Netflix chief Reed Hastings in hot water with SEC over a Facebook post

I’ve often praised Netflix chief exec Reed Hastings for his ability to cut through the jargon and communicate information about his company clearly and not always through traditionally recognized channels.

Apparently, the staff of the Securities and Exchange Commission does not agree and is recommending that it take action against both Netflix and Hastings for violating disclosure regulations, according to a new SEC filing released today (PDF).

Regulators are taking issue over a message Hastings sent in July about Netflix users watching over a billion hours on the streaming video service during the previous month. While the company’s stock did receive a 20 percent increase after the news was communicated on Facebook, Hastings said that wasn’t the purpose of the message.

Here’s Hastings response from the SEC document:

SEC staff questions a Facebook post. Fascinating social media story.

We use blogging and social media, including Facebook, to communicate effectively with the public and our members.
In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers.  Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.

SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated “Reg FD”.  This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information.  The SEC staff believes that I gave you all “material” investor information in my post and that we needed to instead release the June viewing fact “publicly” with an 8-K filing or press release.

I want to note a few things.

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.

Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.

We remain optimistic this can be cleared up quickly through the SEC’s review process.

-Reed

Essentially, it looks like the SEC is accusing Netflix of keeping shareholders in the dark because the company never filed a press release about the “1 billion hours watched” milestone, and it does not consider Facebook as an equivalent communication mechanism. And to the SEC’s point, the Investor Relations page on Netflix’s website doesn’t contain a feed of Facebook updates. So if you are a Netflix shareholder and you don’t pay attention to Facebook, you are not in the loop.

We’ve reached out to Netflix for further clarification and will update the post with any new information.