Twitter got more bad news this week in the form of a shareholder lawsuit accusing CEO Jack Dorsey and other executives of concealing facts about Twitter’s slow user growth, even as they sold their personal stock holdings “for hundreds of millions of dollars in insider profits.”
The complaint, filed in California federal court by shareholder Jim Porter, seeks to force Dorsey and others, including former CEO Dick Costolo and founder and Board member Evan Williams, to repay profits they made since February 2015, and for Twitter (TWTR) to shake up its board and impose new financial controls.
The crux of the complaint turns on how the Twitter executives portrayed the company’s growth performance, accusing the company of quietly swapping measures for monthly average users (MAUs) and timeline views (which reflect how often a visitor engages with the site) in favor of a metric called daily average users (DAUs). According to the complaint:
Statements in the 2014 10-K filed with the SEC on March 2, 2015 were false and misleading when made because the Individual Defendants concealed adverse facts that they knew and deliberately disregarded, including that: (a) by early 2015, the Company was tracking DAUs rather than timeline views as the primary user engagement metric; and (b) by early 2015, the Company’s metrics showed that user engagement growth was either flat or declining.
The trend in “ad engagements” was not indicative of trends in user engagement. In fact, the trend in “ad engagements” was moving in the opposite direction (i.e., increasing) from the trend in user engagement.
The complaint also says the Twitter executives concealed the poor performance of new products, and claims that the company’s dismal growth prospects recently led potential suitors including Google, Apple and Disney to walk away from plans to pursue an acquisition.
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Twitter did not immediately respond a request for comment about the lawsuit, which also names CFO Anthony Noto and members of the audit committee.
Twitter’s share price is currently around $17, which as the filing points out, is a far cry from its high of $52 in 2015. The complaint states defendants sold shares worth $291 million since February of that year, and includes the chart below to show the sales in question, which it says took place under “highly suspicious circumstances.”
Lawsuits of this kind, known as shareholder derivative suits, are not uncommon and are intended to provide a means for ordinary shareholders to take legal action to protect a company when the firm’s own board can’t or won’t do so. But critics, including James Stewart of the New York Times, have also pointed to evidence that suggests such lawsuits are often little more than a means for opportunistic lawyers to make money.
According to the Twitter lawsuit, the board members would not have undertaken legal action over the alleged concealments because doing so would have voided their Directors and Officers insurance, which ensures they won’t have to pay for legal damages out of their own pocket.
Meanwhile, Twitter raised eyebrows again this week with an announcement that it will release its quarterly earnings at 4 am Pacific Time on Thursday.