A group of shareholders filed a class-action suit against Netflix earlier this month, accusing the company of concealing business details, which resulted in artifically inflated stock prices.
Netflix "issued materially false and misleading statements regarding [its] business practices and its contracts with content providers," according to the lawsuit, which was filed by the City of Royal Oak Retirement System in California district court. "Specifically, defendants concealed negative trends in Netflix's business."
According to the suit, Netflix had short-term contracts with content providers that were set to expire and increase in price. Netflix "faced a Hobbesian choice to renegotiate the contracts in 2011 at much higher rates or not renew them at all."
As a result, Netflix opted to raise prices, according to the lawsuit, but failed to keep shareholders in the loop. In mid-July, Netflix de-linked its streaming and DVD services, so subscribing to one DVD at a time and unlimited streaming would be $7.99 each per month rather than $9.99 for both. Later, Netflix announced plans to further separate those businesses; the DVD business would be known as Qwikster and streaming would remain as Netflix. Amidst user backlash, however, Netflix reversed course on that.
All told, the changes resulted in a loss of 800,000 customers.
"Netflix's stock traded at artifically inflated prices," between Dec. 20, 2010 and Oct. 24, 2011, the suit said, dropping from a high of $300 in July 2011 to about $80 in late October, the suit said.
A Netflix spokesman said the company "does not comment on litigation."
It's not all bad news; Netflix this month revealed that subscribers watched more than two billion hours of movies and TV shows in the fourth quarter.