Netflix Ejects Claim That It Misled Investors

(CN) - Netflix need not face claims that it inflated stock prices by touting the prospects of its new "streaming-focused" business model, a federal judge ruled.

After about eight years of delivering DVDs to customers through the mail, Netflix began offering "streaming video" in 2007, allowing customers to access video content on computers and televisions.

At the time, customers could purchase a service package including both methods of delivery for one fixed price. Netflix later split the services and began charging separate prices for both, eventually causing a drop in stock prices.

An announcement that the cable channel Starz did not plan to renew its contract with Netflix, on top of a disclosure that the company expected to lose a million subscribers in the third quarter of 2011, contributed to a 67 percent plunge in stock prices from $298.73 per share in July 2011 to $169.25 by late September.

The Arkansas Teacher Retirement System and State-Boston Retirement System filed a putative securities class action in 2012, claiming Netflix misled them in statements and did not disclose enough information about the prospects of streaming video.

Defendants to the San Francisco action included Netflix CEO Reed Hastings, CFO David Wells and former CFO Barry McCarthy. They faced claims under the Securities Exchange Act, Securities and Exchange Commission rules and the Private Securities Litigation Reform Act (PSLRA).

U.S. District Court Judge Samuel Conti ruled Tuesday, however, that statements Hastings made were too vague to for any investors to rely on.

"In general, all of plaintiffs' claims, new and old, depend on the tenuous theory that defendants withheld discrete and accurate financial information about streaming while also touting streaming's profitability," Conti said. "The court has not found this to be the case for any statement plaintiffs cite. Plaintiffs supply an array of vague, sometimes conclusory, statements to support a theory that requires much more by virtue of its being narrow and fact-sensitive. This is not enough to state a claim under the PSLRA."

Netflix furthermore did not hide the fact the success of the streaming model depended on other factors largely out of the company's control, the court found.

"Plaintiffs do not plead plausible facts indicating that defendants touted the streaming business's profitability as opposed to the projected or hope-for strength of the interrelated DVD and streaming business," Conti wrote. "Moreover, defendants made clear throughout the class period that the success of a streaming-focused business model was contingent on other factors, suggesting that defendants did not omit any information or warnings in a way that would be misleading under Rule 10b-5 [of federal law]. None of what plaintiffs plead therefore shows that defendants made any false or misleading statements about the profitability of the streaming business."

Conti dismissed the complaint in its entirety with prejudice.

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