* Shareholders were not materially misled, judge rules
* Netflix share price sank 76 percent as subscribers fled
By Jonathan Stempel
Aug 21 (Reuters) - Netflix Inc shareholders failed to persuade a federal judge to order the dominant U.S. video rental and streaming company to pay damages for misleading them about business prospects for its streaming operations.
U.S. District Judge Samuel Conti in San Francisco dismissed a lawsuit by shareholders led by the Arkansas Teacher Retirement System and State-Boston Retirement System on Tuesday, saying they failed to fix shortcomings in an earlier version of the suit he dismissed in February.
He said shareholders did not deserve a third chance to pursue the lawsuit, which began in January 2012, soon after Netflix suffered heavy subscriber losses, and its share price plunge.
"All of plaintiffs' allegations - new and old - depend on the tenuous theory that defendants withheld discrete and accurate financial information about streaming while also touting streaming's profitability," Conti wrote. "The court has not found this to be the case."
Stephen Tountas, a partner at Labaton Sucharow for the plaintiffs, did not immediately respond to requests for comment.
Shareholders accused Netflix of misleading them about pricing trends and the relative profitability of its streaming and DVD businesses, while insiders like Chief Executive Reed Hastings sold millions of dollars in company stock.
Netflix's share price fell 76 percent from early July to late October 2011 as the company lost 800,000 U.S. subscribers, set plans to spin off its DVD business, then quickly abandoned the idea.
Much of the decline stemmed from Hastings' decision to scrap a plan that let subscribers stream movies and receive DVDs for $9.99 per month, and instead offer separate streaming- and DVD-only subscriptions for $7.99 per month each.
Netflix later said it acted too quickly and did not explain the issue of rising costs to obtain streaming content well enough.
To keep their case alive, the shareholders cited several new statements from Hastings, other defendants and a confidential witness who they said showed Netflix knew streaming would be less profitable than advertised.
But the judge said statements such as Hastings' assertion in December 2010 that "there is no risk of a big negative thing happening to Netflix" did not support a securities fraud claim.
"Defendants made clear throughout the class period that the success of a streaming-focused business model was contingent on other factors, primarily the growth and retention of Netflix's subscriber base," he said.
Netflix reported more than 37 million streaming customers at the end of June.
Its share price has roughly tripled this year, helped by subscriber growth and its original programs, such as "Arrested Development" and "House of Cards," which last month won 14 Emmy nominations.
Netflix shares fell nearly 2 percent to $268.30 on Wednesday.
Joris Evers, a Netflix spokesman, said the company was pleased with Conti's decision.
The case is In re: Netflix Inc Securities Litigation, U.S. District Court, Northern District of California, No. 12-00225.