Facebook, Zuckerberg, banks must face IPO lawsuit: judge

NEW YORK Wed Dec 18, 2013 6:10pm EST

Facebook CEO Mark Zuckerberg sits for audience questions in an onstage interview for the Atlantic Magazine in Washington, September 18, 2013. REUTERS/Jonathan Ernst

Facebook CEO Mark Zuckerberg sits for audience questions in an onstage interview for the Atlantic Magazine in Washington, September 18, 2013.

Credit: Reuters/Jonathan Ernst

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NEW YORK (Reuters) - Facebook Inc, Chief Executive Mark Zuckerberg and dozens of banks must face a lawsuit accusing the social media company of misleading investors about its health before its $16 billion initial public offering, a federal judge said.

In a decision made public on Wednesday, U.S. District Judge Robert Sweet in Manhattan said investors could pursue claims that Facebook should have prior to its May 2012 IPO disclosed internal projections on how increased mobile usage and product decisions might reduce future revenue.

"The company's purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialized," Sweet wrote in his 83-page decision. "Plaintiffs have sufficiently pleaded material misrepresentation(s) that could have and did mislead investors regarding the company's future and current revenues."

In a statement, Facebook said: "We continue to believe this suit lacks merit and look forward to a full airing of the facts."

Facebook went public at $38 per share. The Menlo Park, California-based company's share price rose as high as $45 on May 18, 2012, its first day of trading, but quickly fell below the offering price and stayed there for more than a year.

Investors including pension funds in Arkansas, California and North Carolina claimed that Facebook negligently concealed material information from its IPO registration statement that it had provided to its underwriters' analysts.

They sought damages resulting from their having sold or holding onto the shares as they fell below the IPO price, bottoming at $17.55 on September 4, 2012.

The lawsuit does not allege fraud. More than 40 defendants were sued, including Facebook Chief Operating Officer Sheryl Sandberg, lead underwriter Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co.

In Wednesday trading, Facebook shares closed up 71 cents at $55.57. Facebook is expected to join the Standard & Poor's 500 index after the close of trading on Friday.

FACEBOOK: LAWSUIT LACKS MERIT

In court papers, the defendants had argued that Facebook had no obligation to make the requested disclosures, which they called immaterial, and that Facebook's actual results exceeded original projections.

They added that the U.S. Securities and Exchange Commission and other courts have said revenue projections need not be disclosed before an IPO because they are "inherently speculative and unreliable."

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment.

The lead plaintiffs are represented by the law firms Bernstein Litowitz Berger & Grossmann, and Labaton Sucharow.

Both firms "are quite pleased with the thorough and detailed opinion by the court," said Thomas Dubbs, a Labaton Sucharow partner, in a phone interview. "We look forward to prosecuting this action vigorously."

Dubbs said U.S. securities laws allow damages to be pursued by IPO investors who sold shares at a loss, as well as by investors who held on while the share price remained below what it would have been absent the alleged violations.

Zuckerberg, 29, founded Facebook about a decade ago. Forbes magazine said he was worth $19 billion in September.

Sweet oversees litigation arising from the IPO, and the investor case combined 30 lawsuits brought around the country.

On Monday, the judge issued a decision that investors could also pursue claims accusing Nasdaq OMX Group Inc of concealing technology problems that led to difficulties in processing trades on Facebook's first day of trading.

He dismissed claims over Nasdaq's decision not to halt the IPO or cancel trades.

Sweet's decisions are dated December 11 but were not made public for several days.

The case is In re Facebook Inc IPO Securities and Derivative Litigation, U.S. District Court, Southern District of New York, No. 12-md-02389. (Reporting by Jonathan Stempel in New York; Additional reporting by Alexei Oreskovic; Editing by Gerald E. McCormick, Jeffrey Benkoe and Bernard Orr)

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Comments (4)
OnAnIsland wrote:
These disclosures were made, specifically on Jim Cramer’s column and included the fact that assets were unaudited, user numbers were falsified in addition to the fact that the business model was incomplete. Just because people lost money by not knowing what they were buying is no reason for a lawsuit.

Dec 18, 2013 12:02pm EST  --  Report as abuse
kevin2ia wrote:
Those involved intended to mislead, although proving this will be difficult. This is one lawsuit I would enjoy seeing succeed.

Dec 18, 2013 7:25pm EST  --  Report as abuse
At a quick glance the self evident judgment is that all companies are in constant battle to maintain their worth and worth is determined in ways that even a computer can not measure. Facebook works tirelessly to compete in the marketplace, follow user trends, forecast statistics, and ward off saboteur attacks. For an investor to feel they have been misled is that investors own foolish notion as they as investors have the same responsibility to do their own research and foster their own investment in such a way for it to be strong and on a stable path of growth.

Dec 19, 2013 12:30am EST  --  Report as abuse
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