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Snapchat In Federal Court Facing Allegations Of Lying To Investors

(Photo by Drew Angerer/Getty Images)
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Former Snapchat employee Anthony Pompliano is filing suit against the company for allegedly breaking federal whistleblower protection laws and misleading investors ahead of Snap's initial public offering. Pompliano has previously filed suit in January against the company in L.A. County Superior Court on similar claims. According to Business Insider, Pompliano is transferring this January case to federal court, and is filing for whistleblower protections under the Dodd-Frank bill.

But let's back up, first, and have a little refresher both on Snapchat and on what it means to go public.

Snapchat, of course, is a photo sharing-slash-social media app launched in late 2011, and is headed by 26-year-old CEO and co-founder Evan Spiegel. Snap Inc.'s main rival is Facebook, whose Instagram (also a photo sharing-slash-social media app) has been appropriating many all of Snapchat's features, and who has a user base that's over 10 times Snap's reported size.

And size does matter, especially if you're a start-up, and especially before you go public. When Snap Inc. began pitching themselves to investors in the lead-up to their IPO, they presented a series of numbers including Daily Active Users (DAUs), Monthly Active Users (MAUs), and growth projections to increase their valuation (about $20 billion at IPO).

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Anthony Pompliano headed Snap's growth team for three weeks in 2015—a key period during the ramp-up to the IPO—before being fired.

"Social media companies are not valued in the way traditional Industrial Age companies are valued," John Pierce, an attorney representing Pompliano's case, told LAist, citing audits of assets and other concrete metrics. "There is huge room for the manipulation of public markets [with these valuations]. Snap should do an independent third-party audit of their user numbers like Facebook and Google do."

According to the federal lawsuit, when Pompliano joined Snapchat, the growth figures Pompliano was presented were false. "Throughout the recruiting process, Snapchat represented to Mr. Pompliano that Snapchat had been experiencing double-digit, month-over-month growth in its active user base, and that it had already acquired 100 million daily active users. Both metrics were false," the federal filing states.

Pompliano further states that Snapchat was presenting these falsified metrics to investors, and that when he confronted the "highest levels" of Snap's management, he was "rebuffed."

"It also became quickly apparent that the real reason Snapchat hired Mr. Pompliano away from Facebook was not to build a growth team, but for the nefarious purpose of obtaining Facebook’s confidential and proprietary information, and enlisting Mr. Pompliano to help identify and poach key Facebook employees, notwithstanding the fact that Snapchat knew—and Mr. Pompliano repeatedly reminded them—that doing so would violate the confidentiality and non-solicitation agreements he signed with Facebook," the filing continues.

After first quarter earnings were reported last week (Snap reported a net loss of $2.2 billion), the share value plummeted some 25%.

"The company's founders walked away with hundreds-of-millions of dollars, while retail investors are under water," Pierce said. Pompliano "doesn't think that's right."

While Pompliano is seeking damages worth millions for lost salary and tarnished reputation, it should also be noted that, following his brief stint at Snapchat, Pompliano became COO at Brighten Labs, and then filed suit against that company for wrongful termination and breach of contract, notes Variety.

LAist reached out to Snap Inc., but have not heard back at time of publication.

[Update]: Snap responded to LAist citing a recent company spokesperson stating, "These are the same baseless claims and defective arguments, repackaged for yet another new venue [by Pompliano]."

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In an additional company statement emailed to LAist, a spokesperson noted in January over Pompliano's suit filed in State court, "We've reviewed the complaint, and it has no merit. The allegations are totally made up by a disgruntled former employee."

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