More Netflix drama in the news this week – a group of investors is forming a class-action lawsuit again Netflix and several of its executives over misleading investors with false financial projection data and failing to inform investors of financial hardships when the company’s stocks took a dive in 2011.
The lawsuit was filed in the U.S. District Court of Northern California by the City of Royal Oak Retirement System on behalf of all those who purchased stock between Dec. 20, 2010 and Oct. 24, 2011. In addition to Netflix, Chairman and CEO Reed Hastings, CMO David Wells, Chief Content Officer Ted Sarandos, Chief Product Officer Neil Hunt and CMO Leslie Kilgore were named in the complaint.
The plaintiff claims that Netflix issued “materially false and misleading statements regarding the company’s business practices and its contracts with content providers” and “concealed negative trends in Netflix’s business.” Those actions caused the stock to trade at “artificially inflated prices,” reaching a high of $291.27 per share on July 12, 2011. During that period, Netflix executives sold 338,661 shares of Netflix stock for proceeds of $90.2 million.
Speaking off the record, a securities specialist not involved in the case said that the plaintiffs would face an “uphill battle” trying to prove that Netflix intentionally misled investors on its 2011 guidance. “Another issue is damage,” the source pointed out. “How would a judge define them? Typically one’s stock being ‘overvalued’ does not create a cause of action, the logic being that even if the stock was overvalued with respect to fundamentals, it was nevertheless trading at that price so the investor could have sold at the right time and reaped the benefit.”
“All in all the claim looks pretty weak, there are a lot of elements to a 10b-5 claim and each one is going to be a challenge for plaintiffs here,” the source added.
Another source suggested the complaint “might be enough to survive summary judgment,” meaning that the lawsuit could become a financial burden that Netflix would opt to settle.
Most people are familiar with Netflix’s 60% price inflation in 2011 causing record loss in customer base and financials, deeply scarring Netflix’s reputation long term.
How do you think Netflix will proceed in the future? Without investors behind them and a record loss of customers, will the movie rental giant be around for much longer?
