Yelp may have misled investors, court rules while dismissing several parts of fraud lawsuit

By Charmaine Little | Dec 5, 2018

SAN FRANCISCO — Popular review app Yelp had some claims against it dismissed in a lawsuit alleging that the company misled investors over the strength of its advertising business.

A number of Yelp investors sued the company, its CEO Jeremy Stoppelman, CFO Lanny Baker and COO Jed Nachman in the U.S. District Court for the Northern District of California for alleged violations of the Securities Exchange Act, accusing the defendants of making falsified and misleading statements that they expected a boost in the company's revenue for the fiscal year 2017.

The plaintiffs claimed that while Yelp allegedly bragged about its elite advertiser retention rate and plans to grow the company in the beginning of 2017, the company was fully aware that a number of its advertisers would not be renewing their contracts.

As Yelp decreased its expectations and informed investors of the retention issues in May 2017, stock prices fell, the court ruling says.

In order to prove Yelp and its executives had made misleading statements, the plaintiffs were required to show six things: “a material misrepresentation or omission by the defendant, a scienter, a connection between the misrepresentation or omission and the purchase or sale of a security, reliance upon the misrepresentation or omission, economic loss and loss causation,” according to the opinion.

The Yelp defendants said the statements they had made were protected under the Private Securities Litigation Reform Act safe harbor provision. The company's forward-looking statement in February 2017 included cautionary language that pointed out factors that could bring about different results than the ones described, they argued, and the court agreed that the company’s statement was not completely misleading. The court granted the defendants’ motion to dismiss the suit as it relates to the February 2017 statement.

However, concerning statements made during a conference call in February 2017, the court granted in part and denied in part Yelp’s motion to dismiss.

The plaintiffs said the defendants’ description of past results as “strong,” “robust” and “improved" was "way too vague," but the court said the words amounted to mere puffery, and granted the motion to dismiss the parts of the suit relating to those statements.

The court denied the motion to dismiss for another portion of the conference call relating to Yelp's failure to inform investors about advertisers and companies that weren’t renewing their contracts.

The plaintiffs were also required to prove the defendants had acted with scienter (knowledge of wrongdoing) when it made statements on February 9, February 14, and March 1.

The plaintiffs pointed to statements made by Yelp in 2016 and the beginning of 2017 suggesting awareness of problems related to a churn in advertisers.

“These statements do suggest that defendants were aware of the retention issues by the time they made the misleading statements identified…,” the court said, determining that there was a chance that scienter existed.

U.S. District Judge Edward M. Chen ruled on the case.

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