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Netflix Sued by Shareholders Over Alleged False Statements

By Joel Rosenblatt
January 13, 2012 9:31 PM EST

Netflix Inc. (NFLX), the film-streaming and mail-order DVD service, was sued by shareholders who accuse the company of concealing increased costs it faced, which inflated its share price as insiders sold their shares for $90 million.

Netflix officers knew the company faced higher license fees from its content providers before announcing on Sept. 15 that it had lost 1 million subscribers after price increases, according to the complaint filed today in federal court in San Francisco.

“While Netflix stock was inflated partially by Netflix buying back its own stock, company insiders were selling 388,661 shares of their own Netflix stock for proceeds of $90.2 million,” according to the complaint.

Netflix, based in Los Gatos, California, fell $39.46, or 19 percent, to $169.25 on Sept. 15 after cutting its U.S. subscriber forecast following a price increase. The shares plunged 35 percent, to $77.37, on Oct. 25 after the video-rental service said it lost 800,000 U.S. subscribers in the third quarter, more than expected, and predicted more cancellations over a price increase.

Steve Swasey, a Netflix spokesman, said the company declined to comment on the lawsuit.

The case is City of Royal Oak Retirement, 12-00225, U.S. District Court, Northern District of California.

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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