According to the law firm press release, Netflix and certain of its officers and directors are charged with making a series of materially false and misleading statements and omissions related to the Company’s business and operations in violation of the Securities Exchange Act of 1934. The allegations surround Netflix’s May 2014 price increase for monthly streaming subscriptions, and the Company’s failure to inform investors that – consistent with the Company’s prior experiences – the price increase could have a big, negative impact on subscriber growth. Instead, on July 21, 2014 the Company representatives told the market that the price increase had a “minimal” and “nominal” impact on subscriber growth, further stating that any adverse effect on revenue was “background noise” which had “no noticeable effect in the business.”
Less than three months later, on October 15, 2014, and contrary to its earlier statements dismissing the “minimal” adverse impact, the Company revealed that the impact on earnings was hugely negative. In fact, the subscriber growth numbers were so low that Netflix slashed its projected earnings by almost fifty percent. In an explanatory letter to shareholders dated October 15, 2014, the Company stated, “[Y]ear on year net additions in the US were down (1.3 million in Q3 2013 to 1 million in Q3 2014). As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago. Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.”
As a result of the foregoing disclosure, Netflix stock plummeted by more than 19%, falling from a closing price of $448.59 per share on October 15, 2014 to a close of $361.70 per share on October 16, 2014.