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Attorney skeptical of securities fraud claim against Twitter

By Dee Thompson | Nov 11, 2016

Law money 04

SAN FRANCISCO (Legal Newsline) - Social media giant Twitter is facing a class action lawsuit regarding its stock prices, but a Texas securities attorney doesn't expect the plaintiffs will have much success.

Plaintiff Doris Shenwick alleges Twitter withheld important but adverse information about its projected growth, which affected stock-purchasing decisions. When reached for comment, Kristin Binns of Twitter said, “We don't comment on pending litigation matters, unfortunately.”

Shenwick’s class action complaint was filed Sept. 16 in U.S. District Court for the Northern District of California against Twitter Inc., Richard Costolo and Anthony Noto, alleging violation of the 1934 Securities Exchange Act. It alleges all persons or entities who purchased Twitter common stock between Feb. 6-July 28, 2015, are eligible to be part of the class.

A drop in monthly average users (MAUs) precipitated a loss in revenue, the lawsuit says.

Michael Biles, a partner with King & Spalding in its securities litigation group, doesn’t find much merit to this lawsuit. The plaintiffs allege the most important metric is not the MAU, but the DAU, (daily active user), which was tracked internally but not disclosed to the public.

Biles told Legal Newsline: “Internet companies have kind of unique metrics that they use to track demand for their products that are new to investors. I don’t think there’s any law that requires them to disclose every single internal metric they use. 

"That would just flood investors with too much noise. I can’t imagine that a court is going to find that is securities fraud.”

The complaint alleges in November 2014, Twitter “made materially false and misleading statements during the class period in news releases and filings with the Securities and Exchange Commission and in oral statements to the media, securities analysts and investors.” 

The misleading statements alleged are that Twitter projected an increase of MAUs to more than 550 million. Twitter’s revenue is driven by ads on the website.

In 2015, the MAUs actually dropped. The first quarter financial results released in April indicated that ad revenue didn’t meet projections and MAUs only increased by 5 percent over the prior quarter. Twitter stock dropped $9.39 per share as a result of the negative news. 

On July 28, 2015, Twitter again reported it had failed to meet projections and the stock price again dropped, that time by $5.30 per share. Since that time, the stock price has not recovered and now trades at less than $20 per share, according to the complaint.

Twitter has recently added the feature of live video in an attempt to increase viewers.

Securities fraud allegations require an intent to deceive investors, and Biles doesn’t think that applies to the Twitter case. 

“It seems like a stretch to me that Twitter and its executives intended to defraud investors by not disclosing this (DAU) internal metric,” he said.

Twitter has a lot of defenses, he believes. 

“There wasn’t anything in the complaint about an informant or a confidential witness that indicates management was intending to deceive anyone,” Biles said.

“Twitter is a blue chip company with probably adequate D&O insurance [directors and officers liability insurance], and they seem to have very strong defenses, so I don’t think this lawsuit is going to have any impact on the company or its shareholders or stock price.”

The plaintiff is represented by attorneys Shawn A. Williams of Robbins Geller Rudman & Dowd LLP in San Francisco; David C. Walton and Daniel S. Drosman of Robbins Geller Rudman & Dowd LLP in San Diego; and by Jeffrey S. Abraham of Abraham, Fruchter, & Twersky LLP in New York.

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U.S. District Court for the Northern District of California