Netflix (NFLX) won the dismissal of a shareholder lawsuit accusing the dominant U.S. video rental and streaming company of inflating its share price by concealing its rising costs, even as insiders like Chief Executive Reed Hastings sold millions of dollars of stock.
U.S. District Judge Samuel Conti in San Francisco on Wednesday said the plaintiffs failed to show that Netflix materially misled them about its accounting, its pricing trends, the relative profitability of its streaming and DVD businesses, and its dealings with U.S. securities regulators.
He also said Hastings did not materially mislead investors in a conference call on Dec. 8, 2010, when he said Netflix would benefit from a "virtuous cycle" where it could add subscribers and streaming content while lessening its DVD-by-mail costs.
Netflix's share price fell 76 percent between early July and late October 2011, to $74.25 from $304.79, as the Los Gatos-based company raised prices, lost subscribers and set plans it soon abandoned to spin off its DVD business.
Much of the decline stemmed from a decision to end a pricing plan that let subscribers stream movies and receive DVDs for $9.99 per month, and instead offer separate streaming- and DVD-only plans for $7.99 per month each.
The 60 percent price increase for both services contributed to a loss of 800,000 U.S. subscribers in the third quarter of 2011, industry analysts said.
Netflix later admitted it acted too fast and should have better explained its rising costs to obtain streaming content.
In litigation begun in January 2012, shareholders led by the Arkansas Teacher Retirement System and State-Boston Retirement System contended that Netflix misled them about its prospects.
They also said Netflix deceived them by launching a stock buyback program, often a sign that shares might be undervalued, even as insiders were selling close to $85 million of stock, which can signal the opposite.
Citing an analyst report, they said Hastings earned $32 million from stock sales over a six-month period in 2011.
Conti nonetheless said the plaintiffs did not prove their claims against Netflix, whose business model "worked exactly as Netflix said it would, until Netflix began to lose subscribers after announcing its price increases and DVD-business spinoff."
He gave the plaintiffs 30 days to amend their complaint.
Stephen Tountas, a lawyer for the plaintiffs, was not immediately available for comment.
Joris Evers, a Netflix spokesman, said the company is pleased with the court's decision.
Netflix's share price has more than tripled from its 52-week low of $52.81 last August 3. It was aided by the company's surprise profit in last year's fourth quarter, when it added nearly 4 million streaming customers worldwide.
Shares of Netflix closed Thursday up $1.13, or 0.6 percent, at $187.40 on the Nasdaq.
The case is In re: Netflix Inc Securities Litigation, U.S. District Court, Northern District of California, No. 12-00225.