Yelp, a site that lets consumers post reviews of local businesses, allowed fake negative reviews to remain on its website in order to extract advertising money from local businesses, according to a class action complaint filed Wednesday in San Francisco.
The lawsuit was filed on behalf of Yelp shareholders by Joseph Curry, who claims that the company’s executives misled investors about its business practices in order to inflate Yelp’s stock price.
Specifically, Curry claims that Yelp used press releases and financial statements to tout its quality “first hand reviews” as well as its algorithms that screened out unreliable postings; however, Curry claims that in reality:
Algorithms purportedly designed to screen unreliable reviews did not comprehensively do so, and instead, the Company allowed such unreliable reviews to remain prominent while the Company tried to sell services designed to suppress negative reviews or make them go away; and
A Yelp spokesperson said the company has not seen the complaint, but that it believes the allegations are false and without merit.
Yelp has faced allegations about its sales tactics in the past from small businesses upset about negative reviews. The complaint, however, does not cite any specific smoking guns, but instead relies primarily on news accounts, and points to a series of complaints lodged with the Federal Trade Commission. As such, Curry’s allegations remain unproven.
The complaint alleges Yelp violated securities law by committing “fraud on the market,” and claims that executive sold stock when the price was near a high of almost $90 in February; the price fell sharply shortly after this in light of the negative publicity surrounding the FTC complaints.
More details about Yelp’s advertising practices — including whether or not it manipulates reviews — will likely come out in the litigation process, provided the class action complaint gets traction.
Here’s a copy of the complaint with some relevant parts underlined:
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