Green Dot stock tumbles amid earnings reforecast

After Green Dot Corp. warned analysts and investors in its July 26, 2012, conference call about potential threats to its business model, the general purpose reloadable (GPR) prepaid card provider's stock plummeted 60 percent the following day. Green Dot stock, which had been trading in the mid $20-per-share range since March 2012, took a precipitous tumble on July 27 and ended the trading day at under $10 per share.

In the conference call, Green Dot founder and Chief Executive Officer Steve Streit said two main pressures may impact Green Dot's future revenues: increased competition and tighter fraud controls the company had instituted.

Streit expected its retailer partners would start carrying the prepaid card products of Green Dot's competitors, with some retailers making the move in late 2012. He said previous experience showed retailers that started to sell prepaid cards of Green Dot competitors resulted in decreased revenue growth year-over-year via those retailers.

Though Streit pointed out that Green Dot's history in this area is not enough to make an accurate prediction of what will happen, Green Dot wanted to take a cautious approach and disclose how sales might be impacted.

Streit said Green Dot tightened fraud controls on its GPR card in the first and second quarters of 2012. He noted that while the tighter fraud controls increased card security, it also had a negative impact on approval rates; the controls prevented more cardholders from activating the cards after purchasing them or using the cards to make purchases after they had been activated. Streit estimated the tighter fraud controls would reduce Green Dot's growth rate by between 5 percent and 10 percent.

Streit characterized the reforecast of its financial outlook as Green Dot's reaction to the natural evolution of the industry and the uncertainty that change brings.

In the wake of the reforecast, two law firms filed class-action lawsuits on behalf of Green Dot investors against the Monrovia, Calif.-based GPR card provider. The firms – the Law Offices of Howard G. Smith and Glancy, Binkow & Goldberg LLP – allege the company violated federal securities laws by offering false and misleading earnings forecasts prior to the July 26 reforecast.

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