Corporate Governance

Blogging and the Securities Laws: The Curious Case of John Mackey and Whole Foods (redux)

By J. Robert Brown

Mackey is back.  With the controversy over his anonymous blogging receding, the CEO of Whole Foods has returned to the blogosphere with a vengeance, although this time out front and not hiding behind a screen name (having used “rahodeb" in the past).  He posted an explanation for his behavior on a Blog operated off the Whole Foods web page.  It is an extraordinary tour de force and demonstrates he still does not understand the relationship between CEO comments on the web and the securities laws.

Mackey admitted that he had been posting on Yahoo about Whole Foods since the late 1990s.  How many total posts did he write?  "[M]ore than 1400 on the Whole Foods Market and Wild Oats online community message boards on Yahoo! over an eight-year period. (Even though that sounds like a lot, it averages out to about 3 posts per week.)"  The content of the posts?  "More than 95 percent of my posts were made in response to other participants’ posts."   Apparently they were mostly designed to dispel comments promoted by short sellers.

• From the very beginning, I also recognized that this online community had a large number of Whole Foods Market bashers and stock “shorters” who regularly made defamatory and often inaccurate statements about the company. Most of my posts at Yahoo! were made in response to these defamatory attacks on Whole Foods Market.

He noted his constitutional right to speak ("I strongly believe in the First Amendment of our Constitution and our right as citizens to express our opinions to each other. I believe I was exercising this right.") and that his mistake was one of judgment not ethics ("I didn’t realize posting under a screen name in an online community such as Yahoo! would be so controversial and would cause so many people to be upset.").  

Completely absent from the explanation was any awareness of the implications of the federal securities laws and the obligation of corporate CEOs to speak to the market in a complete and accurate fashion.  While it may be that using a screen name caused "so many people to be upset," that is not what motivated the Securities and Exchange  Commission to investigate the behavior. 

First, the securities laws prohibit inaccurate disclosure.  This includes incomplete disclosure.  One wonders whether all of the 1400 posts made by Mackey would meet the definition of accurate and complete.

Second, the securities laws provide additional protection from liability if officers and directors make oral statements but specifically reference risk factors otherwise publicly available.  By remaining anonymous, Mackey did not reference these risk factors, denying the company these protections. 

Third, the securities laws prohibit deliberate selective disclosure of material information to shareholders and other market professionals.  If he wanted to correct rumors or combat short sellers, why not have the company issue a public statement and let all investors have the benefit of the information? 

Nor did his reliance on anonymity mean he was free from potential securities law violations.  His use of a screen name didn't mean that all participants in the chat room were unaware.  Moreover, the quality of the commentary could easily tip off those in the chat room that the person speaking had unique inside information. 

When CEOs of public companies speak to analysts or the investment community, matters are often scripted or at least carefully vetted internally.  If a CEO goes too far and provides nonpublic information or makes a materially incomplete statement, the company can rush out a correction.  Ad hoc comments in chat rooms are the antithesis of this approach.

Mackey learned some lessons from the whole event.  As he put it: 

• I’ve learned many things from these events. The primary lesson I’ve learned is that because of Whole Foods Market’s success, I have become a public figure. My personal and work lives are now closely connected—and impact one another. Anything I say or do is now at risk of showing up on the front page of a national daily newspaper and therefore, I need to be much more conscious about the implications of everything that I say or do in all situations.

Apparently the requirements of the securities laws and the integrity of the disclosure process wasn't one of the lessons.

Full post as published by The Race to the Bottom on May 28, 2008 (boomark / email).