SEC Tags DraftKings for Regulation FD Violation

As the CEO of Boston-based sports gambling operator DraftKings Inc. learned recently, corporate executives are rolling the dice when they discuss their companies on social media.

The Securities and Exchange Commission last month announced a settlement with DraftKings related to posts on its CEO’s X and LinkedIn accounts. According to the SEC, the company’s public relations firm in July 2023 published a note from the CEO’s account on both platforms touting “really strong growth” in states where DraftKings was operating. While that sounds innocuous enough, DraftKings had yet to release its second quarter financial results or publicly disclose the information in the posts. The PR firm removed the posts shortly thereafter at the request of DraftKings.

At issue in this case is Regulation Fair Disclosure, which is more commonly known as Regulation FD. It refers to the “selective disclosure of information” by companies to certain individuals, such as investors. Publicly traded companies aren’t supposed to make such disclosures in the first place. However, if such a disclosure does occur unintentionally, issuers are expected to disclose that information publicly as soon as possible.

As it relates to DraftKings, the SEC noted that the company didn’t publicly disclose the information in the CEO’s social media posts until seven days later when it published its quarterly financial results. In other words, in the agency’s opinion, scrubbing the posts from the accounts alone didn’t meet DraftKings’ obligations under Regulation FD. (Interestingly, if DraftKings had promoted social media outlets as forums for disseminating material information prior to the incident, the company might have been in the clear.)

In a commentary on the announcement, Broc Romanek of Cooley pointed out that cases of CEOs “going rogue on social media” are astonishingly rare. “When you have a strong-willed CEO – and many of them are – it can be challenging to rein them in,” Romanek said. “They are accustomed to being in charge and doing what they want.”

Perhaps the incident will make it easier for compliance professionals to warn executives about the gravity of their public comments and what gets posted on their social media accounts. A PR firm committed the blunder in this case, so it also speaks to the importance of training employees and third-party service providers about Regulation FD’s requirements.

Bear in mind, though, that DraftKings settled these charges by paying a civil penalty of $200,000. The company reported revenue of $3.67 billion for the 2023 fiscal year, which, for DraftKings, works out to something close to a rounding error. If the SEC is serious about getting issuers to respect Regulation FD, it will need to put more bite into enforcing the rule.