Netflix Board Sued for Ignoring ‘Red Flags’ on Subscriber Loss

Streaming giant Netflix’s board misrepresented the company’s business outlook by “blaming any slowing in subscriber growth on the pandemic,” according to a new shareholder suit in a California federal court.

The board breached its fiduciary duties and committed securities law violations, “irreparably” harming the company’s reputation, according to the shareholder derivative action brought Thursday in the U.S. District Court for the Northern District of California.

The lawsuit, brought by investor Mindy Lehmann, said the board “ignored red flags from the news media and financial analysts warnings of Netflix’s shrinking share of the streaming market, due to new competitors, account-sharing issues, and cancellations based on increased subscription pricing.”

Lehmann took issue with the company’s representations in press releases, earning calls and public filings that its business was healthy and its acquisition and retention of paid subscribers was strong.

The company’s stock lost 35% of its value after it reported that it lost 200,000 subscribers in April—instead of its projected gain of 2.5 million subscribers. The company has faced several securities class action lawsuits from investors following the losses.

Netflix then reported an even larger loss of 970,000 subscribers in the second quarter of 2022. The company’s stock has dropped more than 60% since then, the filing said.

The board “sidestepped critical issues regarding emerging competitors, short-sighted price increases, and rampant account sharing, covering over the fact that the Company had inadequate internal controls in place,” the filing said.

A company spokesman didn’t immediately respond to a request for comment.

Claims: Breach of fiduciary duties, securities law violations, contribution and indemnification, gross mismanagement.

Relief: Internal controls and board oversight reforms, damages, disgorgement, restitution.

Attorneys: Joel Elkins, David Katz, Mark Smilow and Joshua Rubin at Weiss Law represent Lehmann.

The case is Lehmann v. Netflix, Inc., N.D. Cal., No. 5:22-cv-05269, complaint filed 9/15/22.