August 30, 2005

Hollywood’s Troubles with the SEC: Now That You Are Publicly Owned

A number of members have sent me emails over the past few months about how Hollywood is being investigated by the SEC. After Friday’s WSJ article about how the SEC has allegedly launched an informal inquiry into Pixar’s recent DVD sales troubles of the “The Incredibles,” I thought it was time to weigh in.

This latest development follows disclosure by DreamWorks a few months back that the SEC is looking into whether that company should have informed investors earlier of the problems it was facing regarding sales of “Shrek 2” DVDs. From the article, you get a sense that both companies are having trouble adapting to being publicly held and staying consistent on “message.” In other words, the company’s PR machines are saying optimistic things about DVD sales – but SEC filings are saying something else (and more realistic).

This important change in communication practices is always hard for newly public companies, but I gotta believe it’s even harder for companies in the Hollywood spotlight.

When Do You Disclose That You Are Being Investigated?

The WSJ article highlights the fact that DreamWorks has disclosed the fact it is being informally investigated by the SEC, while Pixar has not. The end of article notes: “The question of whether companies are under obligation to inform the market if they are under investigation is a gray area: companies are under obligation to report matters they believe to be material events. After the wave of recent corporate scandals, some companies have been more conservative in assessing what constitutes a material event, however.”

In our “SEC Enforcement” Practice Area, we have a set of “Disclosure of SEC Investigation FAQs” as well as sample disclosures of all kinds of SEC enforcement activity. The FAQs address:

– Is there a duty to disclose the commencement of an SEC investigation?

– Will the SEC make public the existence of the investigation on its own?

– When do companies typically disclose the existence of an SEC investigation?

– What should the company do once it decides to disclose the existence of an SEC investigation?

By the way, DreamWorks’ disclosure is simple (first disclosed in this 8-K and repeated in this recent 10-Q): “In July 2005, we announced that we had received a request from the staff of the SEC and are voluntarily complying with an informal inquiry concerning trading in our securities and the disclosure of our financial results on May 10, 2005. The SEC has informed us that the informal investigation should not be construed as an indication that any violations of law have occurred. We are cooperating fully with the inquiry.”

Regulation FD at the Movies

One curious item in the WSJ article is a mention that the SEC reportedly is exploring “industrywide topics such as whether showing a gathering of analysts a prescreening of a movie constitutes disclosure of material information to a group of select people.” I guess the concern is that analysts attending sneak previews would have a leg up on whether a movie might be a blockbuster.

In my mind, this is a bit of a stretch – and if it came full circle, I guess all sneak previews would be shut down going forward. But if you followed the logic of that slippery slope, I would imagine a lot of Hollywood gossip could be actionable if attributable to the company – isn’t the leak that Brad Pitt has signed on for a movie more material than seeing a sneak preview? Wrong – as I explain in tomorrow’s blog.