It's easy to make fun of the SEC for wanting to sue Netflix over a Facebook post. Netflix, Facebook, and the SEC are all a little funny, and bring them all together and you get a delightful orgy of hip-five-years-ago clumsiness. Also, like, olds, get over yourselves, everyone is on Facebook, why should I call Grandma on her birthday, or 8-K my operational stats? Social! 2.0!
And yet I'm a little sympathetic to the SEC here, mostly because I am old and afraid of Facebook. The agency notified Netflix yesterday that it's planning to bring a civil action claiming that Netflix violated Reg FD by posting operational numbers - that Netflix viewing had exceeded 1 billion hours of Netflix June - on CEO Reed Hasting's Facebook wall without press releasing or 8-King those numbers. Reg FD prohibits an issuer from "disclos[ing] any material nonpublic information regarding that issuer or its securities" to any investor or analyst without simultaneously disclosing that information through a "method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public."
So if you're Netflix you have two ways to win this: either the information was not material, or it was disclosed publicly in compliance with Reg FD. Perhaps strangely, Netflix is taking both angles. From its response yesterday:
First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.
Second, while we think my public Facebook post is public, we don't currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think 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.
Ehh I don't buy it. First, is this "public"? The final rule release for Reg FD has interesting discussion of what constitutes public disclosure,1 and while there's the usual subtext of "it's fuzzy and so we get to decide at the SEC," the gist is basically "put out a press release to the wire services."2
Of course that rule was written in 2000, when, true story, Mark Zuckerberg had not even enrolled at Harvard to meet the girl and/or final club who broke his heart and inspired him to devise an alternative social universe in which he was the king of cool, but you can understand why the SEC would be protective of old-school distribution methods. Oh sure 200,000 people are Facebook friends with Reed Hastings; many of them are bloggers or, like, people who like Netflix, but few of them are active traders of big equity positions at major banks or investment managers because those firms block Facebook. I KNOW! Twitter too!
In some ways a Facebook post - "everyone's on Facebook," it's free, etc. - is more democratic than a press release to Business Wire (which charges) that goes to a bunch of wire services that send their news first to high-paying subscribers like Bloomberg terminal users. But it's a mistake to think of the SEC's job as primarily protecting retail individual-stock investors. The vast majority of regular people's money is in institutional funds, not retail; the best thing that the SEC can do to protect "little people" is to keep slow-moving mutual fund managers safe from unfair competition from both rich day-traders and smart hedge funds. (This is why high-frequency trading - which should improve execution for retail traders but hurt institutions3 - is a big worry for the SEC: the institutions who really manage regular-people money are the ones they want to protect.) The hedge fund or day trader who follows Reed Hastings on Netflix has an advantage over the asset manager who doesn't (and can't); but everyone - everyone managing your grandmother's assets I mean - has the same Bloomberg terminal that shows the same wire stories at the same time.
Was this news "material"? Umm yes? Hastings posted the 1 billion hours stat mid-morning on July 3:
There's not really other news around this time, though there were supportive research reports both before and after Hastings's Facebook post. Hastings argues that the stock was already going up by the time of his mid-morning July 3 Facebook post, on the back of a July 2 research report from Citi's Mark Mahaney4 saying that Netflix's valuation was "highly reasonable"; but it jumped on July 5, after the Facebook post and follow-up like this TechCrunch post. If you read Hastings's Facebook wall, you got in at like $70 or so. If you read Bloomberg, here are the first mentions of it on Bloomberg NFLX equity CN:
Bloomberg's timestamps are 10:47am for the brief about Mahaney's previous-night research, 11:50am for the TechCrunch post, 12:16pm for the Bloomberg News story about the 1 billion hours. So you had 44 to 70 minutes, depending on which source you trust, to buy NFLX before the close, at $71 and change. If you missed that window, the stock was over $80 by mid-morning on the next trading day.
Which is all good reason for the SEC, in its role as protector of somewhat lumbering investors, to prefer the more usual dissemination methods - via wire services, and crucially (though not rule-mandated!) pre-open or post-close, not mid-morning on a shortened day. If Hastings had consulted a lawyer on this, he'd have sent it to the wires after the close, everyone who cared would know about it before anyone could trade on it, and we wouldn't be having this conversation.
One other thing though. Consider that Hastings (1) didn't consult a lawyer and (2) didn't (and doesn't) think this news was material. So he put it on his Facebook wall. That's nice! Did he tell anyone else about it first? Anyone who could trade on it? An investor who came in for a little CEO face time? Mark Mahaney, the Citi analyst working on his research report? Whitney Tilson?
Probably not, right? There's no evidence that he did. But on his theory he could have. And, as you and the SEC and the press may have noticed, there seem to be a lot of incidents of company executives meeting with investors, telling them non-material information, and those investors then outperforming the investors who didn't get that non-material information. That seems odd for, y'know, non-material information. If you're the SEC you really don't want to let CEOs get away with saying "oh yeah, that news that moved our stock by 15% was not material. We're free to disclose that selectively to any analyst or investor we happen to be talking to. Whether or not we also put it on Facebook."
S.E.C. Warns Netflix Over a Post on Facebook [DealBook]
Netflix, Social Media, and Regulation Fair Disclosure [Kid Dynamite]
Netflix 8-K [EDGAR5]
If, for example, an issuer knows that its press releases are routinely not carried by major business wire services, it may not be sufficient for that issuer to make public disclosure solely by submitting its press release to one of these wire services; the issuer in these circumstances should use other or additional methods of dissemination, such as distribution of the information to local media, furnishing or filing a Form 8-K with the Commission, posting the information on its website, or using a service that distributes the press release to a variety of media outlets and/or retains the press release.
I'm not sure how this (August 2000) release would finish a sentence starting "If an issuer knows that its Facebook posts are routinely carried by major tech blogs ..." BRAVE NEW WORLD man.
2.Also 8-K'ing it would be polite but not strictly necessary.
3.Which is part of why this study - showing retail investors getting screwed more than institutions - is puzzling. But it's on S&P e-minis so perhaps not representative of actual retail investors. On the other hand this paper suggests that even on e-minis small-size traders do win, while larger investors get picked off, from HFT.
4.A man, incidentally, who knows from selective disclosure.
5.Incidentally this is neatly passive-aggressive: Hastings's response was posted on his Facebook wall. There's no press release, but to be safe Netflix 8-K'ed the response first, saying "A copy of a statement that will be made by Mr. Hastings to subscribers on his publicly available Facebook page is attached as Exhibit 99.1."