Executives of Public Companies Must Use Caution With Social Media – The SEC is Watching!

Are statements made by executives of publicly traded companies via social media held to the same standard as statements they make in any other limited environment when it comes to material information about the company? Absolutely, here is why … 

Just this past week news broke that the Securities and Exchange Commission is considering bringing a lawsuit against Netflix and its CEO, Reed Hastings. The reason? Because in July Mr. Hastings used his personal Facebook page to “boast” that, for the first time ever, Netflix use exceeded 1 billion hours in one month. As a result of this post Netflix shares jumped by 6.2% — on the day of the disclosure.

Securities laws prohibit insider trading. “Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.” (SEC Website)

The SEC’s Argument

The SEC is viewing the followers of Hasting’s Facebook page as being analogous to his family, friends and acquaintances at a private holiday party and saying that by disclosing this information in such a semi-private setting, it amounted to selectively disclosing important information about the company to a select group of people who then used that information to trade shares of the company.

Hastings’ Argument

Hastings counters with 2 arguments: (1) the information was not a “material” event; (2) he has over 200,000 followers on his Facebook page and the disclosure of that information to those 200,000 followers combined with the fact that the Netflix blog disclosed in June that it was nearing 1 billion streaming hours, this amounted to an adequate public disclosure and, therefore, was not insider trading.

You can read more about the details in an excellent Wall Street Journal article by Greg Bensinger, SEC Warns Netflix CEO Over Facebook Post.

The Growing Problem

good numbers tweet

This is not the first time a social media post by a company executive has gotten him into hot water. On March 7, 2012, Gene Morphis, the CFO of of Franscesca’s Holdings Corp. tweeted “Board meeting. Good numbers=Happy Board.” and managed to get himself fired for the post. (read more)

The Takeaway

So what does all of this mean? There are 2 very important takeaways:

  • Executives – do not disclose any information about the company over social media that you would not be permitted to say at a private holiday party.
  • Companies – yes, you definitely need a social media policy, but you also need proper training of your executives as well as your employees to make darn sure they understand and can apply the information provided in your social media policy.

Give me a call or send me an email if you would like me to help you and your company with of these.

-Shawn Tuma (469.635.1335 / stuma@brittontuma.com)

One thought on “Executives of Public Companies Must Use Caution With Social Media – The SEC is Watching!

  1. I heard about the Netflix release several days ago, and have been waiting for the SEC ruling with great interest. I can see this having a huge impact, not only on corporate performance, but on corporate release of all information – thinking, in my area of interest – that a politician in Canada (as an example) complaining about the costs of the F-35 JSF, could negatively impact Lockheed/Martin share performance, because the company is relying on a certain number of fighters being sold, including a group being sold to Canada. That could make for some VERY interesting international laws, as well!

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