Photo: John Disney/ALM

A group of AT&T Corp. investors has alleged in a revised lawsuit that the Dallas-based telecommunications giant and its executives ordered the creation of fake DirecTV Now accounts to mask the failure of the on-demand video streaming service.

According to an amended complaint filed last week in Manhattan federal court, AT&T management overreported the number of customers who had signed up for the company's $35-per-month product, leading investors to believe it was well-positioned to compete with cheaper online streaming services such as Netflix and Hulu.

The filing alleged a "pervasive" and "widespread" pattern at the company, where executives and others among upper echelons of AT&T management encouraged employees to create bogus DirecTV Now accounts for unwitting customers who never signed up for the service. According to the complaint, workers were directed to funnel fees from other services into the allegedly fabricated accounts, which also included fictitious email addresses so customers wouldn't know that they had been enlisted into DirecTV Now.

Meanwhile, AT&T executives, including chairman and CEO Randall Stephenson, trumpeted the service as having "caught fire" with consumers and said the doomed streaming service was experiencing strong growth following AT&T's purchase of DirecTV Group Inc. in 2015.

The new filing came on the heels of a monthslong investigation by lead plaintiffs attorneys from Pomerantz and Labaton Sucharow, which included interviews with former AT&T employees from across the country.

"While AT&T and the executive defendants repeatedly touted the success of DirecTV Now, depicting it as a fast-growing product with strong margins and brisk subscriber growth, in truth, this apparent success was a complete mirage," plaintiffs attorneys from Pomerantz and Labaton Sucharow said in the 233-page filing.

"Information provided by multiple former employees of AT&T and its affiliates from across the country collectively confirm a wide-ranging fraud, perpetrated at the highest levels of the company, as it pertains to subscriber numbers, promotional activity, customer churn, and the growth and success of DirecTV Now," the complaint said.

A spokeswoman for AT&T said the company planned to fight the "baseless" claims in court.

The amended complaint built on an initial filing in April, which alleged violations of the Securities Act of 1933 and the Exchange Act of 1934. The new complaint added named defendants to the suit and offered new theories of scheme liability, lawyers said.

According to the filing, AT&T brass pressured workers to increase sales, leading employees to slip DirecTV Now into customers' subscriptions without their knowledge. In one instance, the complaint said, salespeople were instructed to bundle up to three DirecTV Now accounts with a single mobile phone activation, sometimes creating false email addresses and running a customer's credit cards three separate times.

It wasn't until October 2018, the complaint said, that the company finally reported net subscriber additions for DirecTV were down more than 85% from previous quarters. By January 2019, AT&T acknowledged that "essentially none" of the approximately 500,000 subscribers that were given a steep discount to try DirecTV Now remained with the service, fueling a 4.3% decline in the company's stock price.

"Our complaint alleges that executive management at the very top of the company were aware and approved of the scheme to artificially boost DirecTV Now numbers by whatever means possible. This was a widespread, far-reaching fraud," Labaton Sucharow attorney Carol Villegas said in a statement.

The filing comes as AT&T is facing pressure by activist investor Elliott Management Corp. over its $49 billion takeover of DirecTV in 2015 and its $81 billion deal last year to buy Time Warner. Elliott, which took a $3.2 billion stake in AT&T, said last week in a 23-page letter to the AT&T board that it questioned AT&T's long-term strategy and ability compete for advertising dollars with other deep-pocketed streaming rivals.

Elliott said it would be pushing for additional seats on AT&T's board but stopped short of calling on Stephenson to step down as chief executive.

The lawsuit, filed in U.S. District Court for the Southern District of New York, has been to U.S. District Judge Jesse M. Furman.

The case is captioned Gross v. AT&T.