Not Enough Studying

Yelp is an online networking platform that hosts user-generated reviews of local businesses.  In a recent securities class action (Curry v. Yelp, Inc., 2015 WL 7454137 (N.D. Cal. Nov. 24, 2015)), the court considered claims that Yelp made misstatements about the authenticity of the reviews hosted on the company’s website and whether the company manipulated reviews in favor of businesses that advertised on the website.

In its original motion to dismiss order, the court held that the disclosure of the existence of FTC complaints in a WSJ article about Yelp could not demonstrate either materiality or loss causation.  The company previously had disclosed the existence of media reports and lawsuits about review manipulation, leading the court to conclude that the article did not alter the total mix of information available to the market.  Moreover, the article could not support the existence of loss causation because the FTC complaints merely alerted the market to the possibility that further investigations by the FTC could establish at some later time that the company had made false statements.

In their amended complaint, Plaintiffs responded to these holdings by including the results of an event study purporting to show that the decline in Yelp’s stock price on the day of the WSJ article “was statistically significant and the direct result of the new information contained within The Wall Street Journal’s article.”  According to the court, however, a key problem with this event study was that the WSJ article had been published after the close of the market that day and itself stated that “Yelp was down 6% . . . in Wednesday afternoon trading in the wake of the [FTC] disclosure.”  The WSJ article therefore could not have revealed material information or caused the stock price decline.  Moreover, the amended complaint failed to specify when the FTC disclosure was made or whether it did anything other than disclose that the FTC had received a certain number of complaints about Yelp.  Under these circumstances, the court also could not find that the FTC disclosure itself demonstrated either materiality or loss causation.

Holding: Motion to dismiss granted with prejudice.

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