Class Action Suit Filed Against Yahoo Over “Defective” Search Ad Platform

Lerach Coughlin, a law firm with a reputation for going after companies who have allegedly engaged in financial shenanigans, has filed a class action lawsuit against Yahoo, charging "Yahoo and certain of its officers and directors with violations of the Securities Exchange Act of 1934."

Essentially, the suit claims that Yahoo’s search advertising technology was "operationally defective" and that Yahoo officials misled both advertisers and investors about the company’s advertising capabilities, especially when compared with competitors.

More on the lawsuit in this Business Wire press release or the release on the lawsuit site here. The complaint is here (PDF format).

Postscript From Danny:

From the release, I can’t help but comment on this part:

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.

Let’s be clear. Yahoo’s alleged drop in market share has nothing to do with the status of its ad platform. If that were the case — if how well ads are targeted had an impact on consumer-traffic — arguably Microsoft should be stomping all over Google and Yahoo. It is not.

Many advertisers feel that Microsoft has the most sophisticated ad platform of the big three. However, I’ve long written it has lacked that one key feature that the engineers can’t build in, consumer traffic. If no one is searching, then you can’t show them ads and make money from them.

In contrast, until recently, Yahoo was widely viewed as having the most outdated ad technology. Nevertheless, it has remained a top choice by advertisers because Yahoo has largely maintained search traffic. Search traffic stats can ne and are debated, however, this recent review from us shows Yahoo has largely held its own over the past year.

Among the key points listed as reasons for the action:

• (a) Yahoo! generated fraudulent revenue by deliberately misleading Internet advertising business customers to induce these customers to buy Yahoo! advertising products through deceptive means
   
• (b) 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
   
• (c) 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
   
• (d) Yahoo!’s advertising technology was operationally defective, causing its own advertising offerings to substantially under-perform those of its rivals
   
• (e) 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
   
• (f) Yahoo! was losing market share to Google and other Internet search providers.

I haven’t yet gone through the 54 page complaint to see the evidence listed to back some of these other claims up. Certainly Yahoo has made positive statements that it expect the new ad system to generate more revenues, yet the most recent quarter’s earnings were disappointing to some analysts.

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