Corporate Disclosure and the Internet: The Odd Case of John Mackey and Whole Foods

The WSJ has reported that the Commission has opened an investigation into the activities of Whole Foods CEO John Mackey.  It seems that Mackey over an eight year period made posts on an online stock forum run by Yahoo using a  pseudonym.  Mackey, according to the WSJ report, "lauded Whole Foods' stock, cheered its financial results and bashed a company Whole Foods made a bid to acquire."  Some of the posts are here.  The Journal speculated that the SEC might be looking into whether Mackey's statements contradicted statements made by the company, were "were overly optimistic about the firm's performance", or violated Regulation FD.

We talk often about SOX, particularly in the context of investor confidence.  Accurate disclosure is, in the end, at the core of investor confidence.  But, while Mackey may have exercised very poor judgment, does that equate to a violation of the securities law? 

There are two broad categories of possible violations.  They include fraud (making materially incomplete or inaccurate statements) and selective disclosure (providing material information to select persons in the market).  My book, The Regulation of Corporate Disclosure, examines these topics in detail. 

Selective disclosure is not per se improper, a legacy of Chiarella.  (We have criticized the awful reasoning of this case on this Blog. Suffice it to say that it validated deliberate selective disclosure by corporate insiders in some cases).  Regulation FD was a regulatory response to this case and the problem of selective disclosure.  Regulation FD does not exactly prohibit selective disclosure.  Instead, to the extent a company (through its agents) deliberately discloses material non-public information to certain investors/market professionals, it must simultaneously make public disclosure of the information.  A company that accidentally disclosed material non-public information on a selective basis has 24 hours to disclose it to the entire market. See 17 CFR 243.100, et seq.

These provisions will be very difficult to apply to Mackey.  First, with respect to Regulation FD, the SEC will have to show that Mackey disclosed material nonpublic information.  Second, once disclosure occurs, it is not the disclosure of the information that violates Regulation FD but the failure to disclose the information to the entire market.  This burden rests with Whole Foods.  The SEC will need to show that Whole Foods knew about the disclosure and failed to meet the requirements of Regulation FD.  While the CEO made the disclosure and he is an agent of Whole Foods, the SEC and courts may have a hard time attributing the information to the company given Mackey's the possible stealth involved (indicated by the reported use of a pseudonym).  Finally, Regulation FD only applies to disclosure to certain types of investors or market professionals such as analysts.  It really was not intended to apply to disclosure that was arguably to the entire market.  Disclosure in the Yahoo forum is arguably to the entire market (and, in any event, would arguably meet the defintion of "public dislcosure" for purposes of Regulation FD).   

As for the antifraud provisions (primarily Rule 10b-5), there is no question that the prohibition on fraud applies to material disclosed on the Internet.  Posting false information or making inaccurate statements in chat rooms or threaded discussions can be the basis of a fraud suit much the same was as false statements in press releases.  The SEC will need to show that Mackey made materially false or incomplete statements.  The problem here is materiality.  Since he used a pseudonym, the market was arguably unaware that he was directly connected to Whole Foods.  As a result, the market may have not treated his statements as material but instead viewed them no different than uninformed statements from ordinary investors.   

This is not, however, the end of the story.  Even without disclosing his identity or role in the company, the depth of the comments, the accuracy over time, and the uniqueness of the information, may well have alerted the market to the fact that he had unique information that could only come from an insider (either because he was an insider or because he was communicating with an insider).  In those circumstances, those in the market may well have treated the statements as material.  Analysts who follow Whole Foods in Yahoo could probably resolve this.

We shall see where this case goes.  At a minimum, it suggests that top officers ought not to be communicating (perhaps at all but certainly not through pseudonyms) in chat rooms and investor forums.