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Shareholder Lawsuits Claim Netflix Misled Investors

23 Jul, 2004 By: Holly J. Wagner

Two law firms have filed shareholder lawsuits against Netflix alleging the company misled investors who then lost money in the company's July stock slump.

Netflix's share price tumbled 38 percent, from $32 to $20, in the week after the company's second-quarter earnings call July 15.

A spokesperson for Netflix said the company had not seen the suits and does not comment on pending litigation in any case.

The cases on behalf of shareholders who bought between Oct. 1, 2003 and July 15 were filed July 22 by the Law Offices of Charles J. Piven and Scott + Scott, LLC. Both cases in U.S. District Court for the Northern District of California allege that Netflix and its officers “made materially false and misleading statements to the market throughout the class period which statements had the effect of artificially inflating the market price of the company's securities,” according to an announcement from the Piven firm.

The Scott + Scott announcement is more specific, alleging that Netflix, CEO Reed Hastings, CFO Barry McCarthy and chief marketing officer Leslie Kilgore failed to accurately disclose churn — the number of subscriber cancellations the company was getting — while trumpeting its subscriber acquisition numbers. The suit contends that Netflix should measure churn in the same way that other publicly-traded companies, such as cell-phone service providers, measure churn.

It also claims Netflix made statements over time that its churn rate was declining to record lows, “when in fact in some of these quarters its churn rate was markedly rising,” and that the three executives named sold $13 million worth of stock during the months in which they are claiming investors were misled.

Attorneys are still seeking lead plaintiffs for the cases and must seek class-action status for the cases.

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