robwebb2k

There is lots of chatter about Whole Foods’ Mackey and his internet posting idiocy. It’s clear Mackey’s actions weren’t smart…but were they illegal?

Mark Astarita of SECLaw has a good post about the SEC’s investigation – his central point is that here’s a big difference between churning a stock prices and violating Regulation FD’s disclosure rules. Currently, the Mackey investigation is focusing on improper disclosure, not stock price manipulation. That’s not to say that a stock price manipulation investigation couldn’t be in the works, but that analysis would in large part be based on whether Mackey has a 10b-5(1) trading plan and whether such a plan could be used to cut against price manipulation charges.

Since the current investigation is examining improper disclosure, not stock price manipulation, the fact that Mackey’s posts were anonymous will be of huge importance. Regulation FD prohibits executives and investor relations personnel from making material nonpublic disclosures to individuals before they are made publicly. The “material nonpublic” line is generally regarded as information that would influence an average investor to purchase or sell securities. If an average investor knew that the CEO of Whole Foods was behind the Rahodeb posts, they certainly would influence purchasing and certainly would have been regarded as material and nonpublic. But, since no one knew that Mackey was Rahodeb, the question is whether anonymity prevents a disclosure from being material and nonpublic.

Further, Regulation FD requires that disclosures of material nonpublic information be made “by filing a Form 8-K, by distributing a press release through a widely disseminated news or wire service, or by any other non-exclusionary method of disclosure that is reasonably designed to provide broad public access.” Yahoo message boards are publicly accessible, and since Yahoo Finance is the most popular finance site on the web, it is arguable that releasing news there is as good a place as any. If Mackey had posted as “John Mackey” instead of Rahodeb, he most likely would have been making a fair disclosure…so again, the question hinges on the fact that he didn’t post as himself.

Logically, the identity of a person making a disclosure is critical to the materiality of the facts disclosed and a disclosure of unknown origin is on its face non-material. That said, the Mackey story has made the front pages for days on end, and it seems doubtful that the SEC will stick with a tight legal interpretation and let him off without penalty.

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As a side note, I was somewhat surprised to see yesterday that the New York Times drew parallels between Mackey and the Conrad Black case. Black faces 35 years in jail not because he posted anonymously on a message board, but because he committed massive acts of fraud, tax evasion and racketeering. The message board incident was used by the prosecution to illustrate his disregard for the advice given to him by his investment relations department.