Information Arbitrage: A Few More Thoughts on CEO Blogging and Whole Foods

There have been a few new developments since last week's post on John Mackey and his message board exploits:

The SEC has opened an informal inquiry into his conduct;

Several legal experts, contrary to several of those who commented on my post, believe that Mr. Mackey could be in a heap of trouble with the SEC; and

A host of other writers have come out with their views of "The Whole Foods Message Board Incident," some of which possess logic threads that befuddle me.

Regardless of whether or not Mr. Mackey is ultimately charged by the SEC, his is an important case to review. The issues: Corporate insiders' blogging or posting on the Internet in light of Regulation FD; anonymous posting on the Internet and whether this changes the Reg. FD analysis; and the moral, ethical and fiduciary responsibilities of corporate leaders as it relates to employees, consumers and shareholders. Just to be clear: I am not a big regulatory guy, as my readers know. However, some behaviors and certain activities of corporate insiders just can't be tolerated, if not by the SEC then certainly by their Boards.

A CEO who blogs? Great. See Jonathan's Blog, penned by Jonathan Schwartz of Sun Microsystems. I've written about CEO blogging in general and his blogging in particular before, and I am a mega-fan. He went so far as to petition the SEC to let his blog be the portal for the release of official Sun Microsystems documents like press releases. Hooray, I said. Now this is a forward-looking, smart guy. But you know why Mr. Schwartz is praised while Mr. Mackey is vilified? Because Mr. Schwartz acted like a prudent, sentient CEO who adhered to the principles of corporate responsibility, concern for all stakeholders and just plain common sense. Mr. Mackey, conversely, waged an anonymous, ego-fueled eight-year battle with petulant posters on Yahoo! message boards concerning the company's performance and prospects. He presumably didn't speak to his General Counsel. He certainly didn't consider what might happen if people found out he was behind the postings. And he most definitely checked his brain at the door when he sat down to rant in the WFMI message board mosh pit. A breach of law or not, it certainly was a breach of his position. And I don't think this is either a pedestrian or prudish viewpoint, even in a hyper-communicative Web 2.0 world.

Apparently some think that Mr. Mackey's actions do, in fact, cross the line from the merely stupid to the legally dangerous. From today's New York Times:

Some securities laws experts, meanwhile, say that Mr. Mackey’s postings could be illegal, though the fact that they were anonymous makes the legality murky.

Peter J. Henning, a professor of securities law at Wayne State University in Detroit, said executives of public companies are required to make financial disclosures available to all investors, not just a select few.

“He wasn’t speaking on behalf of the company,” Professor Henning said, adding, “He certainly was talking about it. And he was attempting to influence the stock price.”

After hearing some of Rahodeb’s postings, Professor Henning added, “I would have to believe that Whole Foods’ general counsel nearly keeled over when they learned about this.”

Lewis D. Lowenfels, a securities law expert at Tolins & Lowenfels in New York, said he, too, believed that Mr. Mackey’s remarks could be illegal.

“For a C.E.O. of a public company to make public postings regarding his company while concealing his true identity behind a pseudonym may, in and of itself, be an illegal misrepresentation.”

Well, I'm glad that some legal-types were thinking the same things as me. While not a lawyer myself, I've always been of the opinion that disclosure solves all kinds of problems. And in Mr. Mackey's case, there was not an abundance of disclosure, to say the least.

Finally, an editorial in today's Wall Street Journal made light of Mr. Mackey's actions, conveying the view that maybe we're all taking this a little too seriously, and that this is yet another example of the free flow of information being squelched:

Reading about the covert blogging of Whole Foods CEO John Mackey, we were reminded of a New Yorker cartoon from some years ago featuring two mutts and a computer. "On the Internet," one says to the other, "nobody knows you're a dog."

Apparently U.S. financial regulators don't get the joke. They're responding to Mr. Mackey's anonymous blogging by treating him like a dog -- or more precisely a potential violator of U.S. securities laws, with the bonus goal of scuttling Mr. Mackey's attempted purchase of Whole Foods competitor Wild Oats. The SEC is leaking (as usual) that it has opened an "informal" enforcement probe. Sure, "informal."

That'll teach Mr. Mackey to flog the virtues of his company on the Web. He made the mistake -- in today's hyper-regulated world -- of giving the impression in his blogging that he was just another Internet-surfing schmoe with an opinion. Using the alias "Rahodeb," a scramble of his wife's name, he talked up his company while talking down competitors, and judging from the exchanges we've seen generally served as an anonymous corporate cheerleader.

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Without having read all of his posts, we can't say what Mr. Mackey might have disclosed. But from what we've read, we can't see how any reasonable person could conclude that Rahodeb's opinions were going to have any appreciable effect on the Whole Foods share price. The fact that they weren't was precisely the point: At a time when corporate execs are often accused of being isolated, Mr. Mackey seems to have enjoyed the Web engagement and used the semi-informed opinions voiced on a Yahoo message board as his own sounding board to sample the mood of his customers.

