Yelp gets slapped with lawsuit from its investors
Yelp paved the way for the ratings and review world, despite what Angie’s List may say about it. We often reference companies as “the Yelp for job hunters,” and “the Yelp of startups,” and so forth, proving the usefulness of the user-generated, transparent review site. We’ve all heard complaints from business owners that didn’t appreciate customers lying, exaggerating, or excluding context in their reviews, and we’re all aware that Yelp had to crack down on companies posting fake reviews to hurt their competitors.
Yelp investors have been all over that goodness, making money hand over fist as the company’s stock price doubled in the second half of last year alone. While you would think they’re sitting pretty, one investor has filed a lawsuit in the U.S. District Court in San Francisco on behalf of himself and other shareholders, accusing the company of attempting to mislead investors as to the quality of the user-generated reviews and how they screen their content, according to Reuters.
Yelp tells Reuters that the lawsuit is “without merit” and that it “will vigorously contest” all of the allegations.
So what exactly are the allegations?
According to the lawsuit, 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.”
Further, the complaint claims that not all reviews posted to the site were “authentic ‘firsthand’ reviews, but instead included fraudulent reviews by reviewers who did not have first-hand experience with the business.”
This doesn’t seem to be quite as damming as the allegations that Yelp failed to screen reviews, allowing “unreliable reviews to remain prominent while the Company tried to sell services designed to suppress negative reviews or make them go away.”
Ultimately, the plaintiff claims that Yelp “engaged in a scheme to deceive the market” by essentially bragging about its user-generated reviews and the company’s financial prospects.
Speaking of financial prospects…
As previously mentioned, in the second half of last year, Yelp’s stock price almost doubled, hitting a high point of $98 per share in March of this year. Stock prices fell to $51 in May after slumping to $66 in April, following the news that the Federal Trade Commission had received over 2,000 complaints about the site.
The investor alleges in the lawsuit that Yelp CEO Jeremy Stoppelman made $2.5 million for himself by selling some 132,000 shares of stock before the drop in price.
While Yelp defends these allegations, it is a troublesome lawsuit for the company, regardless of the benefits of their service.