Was Yelp Misleading About Its Reviews?By: Chris Crum - August 7, 2014
Yelp is no stranger to legal battles, nor is it a stranger to complaints about how it handles reviews. Now, the company faces a new class action suit from shareholders, accusing it of selling over $81 million in stock, while misleading shareholders about the legitimacy of reviews.
Do you believe Yelp would mislead investors about its reviews, or do you think the suit is baseless? Share your thoughts in the comments.
Named defendants include CEO Jeremy Stoppelman, CFO Robert Krolik, and COO Geoffrey Donaker.
Joseph Curry, who filed the suit, alleges that Yelp “made false and misleading statements concerning the company’s true business and financial condition, including but not limited to the true nature of the so-called “firsthand” experiences and reviews appearing on the company’s website, the robustness of its processes and algorithms purportedly designed to screen unreliable reviews, and the company’s forecasted financial growth prospects and the extent to which they were reliant upon undisclosed business practices, including but not limited to requiring business customers to pay to suppress negative reviews.”
The complaint adds, “The class period misrepresentations made by defendants concerning the company’s current financial and business condition, including its forecasted financial and business condition alleged herein, were each materially false and misleading when made and caused the company’s stock to trade at artificially inflated prices of over $98.00 per share on March 4, 2014, because defendants knew, or recklessly disregarded, the following facts:
(a) Reviews, including anonymous reviews, appearing on the company’s website were not all authentic “firsthand” reviews, but instead included fraudulent reviews by reviewers who did not have first-hand experience with the business being reviewed;
(b) Algorithms purportedly designed to screen unreliable reviews did not comprehensively do so, and instead the company allowed such unreliable reviews to remain prominent while the company tried to sell services designed to suppress negative reviews or make them go away; and
(c) In light of the above facts, the representations concerning the company’s current and future financial condition and prospects, and the extent to which they were reliant upon undisclosed business practices, did not have a reasonable basis.”
It goes on to allege that the defendants sold over a million shares of Yelp stock at prices as high as $98.99 per share for “insider trading proceeds” of over $81.5 million. As a point of reference, shares are $67.78 as of the time of this writing.
Here’s the actual complaint (via GigaOm):
Yelp has suggested that the claims made in the complaint are without merit, as you would expect.
The company was in the news earlier this week as a hotel called Union Street Guest House was charging people for posting negative reviews. As a result, people who hadn’t actually stayed there flocked to the hotel’s Yelp page to leave bad reviews. Yelp said this was against its policy, and said “reviews that are contributed as a result of media attention and do not reflect first-hand experiences run counter to Yelp’s Terms of Service and will be removed from the site.”
In April, the FTC disclosed that it had seen over 2,000 complaints about Yelp’s business practices between 2008 and March of this year. The company, which is celebrating its ten-year anniversary, released its quarterly earnings report last week, as it became profitable for the first time since going public in 2012.
Do you think Yelp can actually do a good job of keeping reviews legitimate? Let us know in the comments.
Image via Yelp (Flickr)