Facebook IPO Results in Class Action Securities Lawsuit

Posted on: May 25, 2012

Several Class Action lawsuits have been filed against Facebook, Morgan Stanley, as well as the other banks that underwrote Facebook's highly publicized IPO last Thursday. On May 18th, 421 million shares of Facebook common stock were made available to the public, making the total value of the IPO more than $16 billion.

One of these actions was filed by the Law Offices of Bernard M. Gross in the Southern District of New York on behalf of all persons who purchased Facebook common stock. That complaint alleges that the Registration Statement filed with the SEC on May 16th and the Prospectus contained untrue statements of material facts, omitted other facts necessary to make the prior statements not misleading, and were not prepared in accordance with the rules and regulations governing their preparation. Specifically, the statements at issue have to do with Facebook’s reporting of the ratio of the rate of increase of users to ads delivered, the risks associated with the growth in the use of Facebook through mobile devices, as well as their revenue reporting. The plaintiffs claim that at the time of the IPO Facebook was experiencing a severe and pronounced reduction in revenue growth due to more people accessing Facebook through mobile devices to the extent that Facebook told its underwriters to lower their revenue forecasts for 2012. They also allege that Facebook selectively disclosed revised 2nd quarter and full year 2012 performance estimates and omitted them from the Registration Statement and Prospectus.

When the suit was filed, Facebook’s stock was trading at around $31 per share and that the class has suffered losses of more than $2.5 billion since the IPO. Facebook’s stock had a mild rebound today (3.22%) but has fallen back to $32.82 in after-hours trading.

Market watchers seem to agree that the tepid response to Facebook’s IPO has its roots in the dot-com bubble of the 1990’s and its subsequent burst. Morgan Stanley declined to comment on the lawsuit, and Facebook has said that they believe the lawsuit is without merit. Both the Senate Banking Committee and the House Committee on Financial Services have announced that they will conduct inquiries into the IPO. Senator Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, issued the following statement on the matter:

“Effective capital markets require transparency and accountability, not one set of rules for insiders and another for the rest of us. There’s a lot that we don’t know about this IPO but a lot that we do. We know that the SEC must fully investigate and take appropriate action if it discovers any violations. The conduct in this highly-publicized IPO only reinforces that the Senate was mistaken in voting to remove oversight from approximately 98 percent of all IPOs—for companies making less than $1 billion per year.”

The Plaintiffs are alleging violations of Section 11, 12(a)(2), and 15 of the Securities Act.

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