Posted May 14, 2007 3:56 pm by with 3 comments

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The law firm Lerach Coughlin has issued a press release seeking additional Yahoo share holders to join them in a class action law suit claiming the search engine misled stake holders.

The bulk of the complaint surrounds allegations that Yahoo’s ad platform has caused it to lose market share, undermining revenue.

The complaint alleges that Yahoo!’s stock rose precipitously on defendants’ positive statements concerning Yahoo!’s sales growth, record reported revenues and earnings and strong business fundamentals, which defendants stated would provide further stability and growth, reaching a Class Period high of over $43 per share on January 6, 2006. However, concealed from investors was the fact that due to operational deficiencies in its ad technology, Yahoo! was rapidly losing market share to Google and other search engines and Web destinations that would significantly undermine its revenues, earnings and value.

Additional claims include:

  1. Yahoo! generated fraudulent revenue by deliberately misleading Internet advertising business customers to induce these customers to buy Yahoo! advertising products through deceptive means; 
  2. Yahoo! made false, misleading, and deceptive representations regarding its advertising technology and products to investors and potential investors, industry analysts, and customers to increase sales and stock prices; 
  3. Yahoo!’s false, deceptive, and misleading representations were material in that they had a natural tendency to influence, or were capable of influencing, purchasing decisions, and they related to the essential characteristics, quality, and/or nature of competing products and commercial activities, including relevance, potential click-throughs and quality; 
  4. Yahoo!’s advertising technology was operationally defective, causing its own advertising offerings to substantially under-perform those of its rivals; 
  5. whereas Yahoo!’s rivals were paying high-traffic vendors to route traffic through their Web sites, Yahoo! was charging large vendors for access and was dependent on that revenue to make its revenue targets, making Yahoo!’s Web site a less desirable location for vendors to drive traffic to; and 
  6. Yahoo! was losing market share to Google and other Internet search providers.

This suit certainly seems opportunistic and I don’t see a whole lot of merit. You can’t tie Yahoo’s market share to their ad platform – maybe to Google’s growth – but not to the roll out of Panama. I’ve also not heard any comments from Yahoo (yet) that exaggerated the performance of the new search marketing platform – although others have inferred such suggestions.

In addition, who’s actually leading this complaint? Answer? No one! It appears the law firm is bringing the case forward and hoping enough people will step forward to actually give the case some teeth.

I think the key to the success of this case, will be tied to Yahoo’s Q2 and Q3 earnings. If they don’t show a positive impact from the new search platform, this case could quickly gain momentum.

SEL has more input.