The straitjacket that has descended on CEOs, including Sarbanes-Oxley and the SEC's Regulation FD ("Fair Disclosure"), has often had the perverse effect of restricting the flow of information -- and thus preventing informed corporate insiders from participating in the market's increasingly democratic information free-for-all. In some cases, these prohibitions only keep news and informed views under wraps, leading to volatility and "surprises" that can themselves create incentives for insider trading.

Some media scolds will strain to find examples of Mr. Mackey trying to put more optimistic forecasts into circulation than he would offer as CEO, but the real lesson is in that cartoon about the dogs. Mr. Mackey's comments were the equal of any other. Investors who participate on such message boards know that they don't know who's on the other end of their exchanges. We hope regulators don't punish Mr. Mackey for barking on the Web on behalf of his company.

This has got to be about the most ridiculous series of arguments I've ever read. First of all, this isn't a joke. This is serious business. I don't know what you expect from the CEOs of your public portfolio companies but I certainly expect better from mine. And how do you know what the impact of his comments on the message boards happened to be? You don't. How about defining "reasonable person" - oh, you mean like those who post on Yahoo! message boards? Then you hold up SarBox and Reg. FD up as the unfair shackles to which Mr. Mackey and his CEO brethren are held accountable, because his kind of informal disclosure reduces volatility? THAT IS THE SAME ARGUMENT MADE FOR INSIDER TRADING. Sure, it reduces volatility, because those privy to such information enjoy the smooth ride up while most others are on the sidelines. I am a hard-core fair and free marketeer and this behavior is most assuredly neither fair nor free. And regardless of whether or not Mr. Mackey's comments were anonymous they certainly were NOT the equal of any other, because they came from the CEO of the company who is always in possession of material, non-public information. Anyway, you get my point.

In the final analysis, my guess is Mr. Mackey won't be in (literal) shackles any time soon. The facts are just too murky from a legal perspective, and he'll get off. But he'll lose his job, and hopefully others will learn from his experience. If you want an Internet generation CEO role model, look at Mr. Schwartz. Try and forget Mr. Mackey. Because while the impulse is strong to silence your loudmouthed critics on message boards, the best policy is in these cases is clear: shut up. And remember that it's not about you. It's about the company. Get over it.

Comments

My question is simple: what, fundamentally, is the difference between a CEO anonymously posting on message boards cheerleading for his firm and trashing his competitors, and a pump-and-dump spamming scam?

I don't see much between these. In the field of executive conduct, they're both pretty dark shades of grey in my opinion, where "black" is "Enron".

Posted by: Richard Gaywood | July 18, 2007 at 07:08 AM

Chill out.

I've been in possession of sensitive data occassionally and even though I'm given a certain latitude in how much information related to the data I could give out I make it standard procedure to present myself as someone as clueless about the innerworkings of a company just like any other random individual. I don't like the idea about alluding to data that should "generally" be kept secret, until it's ready to be given out, because I might make a mistake, and give people information they shouldn't have yet.

I've made two such mistakes in my short lifetime, (one of which done through a messageboard) and repurcussions from both instances were non-existent. So for myself, I get your viewpoint on why people need to be diligent in how they present themselves in any public medium especially one that records your work.

Discolsure of who are if in a prominent position is important. By making it known to others who you are you enforce in yourself a mindset to be careful of what you say. Still, I don't feel a need to react so strongly in criticising Mackey's actions as you have done.

Internet anonymity automatically creates a barrier that prevents people from taking each other seriously. People don't start analyzing what you are saying until they get emotionally invested. Since Mackey was on an ego trip, he certainly must've gotten into discussions that would be analyzed, but everything released so far makes me yawn or chuckle instead of making me wonder what the hell he was thinking.

Regulatory measures like sarbanes-Oxley and Regulation FD were put into place to remind people they shouldn't be doing certain things and they have to hold themselves to certain standards or else they'll be punished. Did anything about Mackey's comments so far could be considered insider trading? To my knowledge, no. He was a cheerleader using publicly available information to back up his opinions.

If the SEC discovers postings he made that could be considered illegal then villify him at that point. Expressing public facts and private opinions behind a shield of anonimity doesn't violate the letter of the law, nor the INTENT and NECCESITY behind the law's creation.

Moving beyond the law itself there is the matter of what a person should do responsibly.

You are getting enraged because of the possibility Mackey shared exclusive information with other Yahoo forum users, while not sharing that information with all stakeholders. That's why I say you should chill out, because you are fueled by a presumption and not fact.

Talking about work and showing your enthusiasm for it on the internet is mildly different then going to a party or some other social event and talking to random people about the same matters. The most meaningful difference is that people who didn't go to that party can't refer back to that party to see what you said unless someone had used a video camera while you were talking.

So... does anything that can be referrenced in Mackey's posts can not be found in areas used by his company as public access to information? Maybe, but what I know he said so far wasn't irresponsible. Though I wonder if he would've been as brave to make his remarks on Oakley if he knew it was going to be printed on the front page of the Wall Stret Journal; as you wisely suggest CEOs should consider asking themselves before saying anything.

Posted by: mutantmagnet | July 17, 2007 at 06:02 PM