Netflix Investors File Class-Action Lawsuit

LOS GATOS: A group of investors have filed a class-action lawsuit against Netflix, alleging that the company withheld information and put out false and misleading statements about its business prior to its stock plunge.

The suit, filed in California federal court, lists Reed Hastings (CEO), David Wells (CFO), Ted Sarandos (chief content officer), Neil Hunt (chief product officer) and Leslie Kilgore (chief marketing officer) as defendants. The suit claims that Netflix knew it had short-term contracts with its content providers but did not disclose the fact that many of those pacts would have to be renewed at a substantially higher costs, necessitating its price hike. The suit says Netflix had a "Hobbesian choice to renegotiate the contracts in 2011 at much higher rates or not renew them at all."

The complaint asserts that by withholding this information Netflix’s stock was artificially inflated. It claims that "insiders" sold off many of their own shares at artificially inflated prices during the Class Period, reaching a high of almost $300 per share. With execs selling more than 388,000 shares, this netted $90.2 million.

In its third-quarter guidance, Netflix revealed that it had lost 1 million subscribers due to its price increase. Upon this news, Netflix stock fell nearly $40 per share in a single day. In its third-quarter shareholder letter it reported a cumulative loss of 5.5 million subscribers. "These disclosures caused Netflix stock to collapse from $118.84 per share on October 24, 2011 to $80.86 per share on October 27, 2011, on volume of 76 million shares over three days," the suit states. "The stock has continued to decline since that time."