The online streaming and DVD rental service can take one putative securities class action out of its instant queue. A federal judge Tuesday dismissed the amended suit by investors claiming that Netflix played fast and loose back in 2011 with the financial truths of its shift to a streaming business model. “Plaintiffs do not plead plausible facts indicating that Defendants touted the streaming business’s profitability as opposed to the projected or hoped-for strength of the interrelated DVD and streaming business,” said Judge Samuel Conti on August 20 of the suit whose class action period covered October 2010 to October 2011. The initial complaint was field in January 2012. “None of what Plaintiffs plead therefore shows that Defendants made any false or misleading statements about the profitability of the streaming business,” he added. In a 24-page order (read it here), the US District Judge dismissed the suit against Netflix, CEO Reed Hastings, current CFO David Wells and past CFO Barry McCarthy with prejudice and no leave to amend.
The order this week came after Judge Conti granted Netflix’s motion to dismiss the original complaint back on February 2 of this year. At the time, the judge said that the City of Royal Oak Retirement System and other plaintiffs hadn’t uncovered any evidence that Netflix had specific expenses and revenues for its domestic streaming service before Q4 2011 nor that insiders cashed in on bloated stock. The dismissal Tuesday was of an amended complaint filed in March that shifted its focus to claims that the company and its execs were talking up “the streaming business and creating the false impression that it was driving Netflix’s profitability.” The Judge didn’t buy it. “As for the statements the Court addressed in its prior Order, and to the application of Plaintiffs’ newly cited cases more generally, Plaintiffs have not shown that Defendants touted the independent profitability of streaming such that they would have a duty to disclose any of the negative aspects of their streaming business. Indeed, Defendants explicitly refused to discuss the independent profitability of streaming,” Conti wrote.
What was or was not explicitly discussed, profit was, as almost always is the case, at the core of the whole action. The original 2012 suit was set off by the freefall of Netflix stock in late 2011 after the company revealed it was going to splice into two entities with one concentrating on streaming and another on DVD rentals. Though that idea lasted less than month before Netflix pulled the plug on its own plan, the plaintiffs claimed that the company had broken federal Securities and Exchange Commission rules and common accounting methods by reporting revenues from DVD rental and streaming services together and not separately from July to September 2011. Netflix countered by saying that it wasn’t under an obligation to split the two until that September. On a parallel track, the company’s stock, which fell over $40 during the time of the ill-consider duel entity notion, has seen steady growth since that time and with the introduction of original programming like House Of Cards and the Arrested Development reboot on Netflix. The stock currently sits around $269 with a 52-week high of $274.
Keith Eggleton, Luke Liss, Rodney Strickland and Boris Feldman of Wilson Sonsini Goodrich & Rosati’s LA office represented Netflix.
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