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  • singhlion2001 singhlion2001 Nov 4, 2012 8:18 PM Flag

    Isn't the point of running a business to make money?

    Here is the consolidated Law suit on fraud by Insider scam gang at Netflix.....

    UNITED STATES DISTRICT COURT
    NORTHERN DISTRICT OF CALIFORNIA
    IN RE NETFLIX, INC., SECURITIES
    LITIGATION
    ________________________________
    This Document Relates To:
    ALL ACTIONS.
    )
    )
    Case No. 3:12-cv-00225-SC
    CLASS ACTION
    CONSOLIDATED CLASS
    ACTION COMPLAINT FOR
    VIOLATIONS OF THE FEDERAL
    SECURITIES LAWS
    DEMAND FOR JURY TRIAL
    Honorable Samuel Conti

    TABLE OF CONTENTS
    I. NATURE OF THE ACTION ........................................................................ 1
    II. JURISDICTION AND VENUE .................................................................... 5
    III. PARTIES ....................................................................................................... 6
    A. Lead Plaintiffs ..................................................................................... 6
    B. Defendant Netflix ................................................................................ 7
    C. The Individual Defendants .................................................................. 8
    IV. CLASS ACTION ALLEGATIONS ............................................................ 11
    V. SUBSTANTIVE ALLEGATIONS ............................................................. 13
    A. Background ....................................................................................... 13
    1. Netflix is Established As An Online DVD Rental Service .... 13
    2. Netflix Introduces Instant Streaming in 2007 ......................... 14
    3. By 2010, Netflix Begins Its Transition Away From
    DVDs And Towards Streaming .............................................. 16
    B. Netflix Changes its Core Strategy to Become “Primarily a
    Streaming Company” ........................................................................ 17
    C. Defendants Repeatedly Emphasized the Purported Benefits of
    Netflix’s “Virtuous Cycle”: More Subscribers = More Content
    = More Subscribers ........................................................................... 21
    D. Netflix Discloses Only “Averaged” Data for the Streaming and
    DVD Business ................................................................................... 25
    E. The SEC Demands That Netflix Provide Additional
    Information About Its Streaming Business ....................................... 27
    1. The SEC Demands More Segment Specific Information ....... 27
    2. The SEC Demands Greater Regulation S-K Disclosures ....... 29
    F. Defendants Were Tracking And Monitoring the Profitability of
    Netflix’s Streaming Segment ............................................................ 31
    1. Even Before the Class Period, Netflix Tracked And
    Monitored Discrete Segment-Specific Information ................ 31
    2. Certain Disclosures in Netflix’s SEC Filings Raise a
    Strong Inference that Defendants Were Tracking And
    Monitoring the Profitability of the Company’s Streaming
    Segment ................................................................................... 33ii
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    CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
    3. Defendants’ Undertaking of Certain Critical Business
    Decisions Demonstrate that they were Separately
    Tracking and Monitoring the Profitability of Netflix’s
    Streaming Segment ................................................................. 35
    G. Defendants Ultimately Reveal that the Streaming Business
    Only Carried An 8% Contribution Margin ....................................... 37
    VI. NETFLIX’S FINANCIAL STATEMENTS WERE MATERIALLY
    MISSTATED IN VIOLATION OF GAAP AND SEC DISCLOSURE
    RULES ......................................................................................................... 41
    A. Netflix Violated GAAP By Failing To Report the Domestic
    Streaming and DVD Businesses as Separate Operating
