Netflix (NSDQ: NFLX) has been hit with a class-action suit by a group of disgruntled investors who claim the online movie-rental chain withheld information from them prior to its steep stock-price plunge over the late summer and fall.
The lawsuit was filed in U.S. District Court in Northern California, by the City of Royal Oak Retirement System, and seeks compensation for all shareholders stock who purchased Netflix stock between December 20, 2010 and October 24, 2011.
The complaint claims Netflix senior management didn’t disclose that many of its contracts to stream content were short term and would soon have to be renegotiated at substantially increased cost. It also states that CEO Reed Hastings made $43.2 million selling 190,000 during the period in question.
It says the defendants violated section 10(b) of the Securities Exchange Act of 1934. The provision forbids manipulation or deception in the securities market, and has been invoked in thousands of investor related lawsuits.
The investors are represented Robbins, Geller, Rudman & Dowd LLP, a firm that specializes in corporate class actions, and has won large verdicts against companies like Enron and AT&T (NYSE: T). Class action law firms typically attempt to force a settlement from firms and then take a commission of around 25 percent.
In addition to Hastings and the company itself, the defendants are: CMO David Wells; chief content officer Ted Sarandos; chief product officer Neil Hunt and CMO Leslie Kilgore.
A Netflix spokesman has yet to respond to an inquiry made late Monday by paidContent.
Netflix stock was trading on the NASDAQ at $291.27 per share on July 12, the day before Netflix announced separate charges for streaming and DVD and a 60 percent price increase for some subs. It quickly abandoned an attempt to spin off its disc-rental operation. The moves that were rejected by consumers and investors alike.
Netflix stock closed after-hours trading Friday at $94.79 a share. On Tuesday, company shares were up almost 2 percent in mid-afternoon trading.
The suit, posted on the law firm’s site, contends:
“At the beginning of the class period, Netflix was facing increasing competition for streaming business, and content providers were exploring new ways to distribute their content and/or maximize their licensing fees, … Rather than fully disclose the devastating cost increases which were then threatening Netflix’s entire business, the defendants talked about [their] ability to grow.”
The suit also notes that Netflix senior managers sold many of their shares when the stock was high, netting $90.2 million between them. It doesn’t cover the circumstances of those sales — whether or not they were pre-scheduled, for instance, or how much stock those managers may have acquired.