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Twitter wants to settle with angry investors for $809 million

Twitter said Monday it is proposing an $809.5 million settlement for a 2016 securities class action lawsuit that alleged the company misled investors about its user engagement figures. The complaint alleged violations of the Securities Exchange Act of 1934, according to a news release. Twitter said it expects to use cash on hand to pay the settlement amount likely in its fourth quarter.

The lawsuit alleged that Twitter provided misleading information to investors about growth metrics to make the company appear financially healthier than it was. The complaint points to a 2014 event Twitter held with financial analysts where the company provided “unrealistic” growth projections that called for its monthly active users (MAU) “to double to over 550 million users and for revenue to grow by $4.6 billion by 2018.”

The complaint alleges Twitter embarked on a “shell game” where it tried to conceal its user engagement from investors; as user engagement was considered a key driver of MAU growth. “[H]ad Defendants provided investors with complete and accurate information regarding user engagement, investors would have learned that Twitter’s MAU growth— and with it, the Company’s ability to increase revenue — had also stalled.

Twitter stopped reporting its primary user engagement metric— timeline views— in 2014 according to the suit, a practice that made it harder for analysts and investors to track the company’s growth. Timeline views were tallied each time a user visited Twitter and refreshed their timeline to view more tweets, or to conduct a search. Twitter said at the time that the metric had become irrelevant.

Instead, it began including what the complaint called “low-quality growth” metrics, including sending automated messages to dormant users to encourage them to log in, so Twitter could include them as an “active” user. This practice was outlined by reporter Nick Bilton in a 2016 Vanity Fair article, where he said Twitter had done what many startups did when they needed to “goose” numbers: “they kind of faked it.”

It also caught the attention of the Securities and Exchange Commission, which asked Twitter in April 2015 —after the company made its annual securities filing— if it planned to provide “alternative metrics” to try to “explain trends in user engagement and advertising services.”

According to a report from the Wall Street Journal at the time, Twitter told the SEC it had started to disclose how often users took an action in response to an ad, and how much its advertisers paid for that information. The SEC dropped its inquiry after this reply, the Journal reported.

Under the terms of Monday’s proposed settlement, Twitter denies any wrongdoing or other improper action. The final agreement is subject to court approval.

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