Snapchat Faces Massive Whistleblower Lawsuit for Defrauding Investors

Did Snap Lie To Investors Prior to Their IPO By Inflating Their Metrics?

Snap CEO Evan Spiegel

So, does Snap have a Snapchat-like functionality that erases key user metrics forever?

Investors punished Snap following the company’s first financial report last week.  Citing weakening Snapchat daily active user growth, the company lost $2 billion for the first quarter of 2017.  In after-hours trading, the company’s stock valuation went down $6 billion.

Rough week, though most analysts remained positive that Snap could turn things around.  Others saw the writing on the wall for a company getting mercilessly copycatted by Instagram.

Now, a new lawsuit may show that Snap was in worse shape than previously reported.

Anthony Pompliano served as Snap’s growth officer for three weeks in 2015.  He first brought a lawsuit against Snapchat’s parent company in January.  Pompliano claimed that the company “falsely misrepresented” several of Snapchat’s key user metrics to attract outside investors.

Snap, he claims, hired him away from Facebook to gain inside information on the social networking giant.  Following his dismissal, the company conducted a smear campaign to ruin his reputation and career.  Filed in California, the lawsuit stated,

“Snapchat will not let anything stand in its way of an IPO, including its obligations to represent material facts accurately.”

Snap defended itself from Pompliano’s allegations, calling them baseless.  The company said that the allegations were “totally made up by a disgruntled former employee.”

Now, Pompliano has transferred his suit to a federal court.  Filed Tuesday at the US District Court of California, the lawsuit demands a trial by jury.  Pompliano also demands at least $10 million in damages.  It names CEO Evan Spiegel, Director of Revenue Brian Thiesen, and Chief Strategy Officer Imran Khan as defendants.

Back in April, Snapchat unsealed Pompliano’s originally redacted lawsuit, per Pompliano’s request.  They claimed then that they “had nothing to hide” and called the lawsuit a “big publicity stunt.”

For the federal lawsuit, Pompliano added slides from a presentation he supposedly showed Spielgel and other key executives.  Key allegations against the company include:

  1. Khan asked Pompliano to violate his non-solicitation and non-compete agreement with Facebook.
  2. Snap actually had 80 million daily active users. But Snapchat told investors that it had reached 100 million.
  3. Snapchat’s executive management team misrepresented potential user registration numbers.  They claimed that 87% of users completed the registration process.  The true number came closer to less than 40%.
  4. The company exaggerated the app’s retention rate after sign-up. Snap claimed a 40% retention rate. They hid the actual number: around or slightly above 20%.
  5. Snapchat’s growth rate was often flat or ranged from 1% to 4% per quarter. However, it told investors that the app experienced double-digit growth.
  6. Pompliano shared his idea with Spiegel: Snapchat should expand to international markets.  However, Spiegel told him, “This app is only for rich people.  I don’t want to expand into poor countries like India and Spain.”  He wouldn’t discuss the matter further.

Pompliano also filed for whistleblower protection as he claims that the company allegedly committed fraud against investors.

Snap has responded to the new lawsuit.  In a statement, the company told Business Insider,

“These are the same baseless claims and defective arguments, repackaged for yet another new venue.”

You can read the lawsuit below.

4 Responses

  1. Avatar
    music stowaway

    It’s all about the IPO.. we’re seeing this over and over.. the way to
    Super Riches is by manufacturing a money machine called I.P.O.
    (Initial Public Offering)

    It has certain similarities to tech and real estate bubbles.. crazy
    valuations that everyone gets caught up in..

    With IPO’s you have the very real chance of becoming a billionaire
    and that’s what it’s all about.. They don’t particularly care about the future of the company as they’ve got their cash and now they can run off to the Bahamas and enjoy the affluent lifestyle of the 1%

    The thing with IPO’s is not to fall for the hype and the figures..

    • Avatar
      Chum

      Yep – exactly. There is so much that comes out of Silicon Valley that is just a shell game. There is very little true innovation, it’s all about trying to luck into some hot button cultural phenomenon then cash in. Apps and social media trends can be incredibly popular, but making money off of them is a tough nut to crack. People may be willing to pay a buck for an app, or maybe spend a little, but in general they’re not going to “subscribe” to something like facebook, so beyond ads where is the revenue coming from?

  2. Avatar
    Remi Swierczek

    SPOTIFY with friends at Goldman and UMG will face same issue!
    ….unless music investors are EQUALLY STUPID to music industry under UMG leadership!!!

    • Avatar
      Chum

      Exactly.

      Younger generations have grown up with the idea that recorded music has no value, or is incredibly, ridiculously cheap. A small monthly fee should give me access to all of the music in the world (that I want)! This sense of entitlement is perhaps the biggest obstacle to getting those who deserve it – artists and performers – paid fairly.

      Right now the industry (which has always functioned in a way to screw artists as much as possible) is keyed toward grabbing every penny they can for themselves so that they can survive. They’re afraid, I’m sure, that if the current delivery mechanisms such as Spotify raise their prices, piracy will just increase.

      I don’t know what the answer is. I grew up buying records and tapes, and then CDs, so sure, the current system allows me to have access to lots of music for not much money. But I also try to support local musicians as much as I can – seeing shows, buying CDs or downloads, etc.