Court Tosses Investor Suit Against Netflix Over Failure to Allege False Statements

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The U.S. District Court for the Northern District of California Aug. 20 threw out a would-be securities class action alleging that Internet television and movie subscription service Netflix Inc.(NFLX) and certain of its officials made material misrepresentations about the prospects of a new “streaming-focus” model that led to a sharp decline in Netflix stock price after the alleged falsity of the statements was revealed (In re Netflix, Inc. Sec. Litig., N.D. Cal., No. 12-00225 SC, 8/20/13).

The court, in a ruling by Judge Samuel Conti, dismissed the plaintiffs’ claims based on their failure to plead false or misleading statements.

It said the plaintiffs “have had two opportunities to plead false statements, but in both cases they failed to do so.” As such, the court dismissed the complaint with prejudice.

The court recounted that Netflix allows consumers to watch movies either by streaming them over the Internet directly to their televisions, computers, or mobile devices, or by receiving DVDs sent to their homes. Allegedly, Netflix encountered various difficulties in attempting to develop its streaming services.

In their lawsuit, the court said, the plaintiffs essentially contended that the defendants “knew streaming would be relatively less profitable than DVD offerings, but decided to tell the public that Netflix’s shift to streaming would be a good thing for the company.” 

Tenuous Theory

Dismissing, the court said the plaintiffs' allegations “depend on the tenuous theory that Defendants withheld discrete and accurate financial information about streaming while also touting streaming’s profitability.” It said it “has not found this to be the case for any statement Plaintiffs cite.”

The plaintiffs, the court said, supply “an array of vague, sometime conclusory, statements to support a theory that requires much more by virtue of its being narrow and fact-sensitive.” This is insufficient to satisfy Private Securities Litigation Reform Act pleading requirements.

In other specifics, the court said that the defendants made clear throughout the class period that the “success of a streaming-focused business model was contingent on other factors, primarily the growth and retention of Netflix’s subscriber base, suggesting that Defendants did not omit any information or warnings in a way that would be misleading under” 1934 Securities Exchange Act Rule 10b-5.

The court also said that because the plaintiffs failed to plead a Section 10(b) violation, their control person and insider trading claims also are inadequate.

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