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From Securities Regulation Daily, May 17, 2017

Snap’s user growth rates attract class action, whistleblower complaints

By Anne Sherry, J.D.

Snap’s disappointing post-IPO results and a whistleblower case filed by a former employee are the basis for a new class action suit filed against the company in California. The plaintiff alleges that statements in Snap’s prospectus contained misrepresentations and omissions about the company’s user growth (Erickson v. Snap Inc., May 16, 2017).

The complaint points to statements in Snap’s prospectus about its metrics, particularly daily active users. Snap said that it regularly reviews such metrics and that "these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement." According to the plaintiff, the falsity of these statements became apparent after the market closed on May 10, when Snap’s 8-K reported a net loss of $2.21 billion. In its 10-Q filed the same day, Snap reported 166 million daily users, only 8 million more than in the previous period and 44 million more than the same period in the prior year—Snap’s slowest year-to-year growth rate in at least two years. Snap’s share price fell by more than 21 percent on this news, to close at $18.05 on May 11.

The class action suit comes on the heels of a whistleblower complaint filed by a former employee who alleges that he was lured away from Facebook to run Snap’s user growth and engagement team, but fired after just three weeks and smeared in the media because he spoke up internally about his concerns. The whistleblower action is premised on Snap executives’ alleged inflation of performance metrics, including user growth and engagement figures.

According to the ex-employee, Snap used two methodologies to count daily active users: Flurry and Blizzard. Flurry, based on external analytics, led to overstated user counts. Blizzard, based on an internal data pipeline, undercounted users because it missed older users. Because Snap had no way to know which measurement, if either, was accurate, employees "merely picked numbers at random that they guessed were accurate." According to the securities fraud plaintiff, Snap’s share price fell by $0.02 on media reports of the whistleblower action.

The case is No. 17-cv-03679.

Attorneys: Jennifer Pafiti (Pomerantz LLP) for James Erickson.

Companies: Snap Inc.

MainStory: TopStory FraudManipulation IPOs PublicCompanyReportingDisclosure SecuritiesOfferings WhistleblowerNews CaliforniaNews

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