    Segments in the Notes to its Class Period Financial Statements ...... 42
    1. GAAP Criteria Triggering Segment Reporting ...................... 44
    2. Netflix’s Domestic Streaming Business Met the ASC 280
    Criteria Requiring Segment Reporting ................................... 45
    a) The Domestic Streaming Business Generated Its
    Own Revenues and Incurred Its Own Expenses
    Separate and Apart From Those of the DVD
    Business ........................................................................ 45
    b) Management Reviewed Discrete Information for
    the Streaming Business During the Class Period ......... 46
    c) Domestic Streaming Exceeded the Quantitative
    Threshold For Segment Disclosure .............................. 49
    3. GAAP and SEC Rules Prohibited Netflix’s Aggregation
    of the Domestic Streaming and DVD Operations for
    Segment Reporting Purposes .................................................. 51
    B. Netflix Violated SEC Regulation S-K Item 303 By Failing to
    Make Required Domestic Streaming Segment Disclosures in
    Management’s Discussion and Analysis ........................................... 53
    C. Netflix Violated SEC Regulation S-K Item 303 By Failing to
    Report Known Trends and Uncertainties Required in
    Management’s Discussion and Analysis ........................................... 55
    VII. ADDITIONAL SCIENTER ALLEGATIONS ........................................... 56
    A. While Inflating the Price of Netflix’s Stock, Defendants
    Engaged in Massive Insider Selling .................................................. 56
    1. Insider Stock Sales By Hastings, McCarthy, and Wells
    During the Class Period Were Highly Unusual and
    Suspicious ............................................................................... 56 iii
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    CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
    a) Methodologies Employed to Analyze Defendants’
    Insider Sales .................................................................. 57
    2. The Dollar Amount of Shares Sold by Defendants During
    the Class Period Was Suspiciously High ................................ 60
    3. Defendants Generated Unusual and Suspicious Abnormal
    Profits on their Sales of Netflix Stock .................................... 63
    4. The Timing of Defendants’ Increased Stock Sales,
    Coinciding with Their Causing the Company to Initiate
    Major Stock Buybacks Further Demonstrates the
    Suspicious Nature of the Sales ................................................ 68
    B. Imputed Knowledge of Facts Critical to Core Operations ................ 74
    C. GAAP and SEC Disclosure Obligations ........................................... 75
    D. Defendants’ Knowing Refusal to Provide Material Streaming
    Metrics to the SEC ............................................................................ 76
    VIII. NETFLIX’S FALSE AND MISLEADING STATEMENTS ..................... 77
    IX. THE TRUTH IS REVEALED .................................................................. 103
    1. The September 1, 2011 Partial Disclosure ............................ 103
    2. The September 15, 2011 Partial Disclosure .......................... 105
    3. The October 24, 2011 Disclosures Reveal the Disparate
    Contribution Profits of the DVD and Streaming
    Businesses ............................................................................. 107
    X. POST CLASS PERIOD EVENTS ............................................................ 110
    XI. LOSS CAUSATION/ECONOMIC LOSS ................................................ 112
    XII. LEAD PLAINTIFFS ARE ENTITLED TO A PRESUMPTION OF
    RELIANCE ................................................................................................ 116
    XIII. THE SAFE HARBOR PROVISION IS INAPPLICABLE ...................... 117
    XIV. CAUSES OF ACTION .............................................................................. 118
    XV. PRAYER FOR RELIEF ............................................................................ 124
    XVI. JURY TRIAL DEMAND .........................

