January 18, 2012, 11:45 AM

Netflix sued for securities fraud

A class-action complaint alleges Netflix helped inflate the retailer's stock price.

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Last year, Netflix Inc. executives misled investors into thinking business was booming while they raked in $90 million dollars from selling their own company shares before the stock plummeted, alleges a class-action complaint filed by investors this week in California.

The complaint against Netflix, No. 13 in Internet Retailer’s Top 500 Guide, alleges that from Dec. 20, 2010, to Oct. 24, 2011, company executives gave false statements to investors in violation of the Securities and Exchange Act of 1934 regarding its business practices and relationships with content providers. The complaint says these statements led to an inflated stock price that peaked July 13, 2011, at nearly $300 per share.

The complaint alleges executives sold 388,661 shares of stock for proceeds of $90.2 million while the share price was high.

A Netflix spokesman says the retailer does not comment on legal matters.

According to the complaint filed in the United States District Court in the Northern District of California, on Sept. 15, 2011, Netflix revised its third quarter 2011 guidance and revealed that it had lost a million subscribers due to previously announced price increases. With this news, Netflix stock fell nearly $40 per share to close at just under $170 per share. Then on Sept. 19, 2011, the retailer said it would begin charging separately for streaming video and DVD by mail service and raised prices. Netflix stock dropped further to $130 per share after that announcement. On Oct. 24, 2011, Netflix reported a net loss of 810,000 U.S. subscribers, and another document filed soon afterward revealed the retailer owed $3.5 billion to content providers, with $2.8 billion due within three years.

The complaint alleges these disclosures caused Netflix stock to fall from $118.84 per share on Oct.24, 2011 to $80.86 per share on Oct. 27, 2011, a 32% decline in three days. The complaint alleges executives knew that Netflix faced contract renegotiations in 2011 and that content providers were demanding higher licensing fees. It says executives also recognized that the retailer’s pricing would have to increase to maintain profit margins and pay off streaming content costs, and that the retailer was not on track to meet forecasts it had made for the company in 2011, the complaint alleges.

The class action is being brought on behalf of investors who purchased Netflix stock from Dec. 20, 2010, to Oct. 24, 2011. The suit seeks unspecified damages and interest.

The lawsuit includes as defendants:

  • CEO Reed Hastings, who sold 190,000 shares of Netflix stock for $43.2 million from Dec. 20, 2010, to Oct. 24, 2011
  • Chief financial officer David Wells, who sold 6,196 shares for $1.5 million
  • Chief content officer Theodor Sarando, who sold 25,360 shares for $5.8 million
  • Chief marketing officer Leslie Kilgore, who sold 29,577 shares for $7.1 million
  • Chief product officer Neil Hunt, who sold 35,589 shares for $8.3 million.
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