Snap, the maker of the disappearing SnapChat app, has been subpoenaed by the U.S. Justice Department and the Securities and Exchange Commission.
Reuters, citing Snap, reported the company said in a statement that it has provided information to the regulators’ requests for information. The subpoenas come amid a shareholder lawsuit that is ongoing in which investors contend Snap misled the public when it came to competition from Facebook-owned Instagram. Investors argued in the lawsuit that Snap was dismissive about the threat Instagram was and should have attributed the slower user growth it saw in 2016 to Instagram. In the IPO prospectus Snap warned that Instagram Stories was a copy of one of Snapchat’s main elements, but just said it “may be directly competitive,” reported Reuters.
Snap told Reuters it thinks regulators are “investigating issues related to the previously disclosed allegations asserted in the class action about our IPO disclosures.” The company went on to say in the statement that while it doesn’t have complete visibility into the inquiries, “our understanding is that the DOJ is likely focused on IPO disclosures relating to competition from Instagram.” Since the company’s IPO in March, it has posted user growth that has disappointed investors and Wall Street. Snap called the lawsuit “meritless,” reported Reuters, noting it contends its pre-IPO disclosures were complete and accurate. It did tell Reuters it will continue to cooperate with the SEC and the Department of Justice.
According to the report, the shareholder complaint dealing with IPO disclosures was filed in May of last year in U.S. District Court in Los Angeles. The suit also contends Snap failed to disclose a sealed lawsuit in which a former employee claimed the company made false claims about user metrics. That lawsuit happened before the IPO, noted Reuters. The current lawsuit also contends Snap misrepresented its use of smartphone notification and other so-called growth hacking strategies to boost usage of Snapchat, reported Reuters. In June a judge denied a motion by Snap to toss the lawsuit.