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Twitter announced Monday that it is proposing a settlement of $ 809.5 million for a 2016 securities class action lawsuit that alleged the company misled investors about its user engagement numbers. The complaint alleged violations of the Securities Exchange Act of 1934, according to a press release. Twitter said it plans to use cash to pay off the settlement amount likely in its fourth quarter.
The lawsuit alleged that Twitter provided misleading information to investors about growth indicators in order to make the company appear in better financial health than it was. The complaint refers to a 2014 Twitter event with financial analysts where the company provided “unrealistic” growth projections that called on its monthly active users (MAUs) “to double to over 550 million users and to increase revenues by $ 4.6 billion by 2018. ”
The complaint alleges that Twitter embarked on a “game of hulls” where it attempted to conceal its user engagement from investors; because user engagement was seen as a key driver of MAU’s growth. “[H]ad Defendants provided investors with full and accurate information regarding user engagement, investors reportedly learned that the growth of Twitter’s MAU – and with it, the company’s ability to increase revenue – was also in focus dead.
Twitter stopped reporting its main user engagement metric – timeline views – in 2014, according to the lawsuit, a practice that has made it harder for analysts and investors to keep up with the company’s growth. Timeline views were counted every time a user visited Twitter and refreshed their timeline to view more tweets or to search. Twitter said at the time that the metric had become irrelevant.
Instead, it started including what the complaint called “low-quality growth” measures, including sending automated messages to sleeping users to encourage them to log in, so Twitter could include them in. as an “active” user. This practice was described by journalist Nick Bilton in a 2016 article. Vanity Fair article, where he said Twitter did what many startups did when they needed to ‘goose’ numbers: “They kind of faked it. “
It also drew the attention of the Securities and Exchange Commission, which asked Twitter in April 2015 – after the company made its annual securities filing – whether it plans to provide “alternative measures” to attempt “to explain trends in user engagement and advertising services. ”
According to a report by the the Wall Street newspaper At the time, Twitter told the SEC that it had started disclosing how often users took action in response to an ad and how much its advertisers paid for that information. The SEC dropped its investigation after this response, the Newspaper reported.
Under the proposed settlement on Monday, Twitter denies any wrongdoing or other inappropriate action. The final agreement is subject to court approval.
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