Fines and Warnings: Do They Matter?

Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On July 3, the Facebook page for Netflix (NASDAQ: NFLX) featured a post announcing that the online video service streamed over 1 billion hours of content in the month of June, a meaningful milestone. Five months later, the Securities and Exchange Commission notified the CEO of Netflix that it is considering official action against the company over the post. According to the allegations, Netflix violated rules about the public disclosure of certain types of information by using Facebook instead of a formal press release or filing.

Any Publicity Is…

Good publicity! This instance illustrates that adage as well as any. Even if Netflix ends up getting hit with a hefty fine (which seems very unlikely), that consequence will quickly fade from the minds of investors. What will remain is the announcement itself: Netflix provided over 1 billion hours of video in a single month! That’s a concrete, “real” number that says a lot about the company’s skill in identifying what customers want to watch and supplying it in a convenient format. If the SEC’s action does hurt Netflix stock in the short run, it will be a great opportunity to buy it up and wait for Netflix to do even more things right.

On the Other Hand…

Compare this story with the recent news that HSBC (NYSE: HBC) has been charged nearly $2 billion for allowing money laundering activity to occur under its authority. Will customers forget this as quickly? It seems unlikely. Not only did HSBC violate U.S. regulations; it did so in a way that benefitted some of the nation’s worst enemies: Iran and drug cartels in Mexico. With the spectacular bank failures of the 2000s still in recent memory, it is hard to imagine investors continuing to get excited about a bank that has treated U.S. law with such flippancy.

One More Example…

On Dec. 10, the Federal Trade Commission made a statement about two tech giants, Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). The statement reprimanded both companies for not doing enough to inform parents about what and how much information gets collected from applications geared toward children. Make no mistake; this is a serious matter. Children are vulnerable and trusting, and parents should know what information they are submitting when they play games on computers or smartphones. But will the announcement hurt Apple and Google’s profits?

Only one day after the public announcement, this writer found it surprisingly difficult to locate the story—it’s already been replaced by other business and tech news on the major feeds. My guess is that this negative publicity will be even more short-lived than the SEC’s accusations against Netflix. For better or worse, the momentum of both companies is just too strong for a nonbinding slap on the wrist over kids’ privacy to derail them.

Moving Forward…

When companies run afoul of U.S. regulations, it is important for investors to look at each situation on its own merits. A settlement for millions of dollars over a broken rule isn’t necessarily a recipe for plunging stocks, but an admission of guilt can also show that a company has been playing dangerous games with investors’ money. Remember that the closer to home a scandal hits, the longer investors are likely to remember it. Announcing a milestone on Facebook instead of through a press release? Not that important. Helping Iran get around U.N. sanctions? Quite a bit more important. Failing to notify parents that their kids are giving up sensitive information by playing games? Probably important, but not enough to overcome the promise of continued profits.


copyhubwriters has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Netflix. Motley Fool newsletter services recommend Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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