June 15, 2012 / 6:20 PM / 6 years ago

WRAPUP 1-Facebook sketches out IPO-mess defense; CTO departs

* Facebook cites trading glitch, oral disclosure reports
    * Defends "customary practices" on Wall Street
    * Market value has fallen by a quarter since debut
    * SEC warned Facebook on mobile - new filings

    By Basil Katz and Edwin Chan	
    NEW YORK/SAN FRANCISCO, June 15 (Reuters) - Facebook Inc
, facing a raft of lawsuits from investors seeking to
recoup losses from its botched IPO, laid out on Friday how
cascading Nasdaq trading glitches might have stoked the
confusion that marred its May 18 debut.	
    The No. 1 social network and lead underwriters Morgan
Stanley, Goldman Sachs Group Inc and JPMorgan
Chase & Co have filed a motion requesting that dozens of
shareholder lawsuits over its $16 billion initial public
offering be grouped together in Manhattan federal court.	
    The filing, while standard in cases with multiple lawsuits,
gives a glimpse at how Facebook may choose to structure its
defense and represents the social networking company's first
public response to the chaos that engulfed its high-profile
    Facebook's stock leapt 6 percent on Friday to end above $30
for the first time since May 25. It also recorded its biggest
single-day gain since it began trading, as a string of recent
improvements to its advertising system raised hopes about its 
prospects. But the eight-year-old company founded by Mark
Zuckerberg in his Harvard dorm room has shed a fifth, or $20
billion, of its value from the $38 IPO price. 	
    Despite the downward spiral, many employees made millions
with stock awards. On Friday, chief technology officer Bret
Taylor - overseer of the social network's main platform and
mobile business - announced he was leaving this summer, becoming
the first senior executive to break ranks.	
    "It's certainly a negative when so soon after the company
has gone public that key people leave," said Pivotal Research
Group analyst Brian Wieser.	
    But he said such post-IPO departures are not surprising, as
executives whose equity shares in the company have vested, cash
out and move on. 	
    "It's not something that you would take as a vote of
no-confidence" in the company, Wieser said.	
    He noted that investors are primarily concerned about
Facebook CEO Zuckerberg, Chief Operating Officer Sheryl Sandberg
and Chief Financial Officer David Ebersman.	
    Facebook's IPO was to have been the culmination of years of
breakneck growth for the cultural phenomenon. But it became
mired in controversy as more than a dozen shareholder lawsuits
accused Facebook and its underwriters of obscuring the company's
weakened growth forecasts ahead of the May 18 stock offering.	
    Nasdaq OMX Group Inc has also been sued by
investors who claimed the exchange operator was negligent in
handling orders for Facebook shares. Nasdaq spokesman Joseph
Christinat declined to comment on Friday.	
    In the motion filed late Thursday, Facebook - the first U.S.
company to debut with a market value of more than $100 billion -
defended its pre-IPO disclosures on mobile user revenue growth.
The motion cited reports that Facebook had told underwriters
about lowered revenue forecasts but not amended its prospectus.	
    Plaintiffs "ignore that what Facebook and the underwriter
defendants allegedly did both followed customary practices and
did not violate any rules," according to the motion.	
    Reuters reported on May 22 that analysts at Morgan Stanley
and other top underwriters cut their Facebook estimates just
over a week before the IPO and told some institutional investors
about the unusual step in conference calls. 	
    A series of filings on Friday revealed that the Securities &
Exchange Commission quizzed Facebook about the potential impact
of growth in mobile users in the months leading up to the social
network's initial public offering and asked the company to make
the risks plainer. 	
    "Assuming that the trend towards mobile continues and your
mobile monetization efforts are unsuccessful, ensure that your
disclosure fully addresses the potential consequences to your
revenue and financial results rather than just stating that they
'may be negatively affected,'" the SEC wrote in a Feb. 28 letter
to Facebook Chief Financial Officer David Ebersman.   	
    In court papers filed late on Thursday before the U.S.
Judicial Panel on Multi-District Litigation, Facebook and the
banks said the U.S. District Court in Manhattan was the "most
appropriate and convenient forum to oversee these coordinated
and/or consolidated proceedings."	
    Consolidating the many lawsuits leveled at Facebook may help
reduce distraction for a company struggling to convince Wall
Street it can maintain its growth rates and persuade marketers
of the benefits of advertising on a platform with 900 million
    Internet retailers at a Chicago conference last week voiced
worries about a lack of reliable data on the impact of ads on
Facebook and many said they were reluctant to switch to paid
advertising without that. General Motors upset some investors
when it announced days before Facebook's debut that it saw
little reason to pay for ads on the social network.
    In the short term, however, Facebook has to fend off
accusations it played favorites with disclosures and avoid
potentially hefty damages from irate investors who bought into a
company valued at 100 times earnings.	
    Facebook cited on Friday a series of news reports that
described how trading errors compounded uncertainty on May 18
after the start of trading in its shares was delayed by about
half an hour. 	
    The motion cited lawsuits "alleging that technical problems
and other trading-related errors affecting Facebook's stock -
which Nasdaq subsequently admitted - created market uncertainty
and caused investor losses."	
    IFR, a Thomson Reuters publication, reported on Friday that
Nasdaq was still testing for the consequences of a significant
change to its IPO procedures the evening before Facebook's
troubled debut.  	
    The change, which made compelling commercial sense for
Nasdaq and was introduced just weeks ahead of Facebook's debut,
allowed the exchange to capture orders for IPO securities from
07:00 EST on the first day of trading. The previous system only
allowed Nasdaq to capture orders in a 15-minute pre-opening
bookbuilding phase.  	
    The fact that the extra time allowed the exchange to gather
a greater number of orders that were then fed into the 15-minute
bookbuild is significant because Nasdaq acknowledges the volume
of trades during that period exposed a software glitch that
gummed up IPO trading, IFR reported.

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