SAN FRANCISCO (Legal Newsline) - A class action lawsuit has been filed against Yelp after shareholders claim the company lied about business practices to investors to try to increase Yelp's stock prices.
The securities class action is against Yelp Inc., Jeremy Stoppelman, the company's CEO; Robert J. Krolik, the company's CFO; and Geoffrey Donaker, the company's COO.
Joseph Curry claims all persons who purchased or otherwise acquired common stock of Yelp from Oct. 29 until April 3 have standing against Yelp and its officers and/or directors for violations of the Securities Exchange Act of 1934, according to a complaint filed Aug. 6 in the U.S. District Court for the Northern District of California.
Curry claims the online networking platform that connects people with local businesses went public in March 2012 and the company's shares are traded on the New York Stock Exchange under ticker symbol "YELP."
"The company’s most recent Form 10-K states that Yelp users have contributed a total of approximately 52.8 million cumulative reviews of almost every type of local business," the complaint states. "According to the company, the reviews appearing on its website are written by people using Yelp to share their everyday local business experiences, giving voice to consumers and bringing 'word of mouth' online."
Yelp generates revenue primarily from the sale of advertising on its website and mobile app to local businesses of all sizes that seek to reach its growing audience of consumers, according to the suit.
Curry claims during the fiscal year that ended Dec. 31, Yelp reported that it generated net revenue of $233 million, representing 69 percent growth over 2012, a net loss of $10.1 million and adjusted EBITDA of $29.4 million.
"During the class period, defendants made materially false and misleading statements concerning the company’s true business and financial condition, including but not limited to the true nature of the so-called 'firsthand' experiences and reviews appearing on the company’s website, the robustness of its processes and algorithms purportedly designed to screen unreliable reviews and the company’s forecasted financial growth prospects and the extent to which they were reliant upon undisclosed business practices, including but not limited to requiring business customers to pay to suppress negative reviews," the complaint states.
The misrepresentations made by the defendants concerning Yelp's current financial and business condition, including its forecasted financial and business condition, were each materially false and misleading when made and caused Yelp's stock to trade at artificially inflated prices of over $98 per share on March 4, according to the suit.
Curry claims Yelp and its operating officers knew, or recklessly disregarded the fact that reviews, including anonymous reviews, appearing on the company’s website were not all authentic "firsthand" reviews, but instead included fraudulent reviews by reviewers who did not have first-hand experience with the business being reviewed.
Yelp also knew that algorithms purportedly designed to screen unreliable reviews did not comprehensively do so, and instead, the company allowed such unreliable reviews to remain prominent while the company tried to sell services designed to suppress negative reviews or make them go away, plaintiffs say.
Curry claims the representations concerning the company’s current and future financial condition and prospects and the extent to which they were reliant upon undisclosed business practices, did not have a reasonable basis.
"Nevertheless, between November 11...and March 10...company insiders...sold 1,160,910 shares of Yelp stock at prices as high as $98.99 per share for insider trading proceeds of more than $81.5 million," the complaint states.
As the true facts concerning the company’s business practices began to be revealed to the market, the company’s stock price declined, falling from a class period high of over $98 per share to $65.76 per share at the end of the class period, according to the suit.
Curry is seeking class certification and compensatory damages. He is being represented by Darren J. Robbins and David C. Walton of Robbins Geller Rudman & Dowd; Shawn A. Williams; and Frank J. Johnson and Nathan Hamler of Johnson & Weaver LLP.
Yelp has been under fire in the past about its review system.
Some business owners claim that they let fake negative reviews stay on the site with the purpose of squeezing more advertising dollars from those businesses.
Earlier this year, a lawsuit was filed against Yelp by writers who claimed they were unpaid writers and that Yelp's entire business model is predicated entirely on the exploitation of writers' work products.
The lawsuit was dismissed in February after the plaintiffs failed to oppose Yelp's motion to dismiss in a timely manner.
The case has been assigned to District Judge Jon S. Tigar.
U.S. District Court for the Northern District of California: 3:14-cv-03547
From Legal Newsline: Kyla Asbury can be reached at email@example.com.