Facebook Inc and lead underwriter Morgan Stanley were sued by shareholders who claimed they hid the social networking company's weakened growth forecasts ahead of its $16 billion initial public offering.
The lawsuit came as Facebook and the banks that took it public face questions about the IPO, which culminated in a May 18 stock market debut plagued by technical glitches.
Facebook shares fell 18.4 percent from their $38 IPO price in their first three trading days. They were up $1.08, or 3.5 percent, at $32.08 in Wednesday afternoon trading.
The lawsuit claimed that the defendants, including Facebook Chief Executive Mark Zuckerberg, Goldman Sachs Group Inc and JPMorgan Chase & Co, concealed "a severe and pronounced reduction" in revenue growth forecasts resulting from greater use of Facebook's app or website through mobile devices.
It also accused Facebook of telling its bank underwriters to "materially lower" their forecasts for the company. The lawsuit said the underwriters disclosed the lowered forecasts to "preferred" investors only, instead of all investors.
"The main underwriters in the middle of the road show reduced their estimates and didn't tell everyone," said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. "I don't think any investor in Facebook wouldn't have wanted to know that information."
Andrew Noyes, a Facebook spokesman, said: "We believe the lawsuit is without merit and will defend ourselves vigorously."
Morgan Stanley had no comment. It said on Tuesday that Facebook IPO procedures complied with all applicable regulations and were the same as in any initial offering.
The lawsuit seeks class-action status, and was filed in U.S. District Court in Manhattan. It asks for compensatory damages and other remedies.
On Tuesday, law firm Glancy Binkow & Goldberg said it filed its own Facebook lawsuit in California state court on behalf of an investor.
Nasdaq OMX Group Inc was also sued on Tuesday by an investor who claimed the exchange operator was negligent in handling orders for Facebook shares. Morgan Stanley said it is reviewing Facebook trades and would adjust prices for some retail customers who overpaid.
Research analysts at several underwriters lowered their forecasts for Facebook after the Menlo Park, California-based company in a May 9 prospectus that cautioned investors about the possible impact of users shifting to mobile platforms. Facebook said it makes little revenue from mobile ads.
The shareholders, in contrast, called the disclosures of Facebook's business risks inadequate, saying that analysts knew more about these risks and cut their business outlooks accordingly -- for the benefit of only some investors, not all.
"If Facebook told analysts to materially lower their forecasts, it should have told the entire market," said Antony Page, a professor at the Indiana University Robert H. McKinney School of Law. "We need to know what exactly was said to the analysts, and determine how different Facebook's public story was from its private story."
Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin are looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter.
BofA, BARCLAYS ALSO SUED
The New York lawsuit was brought on behalf of Dennis Palkon and Brian Roffe, who said they respectively bought 1,800 and 200 Facebook shares at the IPO price, and Jacob Salzmann, who said he paid more than $123,000 on May 18 for 2,961 shares at an average $41.77 each.
Citing people with direct knowledge of the matter, Reuters this week reported that Facebook during its IPO road show advised analysts for its underwriters to reduce their profit and revenue forecasts.
It also said underwriters Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America Corp cut their forecasts after the May 9 prospectus was filed but that these cuts were not publicly revealed before the IPO.
"If Facebook faced a known and particularly salient risk, boilerplate language would be insufficient," said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. "If Facebook told underwriters to lower their forecasts, it would certainly be material."
Bank of America and Barclays Plc are also defendants in the New York case, as are Facebook Chief Financial Officer David Ebersman and several Facebook directors.
Bank of America spokesman Bill Halldin, Barclays spokesman Mark Lane and Goldman spokesman Michael DuVally declined to comment. JPMorgan did not respond to requests for a comment.
The case is Brian Roffe Profit Sharing Plan et al v. Facebook Inc et al, U.S. District Court, Southern District of New York, No. 12-04081.
(Additional reporting by Alistair Barr in San Francisco, and Nadia Damouni and Olivia Oran in New York and Sarah N. Lynch in Washington, D.C.; Editing by Martha Graybow and Steve Orlofsky)