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Netflix Sued for Allegedly Misleading Investors on Growth

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Feb. 20 (Bloomberg) -- Netflix Inc., the film-streaming and mail-order DVD service, was sued by a shareholder who accused the company of intentionally misrepresenting subscriber growth.

On July 3 Netflix Chief Executive Officer Reed Hastings posted on the company’s public Facebook page that Netflix “monthly viewing exceeded 1 billion hours for the first time ever in June,” according to the complaint filed yesterday in federal court in San Jose, California.

The company’s stock price rose on July 5 from $72.04 to close at $81.72 a share, a 13.4 percent increase, according to the complaint.

Hastings’s Facebook statement “led the market to believe that Netflix was on target to achieve the 7 million net additions in domestic subscribers” for 2012 that Hastings had predicted earlier, according to the complaint.

The company, Hastings and Chief Financial Officer David Wells “intentionally misrepresented the impact of the 1 billion hours of viewing on subscriber growth,” according to the complaint.

Joris Evers, a Netflix spokesman, declined to comment on the lawsuit.

Hastings said last month that he will keep posting on Facebook even as the U.S. Securities and Exchange Commission weighs whether to file a lawsuit over a disclosure he made on the social network.

Wells Notice

In December, Hastings and Netflix each received a Wells Notice, indicating SEC staff had determined sufficient wrongdoing occurred to warrant a civil claim against Hastings and his Los Gatos, California-based company for allegedly violating selective disclosure rules. The SEC is weighing whether to bring a case.

The incident, which could result in sanctions, has led to calls for the SEC to broaden its rules to allow social media such as Facebook and Twitter to be used to communicate to investors. Hastings said in December that posting to his Facebook contingent of 200,000 followers “is very public.” Hastings also argued that the information wasn’t material, because he had said on his company blog several weeks earlier usage was approaching 1 billion hours a month.

The case is Schulthes v. Netflix Inc., 13-00712, U.S. District Court, Northern District of California (San Jose)

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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