Netflix is facing a class-action lawsuit from one of its investors, who claims executives withheld bad news from shareholders – and cost them billions of dollars in losses.
The video-streaming giant is accused of failing to promptly warn shareholders that raising the cost of its monthly subscriptions was putting off potential new viewers, and of lying to investors and forcing them to bear the brunt of a revenue drop.
Shareholder James Ziolkowsi, who is leading the legal fight, claims CEO Reed Hastings, CFO David Wells, and other Netflix execs knew increased prices had slowed subscriber growth, and would hit their bottom line, but chose to downplay the effect in filings and notes to investors. In other words, they knew user growth figures had taken a hit after the price hike, but held off warning shareholders, it is alleged.
"On July 21, 2014 – more than two months after Netflix's price increase took effect – individual defendants Hastings and Wells told the market that the impact of Netflix's May 2014 price increase on subscriber growth had been 'minimal.' Defendants also called the effect 'nominal'," the filing [PDF] reads.
"They said it was 'background noise' which had 'no noticeable effect in the business.' All of those representations were false and misleading when made, and Defendants knew it when they spoke."
Months later, in October 2014, Netflix admitted in its third-quarter results that new subscriber numbers were down due to higher prices. Its stock price immediately fell by 19 per cent and it lost $5bn in valuation. By not telling shareholders earlier how severely the pricing change would hurt Netflix's revenues, the lawsuit claims, Hastings and other executives at Netflix broke the US Securities Exchange Act.
Netflix did not respond to a request for comment on the filing.
The suit, filed this week, seeks a jury trial to decide damages to shareholders both from Netflix itself and from Hastings and Wells individually. The case, Ziolkowski v Netflix, is being heard by the US District Court for Northern California in San Francisco. ®