothering


With 16 percent of CEOs already using social media and that number expected to continue to climb, the Securities and Exchange Commission (SEC) is now faced with applying old rules to a new way of doing business.

Senior executives now regularly post on Twitter, Facebook, LinkedIn and other sites; sometimes posting interesting items about the company or employees, and sometimes posting items that catch the eye of the SEC. While the SEC itself uses social media to disseminate important information (for example, the SEC maintains four different Twitter accounts), the agency hasn't provided much formal guidance on how public companies should use social media to communicate with the investing public.

Security Regulation Fair Disclosure (also known as "Reg FD") is intended to prevent the selective release of important information to some investors, depriving others of material knowledge that would affect a public company's stock. Since the SEC adopted the rule in 2000, public companies have generally made announcements through news releases or regulatory filings. When a company or individual has allegedly committed a violation, the SEC may issue a Wells Notice, which is a notice that investigators plan to recommend civil charges against a public company and/or executive.

Reed Hastings, CEO of Netflix, was the latest CEO to find out that his use of social media may be a potential violation of Reg FD. In July, Hastings posted on his Facebook page blog that people had watched more than 1 billion hours of the company's videos in the previous month. Netflix stock soared on that news.

The SEC took note and was not pleased and, on December 5, issued a Wells Notice. According to the SEC, this sort of news should have been shared in a more traditional fashion such as a press release. When Hastings shared the news on his Facebook page, which is a limited-access Web page, the news was limited only to "friends," which gave those people insider knowledge.

Hastings argues that the news was public once it was shared on the Internet since it could easily be forwarded, shared and reported. He also defends his Facebook post by stating that it posted to more than 200,000 people, which made it very public in nature by definition. Furthermore, he said. "The fact of 1 billion hours of viewing in June was not ‘material' to investors," and Netflix's stock increase on the day of his post "started well before [the] midmorning post was out," due to a report from a positive analyst published the night before. Netflix also had already posted on its company blog in June that it was nearing the 1 billion streaming hours milestone, so Hastings' argument that his Facebook post was "not material" may very well be correct.

Hastings is not the only executive to use social media to discuss the state of a corporation. In May, Gene Morphis, the CFO of Francesca's Holdings Corp., which operates many popular retail stores, was fired after the company completed its investigation and found that Morphis was improperly posting about company information on his Facebook account.

Morphis posted personal comments about legislation, mentioned company meetings and included personal commentary about various items that blurred the line between personal and business. Morphis and Francesca's Holdings managed to avoid SEC action, but it was probably only a matter of time before the SEC would have been knocking on the door with a Wells Notice.

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