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Class action suit claims Netflix misled investors to bump share price

By | January 17, 2012, 4:24am PST

Summary: A class action suit claims that Netflix executives not only misled investors regarding the state of the streaming business, but also cashed in on shares at an all-time trading high.

Netflix has been hit with a class action suit by a group of shareholders that allege the company gave false statements about the business, as part of alleged efforts to artificially raise the company’s share price.

Reuters reports the suit, filed in California, claims that the home streaming made misleading comments about the state of contracts it had made with television and film studios, and withheld other information that may have plunged the share price company further.

It also claims that Netflix’s senior management sold over 380,000 shares while the company was trading at a high point, paying out over $90 million in cash. The suit also states the executive team held back important data from investors, including contracts that would then have to be renegotiated at an increased rate.

The suit also claims that despite public statements, Netflix executives knew privately that the company would not meet its earnings forecast, giving the executives the opportunity to sell before the share price crashed.

Defendants named include chief executive Reed Hastings, chief financial officer David Wells, and three other senior Netflix executives.

The complaint seeks unspecified damages and legal fees.

Before Netflix announced separate charges for streaming and DVD rentals, along with a 60 percent price increase for some subscriptions, the company was trading at over $290 a share. But after a series of failed attempts to change the business, even by name to the ill-fated and short-lived Qwikster, the company suffered a massive share drop.

Last quarter, Netflix announced that it had lost over 1 million subscribers as it was preparing to launch in the UK and Ireland, as part of a wider European rollout of it service.

Netflix is currently trading at just over $94 a share on Friday at market close.

Netflix did not respond for comment immediately.

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Topics

NetFlix Inc., Class Action, Investor, Zack Whittaker

Zack Whittaker, a criminologist who studied at the University of Kent, Canterbury, is a journalist, writer and broadcaster.

Disclosure

Zack Whittaker

I worked briefly with Microsoft UK in 2006 but no longer have any connection with the company. Regardless, I remain impartial and unbiased in my views.

I don't hold any stock or shares, investments or industrial secrets in any company, but have signed confidentiality agreements with a number of UK and U.S. organisations, whose names I am not at liberty to disclose.

I was involved with Kent Union, the University of Kent's student union, undertaking voluntary, non-salaried, elected positions between early 2009 and mid-2010.

No other company, body, government department, non-governmental organisation or third sector organisation employs me or pays me a salary in any capacity whatsoever.

As a freelance journalist, whenever expenses are given and taken by a company that is not CBS Interactive, these will be disclosed in each relevant post to ensure transparency.

I currently work with a UK law enforcement unit, but this is an entirely separate position which bears no connection to other work.

(Updated: 23rd October 2011)

Biography

Zack Whittaker

Zack Whittaker, criminologist who studied at the University of Kent, UK, is a journalist, writer and broadcaster.

After studying criminology at university, though still in his early-20's, he has already had a series unconventional work and voluntary positions. He has worked with researchers studying neurological illnesses like Tourette's syndrome (which he suffers from), has given lectures on the nature of disabilities in the public community, and occasionally ends up speaking on television and radio discussing the events of the day.

He first had academic work published at the age of 22, then still an undergraduate, and has been cited by a wide range of publications: from CNN, the Huffington Post, AllThingsDigital, The Atlantic Wire and CBS News.

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RE: Class action suit claims Netflix misled investors to bump share price
kc63092@... 17th Jan
@Netteligent
always!!!
View in thread
0 Votes
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Lawyers, God bless 'em
Robert Hahn 17th Jan
    claims that the home streaming made misleading comments about the state of contracts it had made with television and film studios
I dunno, I don't see it. In their annual report, they warn:
    The Company also has entered into certain license agreements that include an unspecified or a maximum number of titles that the Company may or may not receive in the future and /or that include pricing contingent upon certain variables, such as domestic theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether the Company will receive access to these titles or what the ultimate price per title will be. However such amounts are expected to be significant.

That says they didn't know for sure what the prices might be on future titles, but that the amounts would be significant. Anyone who now claims that the company "hid" this information will have a hard time proving it.
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RE: Class action suit claims Netflix misled investors to bump share price
kc63092@... 17th Jan
@Robert Hahn
leave it to the lawyer-gods to twist the truth, and netflix will be found guilty (guilty or not anyways!!!) and pay.
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I thought investing was about misleading investors?
jscott418 17th Jan
Forgive me for pointing out the obvious. But is'nt investing about taking chances on a company based on your information of a company? I mean what company does not paint a positive picture of their company at all costs? Its up to the investor to decipher that information and decide to believe it or not. Anyone who invested in Neflix was looking for a quick buck like the folks at Netflix did. Some just got out when they should and others did not and now they are bitter.
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RE: Class action suit claims Netflix misled investors to bump share price
Grolaw 17th Jan
It would have been of substantial interest to name the lead plaintiff. The city of Royal Oak, MI is a lead plaintiff and the funds that were lost are municipal retirement funds. Netflix's insiders cashed out before the stock lost more than 50% of its value.
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RE: Class action suit claims Netflix misled investors to bump share price
Regulator1956 17th Jan
@Grolaw Looks like those "insiders" did poor job of scamming. They only sold 380,000 of the millions of shares they own.

More likely, the top few executives sold the same number of shares at about the same time within the quarter as they do each quarter. Lawyers advise CEO's and other top VPs to create a schedule to sell a set number of shares each quarter, at xx number of days after the press release of quarterly results. Sometimes, someone will sell a block to buy a house or something else expensive and the lawyers recommend that they announce that before the sale.
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RE: Class action suit claims Netflix misled investors to bump share price
Netteligent 17th Jan
"Mislead investors so Netflix management cashed out at high peak" for huge profits are the part of investment at your own risks. NFLX Investors are greedy and partly blame for their own huge losses. It was so obvious that NFLX executives knew about their condition and status but only giving its shareholders a rosy forecast. It is part of the investement game.
NFLX management and their closed friends are smart people and laughing all the way to the banks. NFLX Board of Directors issued more million shares at cheap price as stock incentives. It is very difficult to prove and lawyers are the only winners.
0 Votes
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RE: Class action suit claims Netflix misled investors to bump share price
kc63092@... 17th Jan
@Netteligent
always!!!

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