TECH
01/17/2012 08:32 am ET Updated Jan 17, 2012

Netflix Hit With Class Action By Investors Over 2011 Stock Nosedive

Add this to the growing list of Netflix's woes: It's getting sued.

As it struggles with a weakened stock and battered public perception, Netflix now finds itself the subject of a class-action lawsuit in California. A group of investors filed the suit in U.S. District Court "against Netflix and certain of its officers and/or directors", contending that "company insiders" at Netflix were "conceal[ing] negative trends" that preceded the stock's ultimate plummeting and selling NFLX stock while the stock was at that "artificially inflated" peak.

For background, on July 12, the day Netflix announced that it would split its DVD and streaming services, Netflix stock closed at a price of 291.27; on October 25, 2011, the final day of the class action lawsuit, the stock closed at 77.37. On Tuesday, Netflix was trading around the 97.00 mark.

Among the defendants named in the lawsuit are embattled Netflix CEO Reed Hastings; Chief Content Officer Ted Sarandos; and Chief Marketing Officer Leslie Kilgore. A summary of the accusation, from the lawsuit:

During the Class Period, defendants issued materially false and misleading statements regarding the Company's business practices and its contracts with content providers. Specifically, defendants concealed negative trends in Netflix's business. As a result of defendants' false statements, Netflix's stock traded at artificially inflated prices during the Class Period, reaching a high of almost $300 per share on July 13, 2011. While Netflix stock was inflated (partially by Netflix buying back its own stock), Comapny insiders were selling 388,661 shares of their own Netflix stock for proceeds of $90.2 million.

Though Netflix has long been getting pilloried in the court of public opinion, with Internet commenters and message board denizens blasting the company for what they perceive as corporate greed, this is the first official legal thrust at the popular streaming-and-DVD service as a result of its sudden stock price drop. It had also been publicly noted that CEO Hastings was selling lots of his company's stock, with many questioning why, though this lawsuit also marks the first legal criticism of his selling.

Hastings, for one, is taking a huge pay cut for 2012, with his stock options down to $1.5 million from $3 million. His base salary of $500,000 per year remains the same.

A spokesperson Netflix declined to comment.

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Tech Fails 2011 (CLONED)
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Tech Fails 2011 (CLONED)

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