Court tosses shareholder lawsuit against Netflix

Netflix (Nasdaq: NFLX) is riding high these days (its stock price is up about 7 points to $196.95 in late afternoon trading Tuesday) based on a positive earnings report that exceeded expectations. It wasn't so long ago, though, that the company was in a terrible slump, watching its stock drop from $304.79 to $74.25 in the July to October 2011 timeframe before finally bottoming out at $52.81 in August 2012.

That 2011 slump hurt shareholders but, U.S. District Judge Samuel Conti has ruled, it wasn't caused by any actions on the part of management to mislead investors.

Conti's decision, in San Francisco court, effectively quashed a shareholders' lawsuit led by the Arkansas Teacher Retirement System and State-Boston Retirement System that claimed Netflix had, indeed, misled them about its prospects in a Dec. 8, 2010, investors' conference call during which CEO Reed Hastings said the company was about to benefit from a "virtuous cycle" of adding streaming subscribers and gradually spinning off its DVD business.

Instead, as history now shows, the company lost about 800,000 subscribers and their subsequent revenues when it canceled a plan that let subscribers stream movies and receive DVDs for $9.99 a month and instituted dual individual $7.99 plans for streaming or renting.

In addition to claiming that Netflix misled them about how its DVD rollback would pan out, the plaintiffs, who were given 30 days to amend their complaint, also said the company deceived them by launching a stock buyback program--a sign that the stock might be undervalued--at the same time insiders were selling about $85 million in stock--generally considered a signal that the opposite is true.

Hastings, the shareholders added, made about $32 million during the period.

The judge said the shareholders offered inadequate proof that Netflix was being deceptive and a Reuters story said he noted that the Netflix business model "worked exactly as Netflix said it would, until Netflix began to lose subscribers after announcing its price increases and DVD business spinoff." He also absolved Hastings of materially misleading the shareholders.

Shareholder attorney Stephen Tountas was unavailable for comment to Reuters. Netflix spokesman Joris Evers said the company was pleased with the decision.

For more:
- Reuters carried this initial story

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