Mad As Hell! And, See You In Court.

That didn’t take long.

Facebook Inc and Morgan Stanley, the lead underwriter of social networking company’s IPO, were sued by shareholders who claimed the defendants hid Facebook’s weakened growth forecasts ahead of its $16 billion initial public offering.

The lawsuit also names underwriters JPMorgan Chase and Goldman Sachs among others, and follows quickly on the heels of Facebook’s May 18 stock market debut, which was plagued by technical glitches.

Facebook shares fell 18.4 percent from their $38 IPO price in the first three trading days. In early afternoon trade today, Facebook shares were up 2.1 percent at $29.51.

Hey, I just lost $2 Billion. Don’t bug me with your problems!

The legal action accused the defendants, including Facebook Chief Executive Mark Zuckerberg, of concealing “a severe and pronounced reduction” in revenue growth forecasts resulting from increased use of Facebook’s app or website through mobile devices.

Facebook was also accused in the lawsuit of telling its bank underwriters to “materially lower” forecasts for the company.

“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. “I don’t think any investor in Facebook wouldn’t have wanted to know that information.”

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin have begun looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter. Busy, busy, busy. Let no self-respecting agency appear as though they aren’t busy looking into things. Problem: Horses are already gone. 

“The SEC has since the 1990s broadly condemned the trickling out of material non-public information, which would include that savvy, well-paid analysts are lowering estimates,” said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. Condemned? Or, is it actually against the law?

Syndicate banks “are on the hook in terms of liability by not making accurate, complete disclosure,” she added. “Selective disclosure of analyst outlook changes is not acceptable.” Not acceptable? Or, against the law?

Andrew Noyes, a Facebook spokesman, said: “We believe the lawsuit is without merit and will defend ourselves vigorously.”

Andrew Noyse.

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 shareholders said the disclosures about Facebook’s business risks were inadequate, and that the company should have told everyone, not just “preferred” investors, that analysts knew those risks and cut their business outlooks accordingly.

Should have? Or, were they bound under the law to disclose to everyone?

 

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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