Plaintiffs, Twitter spar over metrics in shareholders' class action

By Russell Boniface | Dec 15, 2017

SAN FRANCISCO (Legal Newsline) – A federal judge has allowed plaintiffs in a class action lawsuit against Twitter over its stock prices to introduce certain evidence regarding user information.

Twitter sought to dismiss claims regarding statements on daily active users (DAU) and monthly average users (MAU). The court ruled against Twitter on the DAU metrics, but it dismissed plaintiff's claims regarding the MAU.

Judge Jon S. Tigar of the U.S. District Court for the Northern District of California wrote in his Oct. 16 opinion that there is a “strong inference of scienter (intent or knowledge of wrongdoing) with respect to the misleading statements.”

The court wrote that because Twitter made factual statements “without disclosing adverse DAU (daily active user) trends, and indeed, while refusing to acknowledge the importance of DAU when asked for a measure of user engagement, 'a strong inference arises that [they] knowingly misled the public' what was really happening with user engagement at Twitter in 2015.”

In September 2016, lead plaintiff Doris Shenwick filed a class action complaint against Twitter, former CEO Richard Costolo, and Chief Financial Officer Anthony Noto, alleging Twitter withheld information about its projected growth based on its metric of daily users, thus affecting stock-purchasing decisions during the class period between Feb. 6, 2015, and July 28, 2015.

Shenwick’s class action complaint alleges that Twitter was in violation of the 1934 Securities Exchange Act.

The plaintiffs noted that their complaint does not rely on allegations of an improper financial motive, but rather that Twitter was motivated by “an attempt to live up to the overly optimistic promises” made to persons who purchased or acquired Twitter common stock, the order states.

The plaintiffs argued that Twitter did not disclose to the public the DAU metric used to track how many users Twitter has and whether those users are engaged. This metric is used to generate website advertising revenue.

Shenwick claimed that Costolo and Noto made false statements about the metrics, causing the price of Twitter common stock to be artificially inflated, which fell when the truth about user engagement became known.

The class alleged that Twitter “did not tell investors that DAU was its primary user engagement metric or provide meaningful updates on user engagement trends, in particular DAU,” the complaint stated. Instead, it was “positive but vague” about DAU and highlighted its MAU numbers. Twitter projected an increase of MAUs to more than 550 million, but in April 2015, the MAUs had dropped.

The plaintiffs contended the most important metric was not the MAU but the DAU.

The lack of specific DAU data in Twitter‘s February and March filings in 2015 was spotted by analysts and officials from the Securities and Exchange Commission.

According to the complaint, Twitter made materially false and misleading statements during the class period in press releases, and in filings with the SEC and in oral statements to the media, securities analysts and investors.

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Twitter, Inc. U.S. District Court for the Northern District of California

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