There have been reports circling of Yelp extorting small businesses for over five years. Those anecdotal stories have never been proven in court. But after the Federal Trade Commission revealed a number of complaints, shareholders are taking the company to court, claiming Yelp artificially inflated the price of stock for its executive's benefit.

The class action lawsuit, being led by investor Joseph Curry, focuses on Yelp's "first-hand" reviews. The suit says Yelp required businesses "to pay to suppress negative reviews," and then lied about the practice.

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;



Yelp allegedly made its millions by hiding the fact that some of that money came from extorting businesses with bad reviews. And that lack of transparency allegedly allowed company insiders to earn more than $81.5 million from "insider trading proceeds."

The company's stock price climbed earlier this year following a strong financial report released in February. Many company executives then sold off portions of their stock, including CEO Jeremy Stoppelman, who made $8,493,479 from his stock sale. However, it is alleged that by not revealing the true nature of Yelp's business, the stock price was artificially high when the executives sold off their shares. So when the FTC acknowledged the thousands of complaints against the company, shareholders were left owning a tumbling stock.

On or around April 2, 2014, it was publicly disclosed and reported that the Federal Trade Commission had received more than 2,000 complaints about Yelp, many contending that Yelp would solicit businesses to buy advertisements on the Company's website and would retaliate if businesses declined by deleting positive reviews and claiming the deletions were due to an updated "automated algorithm." [...] During the Class Period, as detailed herein, defendants made false and misleading statements about the strength of the Company's business and prospects and engaged in a scheme to deceive the market. This artificially inflated Yelp's stock price and operated as a fraud or deceit on Class Period purchasers of Yelp common stock. Later, when defendants' prior misrepresentations and fraudulent conduct became apparent to the market, Yelp's stock price fell precipitously, as the prior artificial inflation came out of the stock price over time. As a result of their purchases of Yelp common stock during the Class Period, plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal securities laws.

In a statement, a Yelp spokesperson tells Valleywag that the company has not been served the lawsuit yet, but "the allegations you describe are without merit and, assuming we are served, we will vigorously contest them."

Below, the full lawsuit, with portions highlighted by Gigaom's Jeff John Roberts:

To contact the author of this post, please email kevin@valleywag.com.

Photo: AP, h/t Gigaom