Twitter investors are bringing actions against the social media giant on grounds that employee compensation structuring has depressed stock values, slowed company growth, and incurred investors enormous losses. This class action has been brought by investors Johnny Hosey (“Hosey”) and George Shillliare (“Shillaire”) (collectively, “Plaintiffs”). The suit was filed in San Mateo County Superior Court, CA, taking aim against Twitter, its executives and several prominent investment banks. The suit accuses the social media company of lying in its public disclosures when it went public in November 2013. A company of Twitter’s size faces numerous suits on a regular basis, fielding a wide variety of complaints. This case is unique, however, in that it is a class action, and specifically addresses Twitter’s unusual employee compensation structures that claimants allege contributed to damages.
Plaintiffs allege that Twitter’s employee compensation package devalued the company through the following mechanism: employees were compensated largely with stock, with it representing a disproportionate percentage of their compensation package relative to other tech companies of Twitter’s size. As Twitter stock fell, due to issues with user growth, ad monetization, and management uncertainty, Twitter’s stock fell. As the stock fell, it became harder to retain or attract tech talent, given that the majority of compensation was stock based. As talented managers left for better opportunities, stock price fell further, and the cycle repeated itself. The complaint summarizes this mechanism as follows: “[u]ltimately a ‘death spiral’ ensues: departing employees weaken the company’s competitiveness; a less competitive company results in lower user growth which hurts the growth of advertising revenue; the company’s poor performance causes its stock price to fall; a falling stock price results in reduced compensation to current and prospective employees causing them to leave for better prospects, which in turn further weakens the company.”
Most litigation to date levied at Twitter allege poor stock performance due to actionable management negligence, or fraud in regard to user growth metrics being exaggerated, or stock decline due to the company’s inaction regarding user bullying leading to bad public relations. This is the first suit of its kind from investors that specifically seeks damages in relation to management decisions regarding employee compensation. The suit will likely cite findings and actions made in suits brought by Twitter employees themselves, who have sued their employer alleging they were misled as to how much stock growth would increase their compensation packages. Twitter made its Initial Public Offering (“IPO”) November 2013 at $28 a share. It is currently fluctuating between $14-18 a share. By focusing on employee retention and compensation this lawsuit opens a new front in regards to analyzing Twitters problems.
This lawsuit further alleges that during the IPO process Twitter did not disclose its stock based pay model. On average, about 30% of Twitter’s compensation packages were comprised of stock pay, compared to 16% and 17% at Facebook and LinkedIn. Claimants allege that Twitter’s failure to disclose these unusually high amounts of employee stock based pay violated provisions in the Exchange Act of 1933 (the “Exchange Act”), and mislead investors as to the true risk profile of Twitter.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of individuals who have suffered losses as a result of investment and securities fraud, and for claims of compensation. If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.