Yelp Is Going to Court Again: Were Shareholders Misled?

Thousands of complaints to the FTC, legal battle after battle, and now Yelp is going to court again. This time the issue is whether Yelp intentionally misled shareholders in order to line its pockets with over $80 million. Yelp has certainly had its share of detractors, and now the company’s CEO, CFO, and COO are going to be making appearances in the courtroom themselves.

The allegations basically claim that the owners misrepresented the company by means of a faulty review algorithm and then allowed the fraudulent reviews to go on unabated. The claim is that this misrepresented the true value of the company, as they made over $80 million selling shares at close to $100 a piece. If the current value of less than $70 a share is any indication, the claims may have some validity. The question is whether or not this actually qualifies as insider trading and if the owners should have been aware of the company’s practices.

Of course, Yelp is proclaiming its innocence.

This follows upon another recent scandal involving Yelp. This one resulted from a bonehead business move on the part of a hotel, which had come up with the worst possible way to fight bad Yelp reviews. The hotel decided to include a clause in the contracts for guests at weddings. They stipulated a fine of $500 for anyone in the wedding party who posted a negative review of the accommodations.

This sent Yelp into crisis mode removing quantities of fraudulent negative reviews from people who had never stayed at the hotel. (Basically it was a grass-roots protest of the hotel’s draconian rider). So, guess where this ingenious tactic landed the hotel? At last check they had a 1.5 star rating, and that’s after most of the fraudulent reviews had been removed. I say most, as I doubt the 5-star review that Hitler posted on August 5th of this year is legit.

Maybe all of the press—good, bad, or sideways (such as the hotel fiasco)—has actually been beneficial for the company. The current quarterly financials show Yelp in the black for the first time since 2012. The fact that Yelp is going to court again, then, does not seem to have hurt the company’s image.