Netflix Inc. and Chief Executive Officer Reed Hastings said theymay face a U.S. Securities and Exchange Commission civil claim overa July Facebook post that coincided with the stock's biggest gainin almost six weeks.

SEC staff alleges Netflix and its CEO violated rules governingselective disclosure, according to a company filing yesterday. TheJuly 3 post by Hastings said Netflix viewing “exceeded 1 billionhours” of videos in June. The shares rose 6.2 percent that day.

The SEC action highlights the potential for legal trouble whencompany executives like Hastings, who has more than 200,000Facebook fans, communicate with the public via social media.Regulation Fair Disclosure, aimed at preventing selectivereporting, was passed by the SEC in 2000, before the use ofsocial-media outlets like Facebook and Twitter exploded.

“This may be a case when the SEC needs to play catch-up,” saidCharley Moore, executive chairman and founder of SanFrancisco-based online legal services firm Rocket Lawyer.“Disclosing information to 200,000-plus Facebook users is basicallythe same as issuing a press release.”

Regulation FD requires public disclosure, such as through apress release on a widely disseminated news or wire service, or by“any other non-exclusionary method” that provides broad publicaccess. In June, Hastings had posted on his company blog thatmembers were viewing “nearly a billion hours per month.” Withneither the June blog post nor the July Facebook post did he issuea press release or an 8-K filing with the SEC.

“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 thatwe were serving nearly 1 billion hours per month,” Hastings said inthe filing. “We remain optimistic this can be cleared up quicklythrough the SEC's review process.”

Netflix and Hastings, 52, each received a Wells Notice, whichthe SEC sends to a company or an individual after its staff hasdetermined that sufficient wrongdoing has occurred to warrant civilclaims being filed.

Though the SEC might argue Netflix and Hastings violated a ruleby not issuing an 8-K filing with the Facebook post, that doesn'tmean they committed a material infraction, Rocket Lawyer's Mooresaid.

Netflix, based in Los Gatos, California, fell as much as 3.4percent to $83.25 yesterday in extended trading. The shares climbed3.4 percent to $86.17 in regular New York trading and have advanced24 percent this year.

Jonathan Friedland, a Netflix spokesman, said the company had noadditional comment. Florence Harmon, an SEC spokeswoman, declinedto comment.

Social Use

Company executives are increasingly using social media as a toolto communicate with customers and investors. On Dec. 4, Elon Musk,chairman and CEO of Tesla Motors Inc., said on Twitter hiselectric-vehicle company was cash-flow positive.

“Am happy to report that Tesla was narrowly cash flow positivelast week,” Musk, 41, wrote to his almost 113,000 followers.“Continued improvement expected through year end.” Musk's message,which was re-posted more than 600 times by Twitter users, providedno additional information.

Tesla, which hasn't turned a quarterly profit, is racing toexpand production of the rechargeable Model S sedan at its factoryin Fremont, California.

Jeff Evanson, Tesla's spokesman for investor relations, said heisn't aware of any contact this week by the SEC.

Silicon Valley has been testing the boundaries of the SEC'sdisclosure rules for years. Some technologists have argued that theInternet has made it easier for people to obtain information, thusmaking other methods of issuing news such as press-release servicesless valuable.

A champion of this idea was Jonathan Schwartz, former CEO of SunMicrosystems, who challenged the SEC's limitations on whatconstitutes public disclosure of material corporateinformation.

In 2007 Schwartz posted Sun's earnings releases on the company'sinvestor relations website 10 minutes before distributing itthrough the traditional channels. Schwartz called the SEC'srequirements “anachronistic.”

The following year, the SEC relented, allowing companies todisclose information solely on their websites, as long as they metcertain criteria. Netflix regularly releases its earnings resultson its website.

“We think posting to over 200,000 people is very public,especially since many of my subscribers are reporters andbloggers,” Hastings said yesterday of his Facebook account.

On July 3, the day of Hastings's mid-morning Facebook post,Netflix shares had their biggest gain since May 23. In yesterday'sfiling, he said the stock was already climbing because of apositive research note from a Citigroup analyst, which calledNetflix shares “highly reasonable” with a target price of $130.They closed at $72.04 that day.

Hastings' post, which is still on his page, received 282“likes,” two comments and 36 re-postings to other pages andWebsites.

“It's interesting to wonder whether disclosure via a post seenby 200,000 people is more selective than a press release and an SECfiling seen by some unknown number,” said Erik Gordon, a professorat the University of Michigan's law school and business school.This “could be a tough, precedent-setting case.”

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