Trouble in the Twittersphere

Twitter shareholder Jim Porter filed a shareholder derivative lawsuit in California federal court this week against a slew of Twitter executives. According to Fortune, the complaint claims that the defendants concealed the truth about Twitter’s slow user growth in order to inflate the stock price and sell their personal stock holdings “for hundreds of millions of dollars in insider profits.” Porter’s argument rests on Twitter’s portrayal of the company’s growth to shareholders, claiming that over time they deceptively switched the user activity metrics to keep up a high growth appearance. As an example, Porter claims that the micro-blogging company’s 2014 10-K form, an annual report required by the SEC that provides a comprehensive summary of the company’s financial performance, was false and misleading because it did not tell shareholders that it had switched the primary user engagement metric from timeline views to Daily Average Users (DAUs). Timeline views actually reflect how often a visitor engages with the site, while DAUs is a broader category which could thus inflate user engagement metrics. The significance of this change is that is made it appear as though more users were Tweeting when in fact user engagement was on the decline.

Porter also accuses the Twitter executives of profiting from this insider knowledge, providing evidence that the executives have sold large volumes of their personal shares since February 2015 under “suspicious circumstances.” Porter is seeking repayment of profits made since February 2015, a “shake up” of the board of directors, and the imposition of new financial controls.

Twitter’s poor financial performance since its IPO has been an existing trend, and in the eyes of investors this lawsuit is likely yet another nail in its coffin.

Jennifer Marr is an Online Highlight Editor for the Harvard Journal of Sports and Entertainment Law and a current second year student at Harvard Law School (Class of 2018).