A recent news headline provided another reminder of both the power of social media to disseminate information, and the dangers of its casual use by public company employees. In this case, a cryptic twitter message led to the firing of a senior executive, perhaps because the tweet raised Regulation FD concerns, or perhaps because it reflected very poor judgment.
In mid-May 2012, Francesca’s Holdings Corporation announced the termination of its CFO after an internal investigation determined that he had improperly communicated company information over twitter. News reports at the time said the CFO posted a tweet that said “Board meeting. Good numbers = Happy Board” during a quiet period prior to the company’s planned earnings release. There is no report of involvement in the matter by the SEC at the time or since.
The exploding popularity of social media – with its temptations to make flippant and less than thoughtful comments, even though they are blasted out to a universe of recipients – should make public companies and their employees leery of using such channels to say anything about their companies. In addition to general concerns about the imprecision and potentially misleading nature of many such communications, there is the potential applicability of Regulation FD (fair disclosure), or Reg FD as it is commonly known. Reg FD prohibits the selective disclosure of material nonpublic information by senior executives and most other company representatives.
The SEC has brought actions under Regulation FD against 11 companies and 12 associated individuals since 2000. Only one of these actions resulted in a judicial decision: SEC v. Siebel Systems Inc., 384 F. Supp. 2d 694 (S.D.N.Y. 2005). In Siebel, the SEC alleged that private statements made by Siebel executives to investors at dinner meetings contained nuanced differences from existing public statements of the company and that this conduct constituted selective disclosure of material nonpublic information.
The U.S. District Court for the Southern District of New York dismissed the entire action on the grounds that the conduct of the Siebel officials did not constitute selective disclosure of material nonpublic information. The court explained that “[t]o be deemed to be material, the statements must contain information of reasonable specificity to impart a definite indicia of performance; and a statement is not material if it constitutes nothing more than a vague assertion on which no reasonable investor would rely.” Id. at 709 n.15.
It is an interesting question whether this, or any other, court would have interpreted the Francesca’s CFO’s brief message as specific enough to support a finding of liability. It seems that the CFO’s message of “Good Numbers,” given the timing and the source, would have been clear enough to cause a reasonable investor to rely on it.
On the other hand, it might be argued that the broad reach of twitter (and many other social media channels) prevents a communication via such media, regardless of its materiality, from being “selectively” disclosed. The practical reach of such channels may be greater than that of a press release or an official SEC filing. Legal recognition of that possible practical reality is not here yet, however. Reg FD defines “public disclosure” as either being included in an 8-K filing with the SEC or dissemination by “another method that is reasonably designed to provide broad non-exclusionary distribution of the information to the public.” Whether social media might satisfy this disclosure requirement has not been the subject of serious public debate to this point.
It is not known if the proactive termination by Francesca of its CFO was prompted by fear of a Reg FD investigation by the SEC or by a more generalized perception of very poor judgment for a company executive to casually disseminate confidential company information to the world. In either case, those in possession of a public company’s material inside information are well advised to guard that information closely, and to recognize that blasting it out via any social media channel is imprudent, at best.