Stockholders v Netflix, Inc.
Netflix Bragged About New Subscribers, Forgot to Mention Cancellations
A class action has been filed against the online movie rental service Netflix, Inc. and certain of its officers and directors by stockholders who purchased the company's common stock between October 1, 2003 and July 15, 2004. The action claims that the defendants violated federal securities laws by issuing a series of material misrepresentations to the market over this time period, thereby artificially inflating the price of the company's securities. The stockholders seek to recover compensatory damages for the loss of value of their stock.
The complaint alleges that Netflix violated the federal Securities Exchange Act by deliberately understating the Company's "churn" rate (the percentage of its subscribers that cancelled per month) by utilizing a novel definition of "churn" that artificially decreased the Company's reported churn rate during quarters when the Company was adding large numbers of new subscribers. Netflix is further accused of misrepresenting subscriber growth to the SEC by reporting numbers of new subscribers without any direct disclosure or the large percentage of subscriber cancellations during the same time period.
On July 15, 2004, after the close of trading, Netflix finally disclosed that while it had added 537,000 new subscribers during the second quarter of 2003, it had lost 422,000 other subscribers in that time period and that although the company added 1,343,000 new subscribers during the first half of 2004, in the same period it had suffered 737,000 cancellations. In response to this news, Netflix shares plummeted 38% in just two days. The lawsuit seeks to recover damages for the lost value of Netflix stock on behalf of class members.
