Netflix, known to have taken over the video rental industry with its red envelopes, now has its investors seeing red. A class-action shareholder rights lawsuit has been filed in California claiming that some of the officers and directors of Netflix disregarded its shareholder's rights by giving misleading information during most of 2011.

Specifically, the lawsuit alleges that Netflix made misleading statements about its business practices and license agreements so that its share price would be maintained at an artificially high price.

In fact, in July of 2011, Netflix shares did hit an all-time high of nearly $300 per share. During that same time period certain officers and directors also sold off hundreds of thousands of shares for almost $100 million.

At issue is whether management knew that the company's short-term content license agreements were about to expire and whether this information should have been disclosed to the public. Once these licenses expired, it became necessary for Netflix to increase Netflix's subscriber prices.

The lawsuit claims that management knew that disclosing this information would result in a drop in the value of Netflix stock, so they decided to sell off a large portion of their stake in Netflix before the price increase and corresponding drop in share prices. The price of Netflix shares plummeted by more than 75 percent in the fall of 2011, after the necessary price increase went into effect.

The focus of this shareholder rights lawsuit is whether the Netflix executives breached their fiduciary duties and injured their shareholders as a result. It is also unclear whether insider trading charges will arise out of the facts of this lawsuit.

Source: Home Media Magazine, "Class-action Lawsuit Filed Against Netflix," Erik Gruenwedel, Jan. 16, 2012