SEC Warns Hastings Of Netflix Over Facebook Post

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December 7, 2012 12:36 PM EST

The Securities and Exchange Commission issued a "Wells Notice" to Netflix (NASDAQ: NFLX) and its CEO Reed Hastings, the company said Thursday.

The move arises from regulators' determination that a Facebook post by Hastings violated Regulation Fair Disclosure, a rule that requires companies to share material and non-public information with all investors. Netflix disclosed the receipt of the Wells Notice in a regulatory filing, USA Today reported.

The post may have violated rules of fair disclosure, the SEC said. The SEC said it may also issue a cease-and-desist proceeding against Netflix and Hastings, The Wall Street Journal reported.

The Securities and Exchange Commission declined comment.

Hastings wrote in the filing that the SEC's allegation stems from a posting he made on July 3. In that post, Hastings told the 200,000 people who subscribe to his Facebook posts that Netflix members had viewed more than 1 billion hours of programming on the service in June. The company did not file an official regulatory filing disclosing that information.

Hastings disputes the allegation, saying that having 200,000 followers on Facebook made his disclosure public. He says the 1 billion hours of viewing not only was not a material fact, but had already been disclosed on a public blog.

He also says that while Netflix' stock rose the day he posted on Facebook, the stock's rise started before the mid-morning post and probably was driven by a positive Citigroup research report. The stock rose 6.2 percent that day.

"We remain optimistic this can be cleared up quickly through the SEC's review process," Hastings wrote.

Other executives have drawn scrutiny for their social-media actions in the past, the Journal notes. Earlier this year, Gene Morphis, chief financial officer of Francesca's Holdings, a publicly traded retail chain, was fired after revealing information about the company on Facebook and Twitter. This summer, Adam Smith, CFO of medical device manufacturing company Vante, also lost his job after he uploaded a video on YouTube of himself berating a Chick-fil-A employee. He later apologized with a tearful apology video on YouTube.

"Facebook and Twitter... are a quasi-public domain," said Robert Bartlett, University of California, Berkeley law professor. "There are good arguments to be made on either side about social media and securities law. Social media is exactly in the gray area."

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