The class-action lawsuit brought against Eros International Plc in the United States, by investors who alleged that the company had misled them regarding the potential of its movie streaming service Eros Now, has been dismissed by the United States District Court for the Southern District of New York. The court was of the view that Eros had been adequately upfront about the prospect of Eros Now, plus the difference between projections stated by the company and the actual result was minor, and definitely didn’t amount to securities fraud.
The lawsuit had been filed in November 2015 and alleged that between November 13, 2013 and November 12, 2015 Eros made misleading statements about the growth in Eros Now’s registered users without disclosing that most of them were using low-quality Internet connections that weren’t fit for streaming, and failed to disclose that Eros enriched its controlling family at the expense of shareholders through a series of related-party transactions. Other allegations included:
- The company lacked adequate internal controls.
- Eros overstated the number of movies it distributed, its theatrical revenues, financial results and operating metrics.
- The company’s financial statements were not prepared in accordance with generally accepted accounting principles.
New charges were added to the lawsuit in 2016, which alleged that Eros and certain officers and directors of the company had also violated Section 10B and 20A of the Securities Exchange Act, 1934. These have been dismissed by the court as well.
Sec. 10B. Position Limits And Position Accountability For Security-Based Swaps And Large Trader Reporting. (a) POSITION LIMITS.—As a means reasonably designed to prevent fraud and manipulation, the Commission shall, by rule or regulation, as necessary or appropriate in the public interest or for the protection of investors, establish limits (including related hedge exemption provisions) on the size of positions in any security-based swap that may be held by any person.
SEC. 20A. (a) PRIVATE RIGHTS OF ACTION BASED ON CONTEMPORANEOUS TRADING—Any person who violates any provision of this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, non-public information shall be liable in an action in any court of competent jurisdiction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securities of the same class.
Trouble began in October 2015, when Eros’ stock was downgraded by investment bank Wells Fargo, because of the company’s unexplained continued increase in revenues from the UAE. And even though Eros was quick to issue a clarification, it did little to dissuade the murmurs. Then came the series of articles published by US-based research firm Seeking Alpha, which alleged that the company overstated its revenues and theatrical releases by stretching its amortization period. Read more on the Seeking Alpha stories here, here and here. Eros issued a statement right away and called the articles by Alpha “baseless”, but didn’t provide any additional information on its theatrical releases. The lawsuit came soon after.
Eros Now subscriber growth
Last month, the company claimed that Eros Now had tripled its paid subscriber count to 2.9 million, from 1 million in early 2016. The total number of users, as opposed to paying subscribers, is 60 million, which means that 4.84% of Eros Now’s users are paying subscribers.
It’s worth noting here that the company had earlier defined what it means by a paying subscriber:
Paying subscribers means any subscriber who has made a valid payment to subscribe to a service that includes the Eros Now service either as part of a bundle or on a standalone basis, either directly or indirectly through a telecom operator or OEM in any given month be it through a daily, weekly or monthly billing pack, as long as the validity of the pack is for at least one month.
Eros Now’s library of digital film rights stands at over 10,000 films, with nearly 50% owned in perpetuity (or forever).