Netflix and Facebook Complicate Relationship With The SEC

Shares of Netflix (NASDAQ:NFLX) have been on a wild journey this year. The world’s leading Internet subscription service for movies and television shows finally received some stability in recent months, and even signed a deal with Disney (NYSE:DIS) to help itself mature. However, the company is now receiving some discipline from the U.S. Securities and Exchange Commission.

What Went Wrong?

When you hear about people getting in trouble over a Facebook (NASDAQ:FB) post, it usually involves a late night and a bottle of grandpa’s old cough medicine, but even a chief executive officer of a multi-billion dollar company can indulge in too-much-information telling. Late Thursday, Netflix and CEO Reed Hastings received a Wells Notice from the SEC, a warning indicating the regulators might bring civil action against the company. The issue is a Facebook post made months ago that may have violated Regulation Fair Disclosure, also known as Reg FD, by announcing material information to a limited audience.

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What Did Hastings Post?

In early July, Hastings posted, “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!” The post made headlines and provided optimism for the most recent quarter. Before the post, Netflix shares traded at $68 a share, but surged to $85 by the following week. At the time of the post, Hastings had around 200,000 Facebook fans.

CHEAT SHEET Analysis: Does A-Level Management Run the Company?

Between defending itself from competitors such as (NASDAQ:AMZN) and Hulu (NASDAQ:NWS), along with hostile actions from billionaire Carl Icahn, there seems to be constant flow of gossip around Netflix. The Wells Notice is just the latest strike against the company. Although it does not showcase star quality management, the incident is not likely to deter investors who still believe in the longer-term story.

On the positive, Hastings remains upbeat and voiced his thoughts in a more proper manner. In a letter submitted with the filing disclosing the Wells Notice, he explains, “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. We remain optimistic this can be cleared up quickly through the SEC’s review process.”

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