Netflix just can’t catch a break.
Only a few weeks into the new year, the flagging video subscription company is already the subject of a new class-action lawsuit by investors, which accuses the company’s executives of issuing “false and misleading statements” about the health of Netflix’s business and selling $90.2 million-worth of their own shares before the stock collapsed.
Specifically named as defendants in the suit are Netflix CEO Reed Hastings, chief financial officer David Wells, chief content officer Ted Sarandos, chief marketing officer Leslie Kilgore and chief product officer Neil Hunt.
The suit was filed on Friday, December 13 in the Northern District Court of California (where Netflix is based) by national law firm Robbins Geller, on behalf of the City of Royal Oak Retirement System. It seeks to recover damages for all investors who purchased Netflix common stock between December 20, 2010 and October 24, 2011.
That could quickly become a hefty sum, depending on how many investors seek to join the class, as Netflix counts 52.5 million outstanding shares. Robbins Geller notes that anyone who purchased stock during the period outlined is eligible to join the suit, so long as they contact the firm by March 13, 2012.
As the complaint reads:
“…Defendants issued materially false and misleading statements regarding the Company’s business practices and its contracts with content providers. Specifically, defendants concealed negative trends in Netflix’s business. As a result of defendants’ false statements, Netflix’s stock traded at artificially inflated prices during the Class Period, reaching a high of almost $300 per share on July 13, 2011. While Netflix stock was inflated (partially by Netflix buying back its own stock), Company insiders were selling 388,661 shares of their own Netflix stock for proceeds of $90.2 million.”
Importantly, as written, the suit hinges on Netflix’s increasingly tenuous agreements with content providers. Later in the complaint, the firm accuses Netflix’s executives of concealing from investors the fact that the company “faced a Hobbesian choice to renegotiate the contracts in 2011 at much higher rates or not renew them at all.”
Indeed, last summer, one of Netflix’s largest and most important content providers, Starz — which was Netflix’s provider of popular Disney and Sony Pictures movies — walked out on contract renegotiations, leaving the company and its subscribers high and dry when it came to those movies as of February 2012.
Worse still, the lawsuit has triggered a separate investigation into Netflix’s Board of Directors by two other law firms. As former SEC attorney Willie Briscoe, of the The Briscoe Law Firm wrote in a release on Monday:
“Because of the severity of the accusations lodged against certain of Netflix’s officers and directors, we are concerned about the possible damage to the company and its shareholders, and the firms have commenced an investigation to uncover possible breaches of fiduciary duties and other violations of state law by the officers and directors.”
So now it appears as though Netflix will have to convince three separate firms it had no clear idea that its content renegotiations would become so contentious.
Meanwhile, the company’s stock is holding up surprisingly well in the face of the news, as well as the earlier confirmation that HBO would force Netflix to purchase DVDs at full price and the news that Time Warner (which owns HBO) wants to make Netflix and other rental companies wait nearly two months before renting out Time Warner content. The stock was trading above $97 on Tuesday morning, up nearly 3 percent, perhaps due to renewed investor confidence following the rollout of Netflix in the U.K. last week. That’s at least the theory floated by financial news and analysis website Trefis, writing at Forbes.
Also, Netflix has successfully fended off class-actions before, although none quite so damning as the allegations in this latest complaint.