    Sentiment: Strong Sell

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • Lead Plaintiffs Arkansas Teacher Retirement System and State-Boston
      Retirement System (together, “Lead Plaintiffs”), individually and on behalf of all
      other persons and entities who purchased or acquired the common stock of Netflix,
      Inc. (“Netflix” or the “Company”) during the period between October 20, 2010 and
      October 24, 2011, inclusive (the “Class Period”), and who were damaged thereby,
      hereby allege the following based upon personal knowledge as to themselves and
      their own acts, and upon information and belief as to all other matters.
      Lead Plaintiffs’ allegations are based on Lead Counsel’s investigation,
      which included, among other things: (i) a review and analysis of Netflix’s public
      filings with the U.S. Securities and Exchange Commission (“SEC”); (ii) a review
      and analysis of research reports issued by financial analysts concerning Netflix;
      (iii) a review and analysis of other publicly available information concerning
      Netflix and its senior officers and directors, including Reed Hastings, David Wells
      and Barry McCarthy (collectively, the “Individual Defendants”); (iv) interviews
      with former Netflix employees on a confidential basis, each of whom have
      specific, personal knowledge of the facts alleged herein; and (v) discussions with
      and analyses prepared by consulting experts. Many of the facts supporting Lead
      Plaintiffs’ allegations are known only by Netflix and the Individual Defendants
      (collectively, “Defendants”), or are exclusively within their custody and control.
      Lead Plaintiffs believe that substantial additional evidentiary support will be
      revealed after a reasonable opportunity for discovery.
      I. NATURE OF THE ACTION
      1. This securities class action arises from material misstatements and
      omissions concerning the disparate profitability between Netflix’s streaming
      segment—which Defendants touted as its “core” business strategy—and the
      Company’s legacy DVD segment, which was supposedly nothing more than a 2

      CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
      “fading differentiator.” In reality, as investors eventually learned, the streaming
      segment carried a mere 8% contribution profit.
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      2. Netflix purports to be the world’s leading internet subscription service
      for viewing TV shows and movies, and offers subscription plans to (i) “stream”
      such content over the Internet to subscribers’ TVs, computers and media devices,
      (ii) rent standard definition DVDs and high definition blue-ray disks (collectively,
      “DVDs”) that are delivered and returned by mail, or (iii) a combination thereof.
      3. On October 20, 2010, the first day of the Class Period, Hastings
      proclaimed that Netflix was “by every measure . . . primarily a streaming company
      that also offers DVD-by-mail,” and represented that Netflix’s “evolution to a
      streaming company has just been phenomenal.” Further, Hastings claimed that
      Netflix was already reaping the benefits of a “virtuous cycle,” whereby the
      Company was “acquir[ing] more streaming content which helps grow [Netflix’s]
      subscriber base and lessen[s] [Netflix’s] DVD-by-mail expense, which in turn
      provides [Netflix] with greater financial resources to acquire more streaming
      content, improve the user interface and continue to grow the subscriber base.” In
      shorthand, the Company’s most cited virtuous cycle (the “virtuous cycle”) boils
      down to: more subscribers = more money for content = more subscribers.
      4. Throughout the Class Period, Defendants continued to echo these
      material misstatements, claiming that the “virtuous cycle” referenced above was
      not only enabling the growth and profitability of the Company’s streaming
      segment, but provided the Company with a distinct “competitive advantage.”

      1
      Contribution profit is defined as revenue less cost of revenues and marketing
      expenses. Netflix describes the usefulness of “contribution profit” as follows:
      “Management believes that contribution profit is useful in assessing the relative
      contribution to operating income of each segment by eliminating any allocation of
      Technology & Development and G&A expenses that apply across these segments.”
      (October 24, 2011, Letter to Shareholders). 3

      CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
      Indeed, when a securities analyst asked Hastings whether rising content costs
      would derail this cycle, Hastings specifically represented that Netflix’s “subscriber
      base [wa]s growing fast enough, and DVD shipments [were] growing slow enough,
      that [Netflix could] afford to pay for the existing streaming content [it had], and
      also get more content.”
      5. Beyond these material misrepresentations, Netflix’s publicly filed
      financial statements fraudulently concealed the highly material fact that, contrary
      to Defendants’ misstatements, the streaming segment that had purportedly become
      the Company’s “core strategy,” was, in fact, significantly less profitable than its
      “fading” DVD segment. Defendants did so by improperly aggregating the reported
      financial data for Netflix’s streaming and DVD segments—including its costs and
      revenue—in direct violation of SEC disclosure rules and U.S. Generally Accepted
      Accounting Principles (“GAAP”). In addition, Defendants further concealed the
      information required under Regulation S-K regarding known trends and
      uncertainties.
      6. Fueled by these material misstatements and omissions, Netflix’s stock
      price soared to all-time highs, nearly doubling in price between the first day of the
      Class Period and July 2011, when it closed at $298.73 per share. In fact, just one
      day into the Class Period, Netflix’s stock price increased from $153.15 per share to
      $172.69 per share upon Defendants’ announcement that Netflix was “by every
      measure primarily a streaming company” and that this “evolution . . . has just been
      phenomenal.” In turn, securities analysts issued a series of highly positive reports
      that characterized Netflix’s streaming segment as “compelling,” and highlighted
      the benefits that the Company was purportedly deriving from its virtuous cycle.
      7. Lead Plaintiffs’ investigation has uncovered specific facts which
      demonstrate that Defendants were tracking and monitoring operating metrics for

