Tweet Becomes CFO's Swan Song

Author:Mr Troy Calkins
Profession:Drinker Biddle & Reath LLP

It has become increasingly common for public companies to use social media not only for marketing to consumers, but also for communicating with investors. In addition, as personal use of social media has soared, many executives of public companies have established a personal social media presence. While social media can provide a quick and easy way to communicate, its typically informal nature and the fact that social media posts can sometimes offer at least an illusion of anonymity can also lay a trap for the unwary.

Francesca's Holdings Corporation announced on May 14, 2012 that it had terminated for cause the employment of Chief Financial Officer Gene Morphis. The termination followed an investigation by the board of Francesca's into the CFO's use of social media. The investigation showed that Morphis had been tweeting non-public information about the company, beginning shortly after his appointment as CFO in October 2010.

The tweet that seems to have triggered the investigation, and ultimately his termination, occurred on March 7. Notwithstanding the fact that the company was in a blackout on that date in anticipation of an earnings release scheduled for March 13, the CFO tweeted "Board Meeting. Good numbers=Happy Board." While Morphis's Twitter handle, @TheOldCFO, did not include his name, his other social media accounts, including LinkedIn and his personal blog, linked to his Twitter feed. As a result, it was not difficult for investment managers and analysts to make the connection between @TheOldCFO and Francesca's. In the time between that tweet and the earnings release, the company's stock jumped 15%.

When the company learned of Morphis's tweet a few days later, it commenced the investigation with the assistance of outside counsel. The investigation turned up numerous prior tweets of non-public information including tweets about private meetings with the company's investment bankers regarding an unfiled registration statement.

Tweets, or other social media postings, of material, non-public information raise a number of potential legal issues. First, the SEC generally does not consider tweets to be "public disclosures" for purposes of Regulation FD. To the extent that a tweet contains material, non-public information and the tweeter's followers include securities industry professionals, the tweet is arguably a "selective disclosure" and a violation of Regulation FD. Second, if an officer or director discloses confidential company...

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