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Netflix Receives Wells Notice Over Reed Hastings' Fantastically Foolish Facebook Update

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Netflix (Nasdaq:NFLX) announced that it received a Wells Notice from the SEC regarding the most foolish Facebook (Nasdaq:FB) update of 2012.

On July 3, CEO Reed Hastings told the world via Facebook that Netflix crossed the 1 billion viewing hours mark in June for the first time ever.

The stock shot up 13% on July 5 (the next day of trading) as investors assumed that there was no possible way that Mr. Hastings would make such a bullish statement while bad news was coming.

Expressing some skepticism, we asked this question on the Buzz that day:

"...will that 1-billion hour metric actually translate into a better-than-expected quarter?"

The answer turned out to be no. On July 24, the company reported an in-line second quarter with a lousy forward outlook. The stock cratered 25% the next day.

The SEC wants to bust Hastings on a Reg FD violation, which is essentially a chart of selective disclosure of important information. In the dot-com days, it was typical for company executives to whisper sweet material nonpublic information to a select group of VIP's like Wall Street analysts and big-time investors, while the general public was oblivious.

Reg FD says important stuff has to be reported to everyone equally, and in this case, the SEC doesn't believe a Facebook posting (to Reed Hastings' 200K+ Facebook followers) counts as such.

I tend to agree with Reed Hastings; while the Facebook announcement showed spectacularly bad judgement, the information was distributed worldwide more-or-less instantaneously.

And keep in mind, I have a vested interested in Netflix going down -- I am still short the $87.50-$90 call spread expiring today. I'll likely close the trade shortly after the open because I think this is non-news and I fear the stock might bounce in a serious way today.
POSITION:  Position in NFLX