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Netflix Targeted by Shareholder Lawsuit After Q2 Subscriber Shortfall

UPDATED: Like clockwork, Netflix’s big miss on subscriber targets for the second quarter of 2019 prompted at least one lawsuit filed on behalf of shareholders.

A suit seeking class-action standing was filed Monday by the Rosen Law Firm, which which specializes in investor litigation. The lawsuit alleges Netflix violated SEC regulations by failing to disclose information about the Q2 shortfall — which precipitated a 13% drop in the company’s stock price. Other law firms have announced investigations into the matter as they seek plaintiffs to represent.

For Q2, Netflix reported a net gain of 2.7 million subs worldwide — almost half as many as the 5 million it had projected — including its first net decline in U.S. customers since 2011.

Rosen’s lawsuit, filed on behalf of Netflix shareholder Johan Wallerstein and others seeking to join the class, names the company as well as CEO Reed Hasting and CFO Spencer Neumann as defendants in its complaint. The company and the named execs “knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading,” which violated U.S. securities laws, the law firm alleged in the lawsuit, filed July 22 in U.S. District Court for the Northern District of California.

In response, a Netflix spokesman said, “We are reviewing the complaint.”

The only surprise is that it took five days for a shareholder suit to pop up after Netflix reported earnings, according to Prof. Erik Gordon of U. of Michigan’s Ross School of Business. The typical pattern in these cases is for the targeted company to call the suits frivolous and without merit and to file a motion to dismiss the complaints, Gordon said. If the company doesn’t win the motion and get the suit thrown out by the judge, the case usually settles.

“The company doesn’t want to pay more to litigate than it costs to settle, and it often doesn’t cost much to settle early,” Gordon said. “Plaintiffs’ lawyers often prefer to make a quick fee rather than to take a chance on making either a bigger fee or no fee after spending a million dollars of their time preparing and trying a case.”

Netflix did report Q2 revenue in-line with expectations — and actually beat Wall Street estimates for earnings per share (EPS of 60 cents vs. consensus estimate of 56 cents).

Correction: Currently, only one shareholder lawsuit related to Netflix’s second-quarter 2019 earnings results has been filed; an earlier version of this story incorrectly reported that the company was the target of at least two such lawsuits.

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