      Sentiment: Strong Sell

      • 1 Reply to singhlion2001
      • the streaming segment, but concealed the weak profit margins of that segment from
        investors at the time these statements were made. For example:
        • CW1, a former Director of Product Management, attended
        Netflix’s quarterly meetings that were attended by Hastings and
        other executives, during which he personally observed discussions
        regarding the amount of streaming business, including the
        streaming usage and rate of growth (see ¶¶130-131);
        • Certain of Defendants’ public disclosures demonstrate that the
        Company was reviewing, tracking and monitoring the operating
        metrics for the DVD and streaming businesses as separate
        segments both before and during the Class Period (see ¶¶137-
        146);
        • Defendants also implemented critical changes to the Company’s
        plan offerings that would have been virtually impossible without
        having actual knowledge of the discrete financial data of each
        business segment (see ¶¶147-155); and
        • Defendants substantially ignored two letters from the SEC, dated
        April 28, 2011 and June 24, 2011, demanding greater transparency
        in Netflix’s public disclosures, including discrete financial data for
        the Company’s DVD and streaming segments so that “investors
        can observe and analyze such data for [its] most recent five years
        of operation” (see ¶¶114-128).
        8. Defendants profited handsomely from their possession of this
        material, adverse information by selling their Netflix stock at artificially inflated
        prices, reaping almost $85 million during the Class Period. As explained herein,
        these insider sales were highly unusual and suspicious, as measured by: (1) the
        dollar amount of shares sold and the profits generated therefrom; (2) the 5
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        CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
        comparison with Defendants’ own prior and subsequent trading history and those
        of other insiders; (3) the timing of stock buybacks and stock sales by Netflix, and
        (4) the timing of the insider sales.
        9. Investors learned the truth about the disparate profitability between
        Netflix’s streaming and DVD segments, and the related failure of its “virtuous
        cycles,” between September 1, 2011 and October 25, 2012. In total, Netflix’s
        stock price plummeted from $233.27 per share on September 1, 2011 to $77.37
        per share on October 25, 2011, representing an aggregate decline of almost 67%.
        10. Securities analysts were stunned by these disclosures. As one analyst
        stated on October 25, 2011: “[t]he other surprise was the disclosure that the DVD
        business currently generates 80%+ of the company’s profits (even though it is only
        about 40% of revenue). Overall, visibility on the company’s earnings has further
        deteriorated.” That same day, another analyst acknowledged that “[i]nvestors are
        now seriously questioning the ‘virtuous cycle’ (more subscribers=more
        content=more subscribers) that Netflix has long celebrated.”
        II. JURISDICTION AND VENUE
        11. The claims asserted herein arise under and pursuant to Sections 10(b)
        20(a) and 20A of the Securities Exchange Act of 1934 (“Exchange Act”), 15
        U.S.C. §§ 78j(b), 78t(a), 78-t1(a), and Rule 10b-5 promulgated under Section 10 of
        the Exchange Act, 17 C.F.R. §240.10b-5.
        12. This Court has jurisdiction over the subject matter of this action
        pursuant to Section 27 of the Exchange Act, 15 U.S.C § 78aa. In addition, because
        this is a civil action arising under the laws of the United States, this Court has
        jurisdiction pursuant to 28 U.S.C. § 1331.
        13. Venue is proper in this District pursuant to Section 27 of the
        Exchange Act, 15 U.S.C. §§ 78aa, and 28 U.S.C. § 1391(b). Netflix resides and
        transacts business in this District, and maintains its principal executive offices in 6
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        CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
        this District at 100 Winchester Circle, Los Gatos, CA 95032. Many of the acts that
