Leave Netflix Alone!

The Securities and Exchange Commission must need some extra work for the interns, or else it's spending its legal power on the least important regulatory issue it could find. Because as it sorts out whether or not Netflix  (NASDAQ: NFLX  ) CEO Reed Hastings violated the "fair disclosure" rule with a Facebook  (NASDAQ: FB  ) post, there are still plenty of real issues that will help protect investors and maintain integrity in the market.

What does the SEC want with Hastings?
Back in July, Hastings posted a note on Facebook celebrating that users were watching "nearly a billion hours per month." According to the SEC, this violates the Regulation Fair Disclosure, which requires that companies must publicly disclose material information. To the SEC, the Facebook post was nonpublic and that viewing statistic was material.

The SEC must not have realized the numerous privacy scandals that Facebook suffered in its aim to "make the world more open and connected." The post itself was immediately available to the 200,000 subscribers to Hastings' page, and was quickly disseminated throughout the millions of different forms of media. The post was also made when the markets were closed after the half-day on July 3, giving time for the information to spread even over the July 4 holiday without immediate market reactions.

Additionally, the announcement itself didn't contain very material information. As Hastings says in an announcement referencing the incident, "we had blogged a few weeks before that we were serving nearly 1 billion hours per month." Additionally, if there are investors who can take the number of streaming hours and deduce the company's value, they likely work for Netflix.

What Fair Disclosure is meant to protect against
This SEC rule is meant to protect against the group of analysts who are friendly with the CEO, not an audience of 200,000 friends, fans, analysts, bloggers, and reporters. To demonstrate the difference, take the questionable moves surrounding the Facebook IPO and analysts who cut revenue and earning forecasts. As Henry Blodget writes, "the information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors" (emphasis his).

Even a violation will likely amount to nothing
In 2010, Office Depot  (NYSE: ODP  ) settled with the SEC for violating fair disclosure laws back in 2006. The company had made one-on-one calls to analysts hinting that they wouldn't meet forecasts, while in an unrelated manner, the company itself overstated earnings. For these actions, the CEO and CFO were fined $50,000 each, while the company paid $1 million. All promised to cease and desist from any current or future violations. For a CEO who made over $11 million in compensation in 2006, $50,000 amounts to a rounding error, and exemplifies the toothless punishment received when one does break fair disclosure.

So even if Reed Hastings is found guilty, chances are the punishment won't amount to much. The simple cease and desist punishment has been handed out before, with no fine whatsoever, as in one of the first cases brought against a company for violating fair disclosure. In 2002, Raytheon's (NYSE: RTN  ) CFO at the time, Franklyn Caine, told select analysts in one-on-one calls that their estimates were "very aggressive" or "too high." The SEC simply ordered Caine and Raytheon to cease and desist from "committing or causing any violations and any future violations."

Plenty of other issues to focus on
Based on statistics, the SEC still performs well, although trying to evaluate the agency based on number of cases or settlements is difficult: Does more SEC activity mean a fairer market, or does it mean more Ponzi schemes and insider trading are occurring? Either way, the median settlement value with individuals is higher than ever, nearing $200,000, and the number of settlements in 2012 is on track to be the highest since 2005. There are plenty of Ponzi schemes that still break the news, and these legitimately hurt investors -- much more than an errant Facebook post.

Additionally, the SEC has deeper issues to tackle. It must resolve its policy of letting companies and individuals deny any wrongdoing yet still pay fines for alleged actions. This issue was brought up when U.S. District Court Judge Jed Rakoff refused to approve a $285 million settlement with Citigroup (NYSE: C  ) in late 2011, criticizing settlements that occurred with a "neither admit nor deny" condition. Rakoff felt that denying any guilt reduced chances of successful civil trials, but forcing companies to admit guilt might make it harder for the SEC to reach settlements and require full trials. This issue is still up in the air, although the SEC changed the "neither admit nor deny" language.

The SEC must also pay attention to the new JOBS act, and how it can limit shady companies from taking advantage of the new law that is supposed to help small businesses.

Both core issues should be resolved, and the SEC has plenty of other truly harmful activity to pursue before taking issue with Hastings' Facebook post.

Outside of the potential litigation, Netflix must face some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

DocumentId: 2146898, ~/Articles/ArticleHandler.aspx, 7/25/2014 6:26:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement