Case Page

 

Case Status:    DISMISSED    
On or around 11/18/2005 (Date of order of final judgment)

Filing Date: July 22, 2004

According to the Dismissal Order, signed by U.S. District Judge William Alsup on November 18, 2005, because no defendant made a false statement actionable under federal securities law, plaintiffs have failed to state a valid claim and there is no need to consider other elements of a valid 10(b) claim, such as scienter. The complaint is dismissed without leave to amend for the reasons stated above. The Clerk is directed to close the case. That same day, the Court entered the Final Judgment in favor of the defendants.

As summarized by the Company’s FORM 10-Q for the quarterly period ended September 30, 2005, between July 22 and September 9, 2004, seven purported securities class action suits were filed in the United States District Court for the Northern District of California against the Company and, in the aggregate, Reed Hastings, W. Barry McCarthy, Jr., and Leslie J. Kilgore. These class action suits were consolidated in January 2005, and a consolidated complaint was filed on February 24, 2005. The complaint alleges violations of certain federal securities laws, seeking unspecified damages on behalf of a class of purchasers of our common stock between October 1, 2003 and October 14, 2004. The plaintiffs allege that the Company made false and misleading statements and omissions of material facts based on its disclosure regarding churn and delivery speed, claiming alleged violations by each named defendant of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and alleged violations by certain of its officers of Section 20A of Securities Exchange Act of 1934. On June 28, 2005, the Court dismissed the action with leave to amend. Plaintiffs did so amend, and the Company filed a motion to dismiss the amended complaint. A hearing on the motion to dismiss is scheduled for November 17, 2005.

The original complaint alleges that Netflix and certain of its officers failed to disclose the number of subscriber cancellations being suffered by the Company, even as they repeatedly touted the large number of new subscribers being added to the Company's subscriber base. The complaint further alleges that they also consistently understated the Company's churn rate (the percentage of its subscribers that cancelled per month). They achieved this by using an improper calculation of the rate that produced an artificially low churn rate in quarters in which the Company was adding substantial numbers of new subscribers.

The standard definition of churn rate (and the definition used by other publicly-traded companies that report churn rate such as Sprint and Nextel Partners) is 'the percentage of participants who discontinue their use of a service divided by the average number of total participants during a given period of time.' Netflix instead divided canceling subscribers by subscribers at the beginning of the period plus subscriber additions.

Because beginning subscribers plus new subscribers were consistently a larger number than average subscribers throughout the Class Period, the Company reported an artificially low churn rate throughout the Class Period by erasing the effect that canceling subscribers had on average subscribers during each period.

Moreover, it is alleged that the Company repeatedly made statements throughout the Class Period that its churn rate was declining to 'record lows,' when in fact in some of these quarters its churn rate was markedly rising. For example, in the third quarter of 2003, Netflix claimed that its churn rate had reached a new record low of 5.2% when in fact its churn rate had risen from 7% to 7.7% during the quarter.

Disclosure of actual subscriber cancellations and the actual churn rate was critically important for investors analyzing the Company's prospects and the potential of its business model. The Company spends approximately $35 in marketing expense to acquire each new subscriber. Had investors known that the Company was being forced continuously to replenish its subscriber base through additional marketing expenditures; it would have called into question the potential long-term profitability of the Company and the viability of its business model. In other words, the Company's artificially low claimed churn rate obscured the fact that it was not retaining many subscribers long enough to break even on them.

The truth came to light when, after the market closed on July 15, 2004, the Company issued an earnings release which, for the first time, disclosed the number of subscriber cancellations during previous quarters. Specifically, the press release stated that, while the Company had added 537,000 new subscribers during the second quarter, it had suffered 422,000 subscriber cancellation, meaning 72% of the Company's 583,000 new subscribers in the second quarter of 2004 had merely replaced subscribers who had cancelled. The release also showed that 41% of the Company's 760,000 new subscribers in the second quarter had merely replaced subscribers who had cancelled, and 71% of the Company's 327,000 new subscribers in the second quarter of 2003 had merely replaced subscribers who had cancelled.

In response, Netflix shares declined from $32 per share to $20 per share over the next two days, a decline of 38%. During the Class Period, the shares had traded as high as $39.77 per share, during which period Hastings, McCarthy and Kilgore sold approximately $13 million in Netflix shares.

COMPANY INFORMATION:

Sector: Services
Industry: Recreational Activities
Headquarters: United States

SECURITIES INFORMATION:

Ticker Symbol: NFLX
Company Market: NASDAQ
Market Status: Public (Listed)

About the Company & Securities Data


"Company" information provides the industry and sector classification and headquarters state for the primary company-defendant in the litigation. In general, "Securities" information provides the ticker symbol, market, and market status for the underlying securities at issue in the litigation.

