Netflix Hit with Class Action Lawsuit over 2011 Stock Drop

Looks like 2012 is not going to be any kinder to Netflix than last year was.

As the company struggles to win back customers, Netflix has been slapped with a class-action lawsuit in California.

A group of the company’s investors filed the suit in U.S. District Court “against Netflix and certain of its officers and/or directors”, contending that “company insiders” at Netflix were “conceal[ing] negative trends” that preceded the stock’s ultimate plummeting and selling NFLX stock while the stock was at that “artificially inflated” peak.

On July 12, 2011, the day Netflix made the ill-conceived announcement that it would split its DVD and streaming business, Netflix stock closed at a price of $291.27.  On October 25, 2011, the final day of the class action lawsuit, the stock closed at $77.37.  Netflix is currently trading at about $97.00.

Named in the suit are Netflix CEO Reed Hastings, Chief Content Officer Ted Sarandos, and Chief Marketing Officer Leslie Kilgore, among others.

An excerpt from the lawsuit reads as follows:

During the Class Period, 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), Comapny insiders were selling 388,661 shares of their own Netflix stock for proceeds of $90.2 million.

This is the first actual legal volley hurled at the company since last year’s fiasco.  It had been publicly observed that Hastings was ditching a lot of Netflix stock, with many questioning why.  This lawsuit seems to address those actions directly.

Hastings is taking a pretty sizable pay cut this year.  His stock options are down to $1.5 million from $3 million. His base salary of $500,000 per year remains the same, however.

Related articles

• Netflix Stock Options Halved For CEO Hastings After Rough Year (inquisitr.com)
• Netflix stock up on deal talk (variety.com)