Netflix faces class-action over stock valuations

Michelle Clancy ©RapidTVNews | 18-01-2012

Netflix is facing a class-action lawsuit that alleges false statements as to its business dealings on the part of some of its officers and of corporate communications.
The suit alleges that Netflix stock was pushed to artificially high levels in the summer, when it touched the $300-per-share mark, only to lose 73% of its value once the facts surfaced.

The suit is open to those individuals who purchased shares of Netflix's common stock between 20 December, 2010 and 24 October, 2011.
The lawsuit, being brought by Robbins Geller Rudman & Dowd LLP on behalf of institutional investor City of Royal Oak Retirement System, names as defendants Netflix Inc., Netflix's co-founder, board chairman and CEO Reed Hastings, CFO David Wells (chief financial officer), Chief Contenyt Officer Theodore Sarandos, CMO Leslie Kilgore and Neil Hunt, the chief product officer. The lawsuit asserts that the defendants "issued materially false and misleading statements" about its "business practices and its contracts with content providers."
Even worse, the suit claims that Netflix insiders took home a collective $90.2 million from selling off the stock at its height, betting against their own company.
Netflix's stock hit its high over the summer during a period that Wall Street analysts were questioning the valuation in light of the shrinking margins that the online streaming company was facing. Escalating content acquisition costs and the fact that the bulk of new subscribers were signing up for the lower-priced streaming-only subscription, instead of one that included DVDs by mail, had many scratching their heads. Subsequent announcements that Netflix was expanding internationally into Latin America garnered mixed reactions, with some lauding the additional planned subscription volume as a way to ease the margin pressure, and others becoming concerned that negotiating content deals to populate the service (presumably including much Hispanic programming) would prove a dear proposition.
It was not long before the company fell on hard times, losing capital and plenty of subscribers (810,000 of them in the third quarter) thanks to an ill-conceived rate hike. Also, Netflix proved unable to re-up a carriage deal with the STARZ premium channel, which was one of the only big differentiating content offerings that the company could boast inside the United States. Eventually, the company was forced to seek a new capital injection towards the end of this last year-- and got it, to the tune of $400 million--in order to fund its continued expansion into Britain. Wall Street did not see that as a good sign either.

The lawsuit says that the defendants didn't simply miscalculate Netflix' coming issues while the stock was circling the stratosphere with bigwigs like Apple and Google. Robbins Geller said that a regulatory filing reveals that Netflix knew its obligations for content over the coming years had climbed to $3.5 billion in order to maintain the service--a mind-bogglingly steep price tag that the plaintiffs say was never mentioned to investors. The suit also accuss Netflix of concealing the fact that they were relying on short-term carriage deals in which renegotiation agreements with much higher rates loomed.
In the class-action suit was filed in the U.S. District Court for the Northern District of California, City of Royal Oak Retirement System is seeking damages on behalf of all purchasers of Netflix stock during the time period in question. The deadline to file lead plaintiff motions is 13 March.