The complaint [PDF] was filed yesterday in a U.S. District Court in San Francisco by a Yelp investor on behalf of himself and other shareholders.
According to the suit, Yelp “made materially false and misleading statements concerning the Company’s true business and financial condition, including… the true nature of the so-called ‘firsthand’ experiences and reviews… 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 plaintiff claims that not all reviews on Yelp were “authentic ‘firsthand’ reviews, but instead included fraudulent reviews by reviewers who did not have first-hand experience with the business.”
And Yelp’s algorithms for screening reviews allegedly failed to do so comprehensively, allowing “unreliable reviews to remain prominent while the Company tried to sell services designed to suppress negative reviews or make them go away.”
The complaint alleges that Yelp “engaged in a scheme to deceive the market” by talking up its business prospects and sending out press releases touting its user-generated reviews and the company’s financial prospects.
During the second half of 2013, Yelp’s stock price nearly doubled, peaking at around $98/share at the beginning of March. Then, following news reports questioning the company’s business tactics, and the revelation that the Federal Trade Commission had received more than 2,000 complaints about the site, the value of those shares dropped quickly to around $66 by early April, sinking as low as $51 in May before rebounding slightly.
The plaintiff alleges that Yelp CEO Jeremy Stoppelman made $2.5 million for himself by selling some 132,000 shares of stock before the drop in price.
Yelp tells Reuters that the lawsuit is “without merit” and that it “will vigorously contest” the allegations.