Yelp shareholders have lost their legal battle against the company as U.S. District Judge Jon Tigar in San Francisco dismissed their lawsuit. Shareholders, led by Joseph Curry, accused Yelp of concocting a calculated strategy to extort businesses into buying ads or making payments in exchange for removing bad or fake reviews. The Yelp shareholders also accused the company of inflating its share price by falsely touting the reliability of its reviews.
Yelp allows users to rate restaurants and other businesses based on a five-star scale. Positive reviews for a business can increase sales, while negative reviews can harm business and reduce traffic. The judge said in the decision that the evidence “does not indicate that Yelp’s directors and officers knew that any significant number of reviews were not authentic or first-hand, beyond what defendants represented to the public.”
The Yelp shareholders claimed they were fraudulently misled about the authenticity and quality of the reviews on the company’s website. The company’s documentation admits that the technology used to screen user-generated content for its website is not foolproof. In the judge’s decision, it was acknowledged that reasonable investors would understand that not all Yelp reviews are real.
The company was also accused of manipulating reviews to favor paying advertisers. In April 2014, the Federal Trade Commission revealed that it had received 2,046 complaints against the San Francisco-based company over five years. However, only 11 of the complaints accused Yelp of offering exchange fees for review manipulation. The judge said that was a small fraction of the tens of millions of reviews hosted by Yelp.
Chief Executive Jeremy Stoppelman and other company insiders were accused of making sales of tens of millions of dollars of Yelp stock at allegedly inflated prices. The judge found no showing of an intent to defraud.
A few weeks ago, Yelp reported exceeding quarterly expectations for both revenue and adjusted earnings for the first time in 2015. The company reported that monthly unique visitors to the site increased to 89 million, a 22 percent rise. The company also reported that page views increased 40 percent over the same quarter last year and local ad revenue increased 36 percent.
Mobile devices are used to make 71 percent of all searches on Yelp, up from 70 percent reported in the third quarter. However, Yelp stock is more than 40 percent lower than it started this year.