In most cases, the primary company-defendant actually issued the securities that are the subject of the litigation, and the securities information and company information relate to the same entity. In a small subset of cases, however, the primary company-defendant is not the issuer (for example, cases against third party brokers/dealers), and the securities information and company information do not relate to the same entity.
COURT: N.D. California
DOCKET #: 04-CV-2978
JUDGE: Hon. Fern M. Smith
DATE FILED: 07/22/2004
CLASS PERIOD START: 10/01/2003
CLASS PERIOD END: 07/15/2004
PLAINTIFF FIRMS NAMED IN COMPLAINT:
  1. Bernstein Liebhard & Lifshitz, LLP (New York)
    10 E. 40th Street, 22nd Floor, Bernstein Liebhard & Lifshitz, LLP (New York), NY 10016
    800.217.1522 · info@bernlieb.com
  2. Brian Felgoise
    230 South Broad Street, Suite 404 , Brian Felgoise, PA 19102
    215.735.6810 215/735.5185. ·
  3. Federman & Sherwood (Oklahoma City)
    120 North Robinson, Suite 2720, Federman & Sherwood (Oklahoma City), OK 73102
    405-235-1560 · wfederman@aol.com
  4. Law Offices of Charles J. Piven, P.A.
    World Trade Center-Baltimore,401 East Pratt Suite 2525, Law Offices of Charles J. Piven, P.A., MD 21202
    410.332.0030 · pivenlaw@erols.com
  5. Law Offices of Marc S. Henzel (Lawrence)
    335 Central Avenue, Law Offices of Marc S. Henzel (Lawrence), NY 11559
    516.374.0707 516.295.3473 · securitiesfraud@comcast.net
  6. Murray, Frank & Sailer LLP
    275 Madison Ave 34th Flr, Murray, Frank & Sailer LLP, NY 10016
    212.682.1818 212.682.1892 · email@murrayfrank.com
  7. Scott & Scott LLC (Connecticut)
    P.O. Box 192, 108 Norwich Avenue, Scott & Scott LLC (Connecticut), CT 06415
    860.537.5537 860.537.4432 · scottlaw@scott-scott.com
  8. Wechsler Harwood LLP
    488 Madison Avenue 8th Floor, Wechsler Harwood LLP, NY 10022
    212.935.7400 · info@whhf.com
  9. Wolf Haldenstein Adler Freeman & Herz LLP (New York)
    270 Madison Avenue, Wolf Haldenstein Adler Freeman & Herz LLP (New York), NY 10016
    212.545.4600 212.686.0114 · newyork@whafh.com
No Document Title Filing Date
COURT: N.D. California
DOCKET #: 04-CV-2978
JUDGE: Hon. Fern M. Smith
DATE FILED: 08/12/2005
CLASS PERIOD START: 04/17/2003
CLASS PERIOD END: 10/14/2004
PLAINTIFF FIRMS NAMED IN COMPLAINT:
  1. Bernstein Liebhard & Lifshitz, LLP (New York)
    10 E. 40th Street, 22nd Floor, Bernstein Liebhard & Lifshitz, LLP (New York), NY 10016
    800.217.1522 · info@bernlieb.com
  2. Cotchett Pitre & Simon
    San Francisco Airport Office Center, 840 Malcolm Road, Suite 200, Cotchett Pitre & Simon, CA 94010
    650.697.6000 ·
  3. Glancy Binkow & GoldBerg LLP
    1925 Century Park East, Suite 2100, Glancy Binkow & GoldBerg LLP, CA 90067
    310-201-9150 · info@glancylaw.com
  4. Green & Jigarjian LLP
    235 Pine Street, 15th Floor, Green & Jigarjian LLP, CA 94104
    415.477.6700 415.477.6710 ·
  5. Lerach Coughlin Stoia Geller Rudman & Robbins LLP (San Diego)
    401 B Street, Suite 1700, Lerach Coughlin Stoia Geller Rudman & Robbins LLP (San Diego), CA 92101
    206.749.5544 206.749.9978 · info@lerachlaw.com
  6. Murray, Frank & Sailer LLP
    275 Madison Ave 34th Flr, Murray, Frank & Sailer LLP, NY 10016
    212.682.1818 212.682.1892 · email@murrayfrank.com
  7. Schiffrin & Barroway LLP
    3 Bala Plaza E, Schiffrin & Barroway LLP, PA 19004
    610.667.7706 610.667.7056 · info@sbclasslaw.com
  8. Scott & Scott LLC (Connecticut)
    P.O. Box 192, 108 Norwich Avenue, Scott & Scott LLC (Connecticut), CT 06415
    860.537.5537 860.537.4432 · scottlaw@scott-scott.com
  9. Wilson Sonsini Goodrich & Rosati. Professional Corporation
    650 Page Mill Road, Wilson Sonsini Goodrich & Rosati. Professional Corporation, CA 94304-1050
    650.493.9300 650.565.5100 ·
  10. Wolf Haldenstein Adler Freeman & Herz LLP (New York)
    270 Madison Avenue, Wolf Haldenstein Adler Freeman & Herz LLP (New York), NY 10016
    212.545.4600 212.686.0114 · newyork@whafh.com
No Document Title Filing Date
No Document Title Filing Date