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Twitter shareholder Doris Shenwick has filed a lawsuit against the social media company. The suit claims that Twitter made misleading statements about its expected growth in order to artificially inflate the value of its stock. The suit is seeking approval for class-action status, which would allow anyone who purchased Twitter stock between February 6, 2015 and July 28, 2015 to join the lawsuit.

In November of 2014, the company stated that the number of monthly active users(MUA) was expected to grow to 500 million in the intermediate term and to over 1 billion in the long term. In February of 2015, a shareholder report for Q4 of 2014 showed lower growth than expected, which the company attributed to quarter specific factors. However, the report still had a high expectations for future growth and announced several new initiatives to increase its users and their engagement. As a result of this report, Twitter stock rose 17% within 24 hours.

However, in April and July of 2015, Twitter released two disappointment quarterly reports in a row, showing that user growth was basically flat, and expectations for future growth had been significantly lowered. As a result, Twitter stock plummeted.

However, the lawsuit doesn’t consider Twitter to be merely mistaken or overoptimistic in its earlier predictions. Instead, the company is accused of making misleading statements to defraud investors. The suit claims that new products and initiatives mentioned in the February report were having no significant effect on user growth, and Twitter executives knew this when they made the report.

In addition to inflating expectations about user growth, the suit also claims that the company was covering up details about declining user engagement. User engagement is a critical factor in earning advertising revenue, and Twitter even admitted that “as your MAU growth slows, engagement becomes a much bigger factor.” Timeline views were originally the primary metric to measure engagement. However, the company revealed in November 2014 that future shareholder reports would no longer contain timelines views.

It was claimed that certain product initiatives by the company would actually hurt timeline views, so it was no longer a reliable metric. Twitter did provide statistics on ad engagement, which the company claims is correlated with overall engagement and is directly tied to revenue. However, it claims that Twitter began using daily active users(DAU) as its internal metric for measuring engagement. Data on DAUs was not provided to shareholders. It is claimed that DAU’s were actually declining during this period, while ad engagements, the metric actually provided to shareholders, were increasing. The filing states that it is against SEC rules to withhold key metrics used internally by management.

Was Twitter misleading Investors? Do you think that they have a legal case here? Should the company have to share what their internal metrics are with shareholders? Share your thoughts in the comments below!

Max Michael

Senior Writer

I’m a technology reporter located near the Innovation District of Kitchener-Waterloo, Ontario.