        constitute the violations of law complained of herein, including the preparation and
        public dissemination of materially false and misleading statements, occurred in
        substantial part in this District.
        14. In connection with the acts alleged herein, Defendants, directly or
        indirectly, used the means and instrumentalities of interstate commerce, including,
        but not limited to, the U.S. mails, interstate telephone communications and the
        facilities of the national securities markets, including NASDAQ.
        III. PARTIES
        A. Lead Plaintiffs
        15. On April 27, 2012, this Court appointed Arkansas Teacher Retirement
        System (“Arkansas Teacher”) and State-Boston Retirement System (“StateBoston”) to serve as Lead Plaintiffs for the Class in this consolidated class action
        pursuant to the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).
        16. Arkansas Teacher is a cost-sharing, multiple-employer defined benefit
        pension plan that provides retirement benefits to public school and other public
        education related employees in the State of Arkansas. Arkansas Teacher was
        established by Act 266 of 1937, as an Office of Arkansas State government, for the
        purpose of providing retirement benefits for employees of any school or other
        educational agency participating in the system. Arkansas Teacher had
        approximately $11.7 billion in net assets held in trust for pension benefits, and
        includes more than 113,291 members as of May 1, 2011. As set forth in its
        PSLRA certification attached hereto, Arkansas Teacher purchased a total of 8,273
        shares, and sold 523 shares of Netflix common stock on the open market during the
        Class Period and suffered damages as a result of the securities law violations
        alleged herein.7
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        CONSOLIDATED CLASS ACTION COMPLAINT - 3:12-CV-00225-SC
        17. As set forth in its certification filed herewith, Arkansas Teacher
        purchased Netflix securities contemporaneously with Defendant Hastings’ sales of
        Netflix stock during the Class Period. Specifically, on March 10, 2011, and
        August 25, 2011, Arkansas Teacher purchased 1,440 shares and 2,510 shares of
        Netflix common stock, respectively. On each of those same dates, Hastings sold
        5,000 shares of Netflix common stock. On two other occasions, Arkansas Teacher
        purchased stock within a day of Hastings’ sale of Netflix common stock.
        18. State-Boston is an institutional investor that provides retirement
        benefits for the employees of the City of Boston, Massachusetts. It had
        approximately 37,000 active and retired participants, representing approximately
        $4.4 billion in assets as of August 1, 2011. As set forth in its PSLRA certification
        attached hereto, State-Boston purchased a total of 10,400 shares, and sold 7,600
        shares of Netflix common stock on the open market during the Class Period and
        suffered damages as a result of the securities law violations alleged herein.
        19. As set forth in its certification filed herewith, State-Boston purchased
        Netflix securities contemporaneously with Defendant Hastings’ sales of Netflix
        stock during the Class Period. Specifically, on March 24, 2011, September 15,
        2011 and September 22, 2011, State-Boston purchased 500 shares, 900 shares, and
        2,300 shares, respectively. On each of those same dates, Hastings sold 5,000
        shares of Netflix common stock. On five other occasions, State-Boston purchased
        Netflix common stock within two days of Hastings’ sale of Netflix common stock.
        B. Defendant Netflix
        20. Netflix purports to be the world’s leading internet subscription service
        for viewing TV shows and movies. Subscribers can instantly watch unlimited
        available TV shows and movies by “streaming” the content over the Internet to
        their TVs, computers and mobile devices. Subscribers can also receive DVDs to
        their homes. Netflix is incorporated in Delaware and maintains its principal place

        Sentiment: Strong Sell

 
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