Wednesday, December 12, 2012

SEC Goes Way Off Base On Netflix

Having been an analyst in the heyday of "whisper numbers" and companies preferentially leaking good news to analysts who worked for their underwriters, I was really happy to see former SEC Chair Arthur Levitt's vision of "fair disclosure" enshrined in Reg FD.  Contrary to the CEOs and CFOs who railed against Reg FD, I always thought that it was a good tool which served its purpose, both by leveling the information playing field and by encouraging companies to share their thinking and forecasts with the Street in a safe harbor.

One of the unfortunate tendencies at financial regulatory agencies, like the SEC, has been the need to justify their existence by appearing to be tough on the Street. Here's an excerpt from a recent press release announcing SEC Chair Mary Schapiro's stepping down:
"In a news release, the SEC said that under Schapiro it brought a record 735 enforcement actions in fiscal 2011, and 734 in fiscal 2012. It also prosecuted the largest insider-trading scheme in its history, winning a record $92.8 million fine in the case against Raj Rajaratnam, the CEO of Galleon hedge fund."
 There it is: it's all about taking scalps and not about really changing the way Wall Street does its business.  And, it shouldn't be about pursuing trivialities just to up these numbers.

The serving of a Wells notice on the CEO of Netflix is a self-serving stunt. It is a waste of their limited resources.  Of course, to be fair, this CEO himself is not the model for mature communications with Wall Street. The CEO posted on Facebook that in June, Netflix viewers' monthly viewing of company media exceeded a billion hours for the first time.  Really?

Imagine that you are Raj Rajaratnam is the elevator with your analyst, as he pulls this post up on his SmartPhone.  When Raj hit the trading floor, would he really give the order to get as big a position in Netflix as he could?  Not in a million years.  It's not a tradeable byte of information.  It doesn't fit into a bullish mosaic on the company.  

This is a company whose entire existence is being called into question.  The CEO is held in low regard among institutional investors.  Their streaming service is widely acknowledged to have inadequate breadth and depth.  Red Box and others have nibbled at the core DVD rental business.  This singular factoid about hours, without any ability to take it into historical context or to make it sing in a financial model, is fascinating, interesting, and ultimately trivial.  It's not actionable, except by a fool. 

The SEC and its bloated staff of lawyers have still not been able to assign responsibility for Jon Corzine's inability to account for $1.6 billion of his investors' supposedly segregated funds. Of course, Mr. Corzine is much more dangerous game to bag than was Mr. Rajaratnam.  The SEC, despite earnest leadership of outgoing Chair Schapiro, has really not covered itself in glory before, during, and after the financial meltdown whose effects still cloud the economy and markets.  Close the books on your really important issues, and let's leave Netflix to the discipline of the stock market.

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