Snapchat Faces Massive Whistleblower Lawsuit for Defrauding Investors

So, does Snap have a Snapchat-like functionality that erases key user metrics forever?

Investors punished Snap following the company’s first financial report last week.  Citing weakening Snapchat daily active user growth, the company lost $2 billion for the first quarter 2017.  In after-hours trading, the company’s stock valuation went down $6 billion.

Rough week, though most analysts remained positive that Snap could turn things around.  Others saw the writing on the wall for a company getting mercilessly copycatted by Instagram.

Now, a new lawsuit may show that Snap was in worse shape than previously reported.

Anthony Pompliano served as Snap’s growth ficer for three weeks in 2015.  He first brought a lawsuit against Snapchat’s parent company in January.  Pompliano claimed that the company “falsely misrepresented” several Snapchat’s key user metrics to attract outside investors.

Snap, he claims, hired him away from Facebook to gain inside information on the social networking giant.  Following his dismissal, the company conducted a smear campaign to ruin his reputation and career.  Filed in California, the lawsuit stated,

“Snapchat will not let anything stand in its way an IPO, including its obligations to represent material facts accurately.”

Snap defended itself from Pompliano’s allegations, calling them baseless.  The company said that the allegations were “totally made up by a disgruntled former employee.”

Now, Pompliano has transferred his suit to a federal court.  Filed Tuesday at the US District Court California, the lawsuit demands a trial by jury.  Pompliano also demands at least $10 million in damages.  It names CEO Evan Spiegel, Director Revenue Brian Thiesen, and Chief Strategy Officer Imran Khan as defendants.

Back in April, Snapchat unsealed Pompliano’s originally redacted lawsuit, per Pompliano’s request.  They claimed then that they “had nothing to hide” and called the lawsuit a “big publicity stunt.”

For the federal lawsuit, Pompliano added slides from a presentation he supposedly showed Spielgel and other key executives.  Key allegations against the company include:

  1. Khan asked Pompliano to violate his non-solicitation and non-compete agreement with Facebook.
  2. Snap actually had 80 million daily active users. But Snapchat told investors that it had reached 100 million.
  3. Snapchat’s executive management team misrepresented potential user registration numbers.  They claimed that 87% users completed the registration process.  The true number came closer to less than 40%.
  4. The company exaggerated the app’s retention rate after sign-up. Snap claimed a 40% retention rate. They hid the actual number: around or slightly above 20%.
  5. Snapchat’s growth rate was ten flat or ranged from 1% to 4% per quarter. However, it told investors that the app experienced double-digit growth.
  6. Pompliano shared his idea with Spiegel: Snapchat should expand to international markets.  However, Spiegel told him, “This app is only for rich people.  I don’t want to expand into poor countries like India and Spain.”  He wouldn’t discuss the matter further.

Pompliano also filed for whistleblower protection as he claims that the company allegedly committed fraud against investors.

Snap has responded to the new lawsuit.  In a statement, the company told Business Insider,

“These are the same baseless claims and defective arguments, repackaged for yet another new venue.”

You can read the lawsuit below.