Class Alleges Ethics Problems and Inside Trading at Angie's List
INDIANAPOLIS (CN) - A federal class action accuses Angie's List executives of selling their own stock for more than $13 million after inflating the share price through false and misleading statements about the company.
Lead plaintiffs Eva and Harold Baron sued Angie's List Inc., CEO William S. Oesterle, Chief Marketing Officer Angela R. Hicks Bowman, Controller and Interim CFO Charles Hundt, CFO Robert R. Millard and Chief Technology Officer Thapar Manu.
They claim the defendants inflated the company's share price throughout 2013 with misleading statements about the company's growth and revenue.
At its peak, Angie's List stock traded at more than $28 per share on July 18, the day on which "certain of the individual defendants cashed in, with defendant Oesterle selling 486,400 shares of Angie's List stock for more than $10.38 million, defendant Hicks Bowman selling 21,000 shares for $487,500, defendant Hundt selling 40,000 shares for $880,850, and defendant Manu selling 67,370 shares for more than $1.34 million," according to the lawsuit.
The Barons claim that the company's growth and revenue forecasts were false and misleading because they failed to disclose key facts, including:
"(a) that Angie's List was increasingly relying on providing free memberships in order to artificially boost its subscriber figures;
"(b) that contrary to Angie's List's repeated class period statements that the online reviews providing the membership fees side of its business were unbiased because Angie's List did not permit service providers to buy ratings on its website ('You can't pay to be on Angie's List'), the company was consistently deriving more than half of its revenues from the service provider side of its business - where it relied heavily on collecting fees for listing paid service providers more prominently;
"(c) that because Angie's List charged services providers hundreds of dollars for 'hot leads,' service providers were faced with the Hobson's choice of charging above-market prices for basic, run-of-the-mill services that could be procured by consumers for cheaper prices in order to absorb the extraordinarily high referral fees Angie's List was charging-or simply abandoning Angie's List;
"(d) that the legitimacy of the service provider side of Angie's List's business model was dubious, as service providers were forced to pay Angie's List thousands of dollars a year in order to be listed as highly rated service providers, and if they did not, they would not get customer referrals from Angie's List;
"(e) that Angie's List did not vet the service providers listed and recommended on its website, either for qualifications or for safety, leading many consumers to question the value of its recommendations, causing them to be unwilling to pay outsized membership fees."
The Barons claim the stock's tenuous position was exposed on Sept. 30, when defendant Manu was fired and the share price dropped by 10 percent in one day, falling to $20.30 on Oct. 1.
The next day, The Wall Street Journal reported that Angie's List was cutting its membership fees by up to 75 percent in some markets, in a quest for new subscribers, resulting in a 17 percent share price decrease on Oct. 3, according to the complaint.
After trading closed on Oct. 23, "Angie's List reported a loss of $13.5 million, or $.23 a share, on revenue of only $65.5 million ... [when] analysts had been led to expect Angie's List to post a loss of only $.20 a share on $66.1 million in revenues," according to the complaint.
The bad news continued on Oct. 24, when the stock blog SeekingAlpha.com published a report headlined "Angie's List - a Deferred Revenue Train Wreck," which claimed "that Angie's List had been receiving cash, booking it as 'deferred revenue,' then rapidly spending it at a rate that, unless the company suddenly became profitable, it would be unable to fulfill its commitments and faced insolvency," the lawsuit states. "The SeekingAlpha.com report also stated that all of the analysts that had been serving as cheerleaders to support the stock price - rather than providing critical analysis - had conflicts of interest in that they had served as underwriters in the company's IPO and follow-on offerings and were unlikely to be critical as they sought additional investment banking work from Angie's List in the future."
Angie's List closed at $14.64 on Oct. 24, nearly 50 percent lower than the price at which the defendants dumped their shares.
The Barons seek class certification and damages for securities violations.
Their lead counsel is James Buddenbaum with Parr, Richey, Obremskey, Frandsen and Patterson.