Yelp Fights Claims of Overhyping Stock Price

SAN FRANCISCO (CN) - Yelp attorneys on Tuesday asked a federal judge to dismiss newly amended claims that the company lied about questionable business practices and its stock price plummeted by a third when the truth was revealed.

Lead plaintiff Joseph Curry sued Yelp, its CEO Jerry Stoppelman and two other executives in August 2014 for securities fraud.

In April, U.S. District Judge Jon Tigar dismissed the plaintiffs' consolidated class action, giving the group a second chance to amend its claims.

During a renewed motion to dismiss hearing Tuesday, class attorney Shawn Williams said a new study shows a clear link between the disclosure of complaints about Yelp's business practices and a steep drop in its share prices on April 2, 2014.

"The new information disclosed on that day was more likely than not at a 95 percent confidence level the reason why the stock price declined the way it did," Williams said.

The first amended complaint points to the Federal Trade Commission's April 2, 2014 disclosure of more than 2,000 complaints about Yelp failing to adequately screen fraudulent reviews and offering to take down fake reviews for advertising customers.

"This company puts on its website that there's absolutely no relationship between advertising and reviews - no amount of money you can pay us to manipulate reviews," Williams said. "That's the key statement we allege to be false in this pleading."

In its motion to dismiss, Yelp argued that business owners "observing changes in which reviews were filtered at some point following a call from a sales representative" did nothing to prove the alleged misconduct.

Yelp attorney Gilbert Serota said that because Yelp was adding more and more businesses to its online review website at the time, an increase in complaints was nothing unexpected.

"There is nothing new, and nothing that undermines the court's conclusion that the investors were already apprised of these issues," Serota said.

The Yelp attorney said the plaintiffs added no significant new evidence to their first amended complaint, still relying on unverified consumer complaints.

"Now they acknowledge that over 700 of those had already been released in 2012," Serota said, adding the Ninth Circuit requires more than investor concerns and complaints to establish liability for a loss in share value.

Tigar questioned Serota's claim that even a substantial amount of complaints could not by themselves establish cause for the stock decline.

"If you have 5 million people saying, 'A Yelp representative called me and said if I paid money for advertising, they'd help me more,' you'd be in trouble," Tigar said.

Tigar posited the same question in reverse to Williams, asking if only one complaint had been lodged about Yelp that alone could establish causation.

"Absolutely yes," Williams responded, adding it depends on the context of the complaint. He pointed to the 2011 Supreme Court decision, Matrixx Initiatives Inc. v. Siracusano, in which causation was established by only 12 complaints.

"As the number increases, especially when there's corroboration like here, there's truth," Williams said.

Serota countered that whatever weight is given to the complaints, they do not equate to a finding of fraud, which he said the Ninth Circuit requires to establish liability.

"They conclude you need more than the revelation of an internal investigation or an FTC investigation," Serota said. "You need a finding - something that reveals fraud."

In his closing argument, Williams said Yelp's stock price has still not recovered since April 2014 due to its problematic business model and the fact that "people don't trust the reviews and think there's a relationship between advertising and reviews."

After about 45 minutes of debate, Tigar ended the hearing and said he would take the arguments under consideration.

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