Twitter to Pay Heavy Price for Misleading Investors

Twitter to Pay Heavy Price for Misleading Investors

Twitter agreed to a US$809.5 million settlement to resolve a shareholder lawsuit over allegedly misleading investors.

Twitter has been grabbing headlines for the past few months. First, it was 140 free non-fungible tokens (NFTs) as a giveaway. Now, it is the shareholder lawsuit against the social media giant. On Monday, Twitter Inc said that it would pay US$809.5 million to settle a shareholder class-action lawsuit which alleged that the company misled investors about its user base growth and user engagement.

Under the terms of the proposed settlement, the San Francisco-based company will pay the sum for the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. It will settle all claims against Twitter without having to admit any wrongdoing, once the settlement is signed by a judge. Twitter plans to use cash on hand to pay the settlement amount in the fourth quarter of 2021. The company expects to record a one-time charge for the settlement during the third quarter of 2021. 

How it all started

In 2016, the original lawsuit was filed by Twitter investor Doris Shenwick in the U.S. District Court for the Northern District of California. The lawsuit alleged that in November 2014, Twitter executives misled investors about the user growth by promising an increase in monthly active users to 550 million in the intermediate-term and “over a billion” over the longer term. It further added that the executives, including CEO Jack Dorsey, former CEO Richard Costolo, and board member Evan Williams, hid internal information, resulting in an inflated share price that fell when the truth about user engagement became known. 

The lawsuit also found that Twitter was using DAU (daily active users) as a primary metric for growth at the beginning of 2015. However, the company didn’t share this fact with the investors. The DAU data from Twitter revealed that the platform’s user engagement growth was either flat or declining.

Monetizing user base

In 2019, Twitter said it would stop reporting monthly active users (MAUs) and daily active users after Q1 2019. The company has switched to a new metric called monetizable daily active users (mDAUs) to track the daily number of users who can see ads. The process helps in measuring the size of the audience engagement with Twitter. The company noted that the mDAUs was a better metric that reflects its goal to drive monetizing usage.

In July 2021, Twitter released its second-quarter earnings report, revealing an 11 percent increase from its first-quarter number for mDAUs. The company reported 206 million average mDAUs as of June 30. On the revenue front, the platform reported a 74 percent increase in revenue, with ad sales crossing US$1 billion. 

In a letter to investors, the company stated that large- to mid-tier customers represent a sizable majority of Twitter’s advertising revenue by sales channel. Brands continue to launch new products and services on Twitter to maintain unique engagement with their audience. Advertising continues to be the most critical revenue source for the company.

Header Image Courtesy of Unsplash

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