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Did Netflix Violate Fair Disclosure Rule?

Netflix CEO Reed Hastings, intentionally or not, appears to be pushing for a new definition of what constitutes fair disclosure.

Reed Hastings | CEO Netflix
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Reed Hastings | CEO Netflix

In a post Thursday morning on his Facebook page, which has around 200,000 subscribers, he wrote:

"Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away. Keep going, Ted, we need even more!"

His disclosure of a record one billion hours of viewing in June, with the added line, “We’ll blow those records away,” caused Netflix’s shares to rise 13 percent, with the momentum gaining throughout the day.

The question is this: Did he violate Regulation FD with the post?

“It certainly violates the spirit of the law,” says securities attorney Andrew Stoltman, of the Stoltman Law Firm in Chicago. “In the minimum, it’s a gray area.”

When the SEC adopted Regulation FD (for fair disclosure) in 2000, the idea was to put some rules in place to avoid selective disclosure of material information.

According to the rule, “the required public disclosure” can be through an SEC filing known as an 8-K ”or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.”

Does that include Hastings’ Facebook page?

Securities attorney Hank Gracin of Gracin & Marlow thinks it does. “They should issue an 8-K,” he says.

Stolman adds, “The essence of the rule is that everybody gets information at the same time. To the extent that someone is disclosing to friends, relatives or acquaintances on Facebook — that is problematic.”

However, he’s quick to point out that while the SEC has issued guidance on using corporate websites for disclosure, the SEC hasn’t yet opined on the issue of social media.

My advice to the SEC: Do it and do it soon. Common sense would seem to prevail, but for some CEOs, arrogance gets in the way.

Netflix didn’t respond to my request for comment.

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