Start-Ups

Facebook under fire, under water: Investor lawsuits

Facebook (Nasdaq: FB) stock closed at $32 today, but that's the least of its problems. It's now besieged with lawsuits and investigations around allegations that it did not disclose negative information about future earnings to investors before it went public on May 18.

Facebook (NASDAQ FB) has worse problems than its stock price sinking well below its $38 opening price on its May 18 Initial Public Offering. This week, two class actions -- a state-filed suit in California Tuesday and a federal suit in New York today -- allege Facebook didn't tell prospective investors that it had significantly lower revenue projections than what it disclosed in its prospectus.

Facebook reps did not return calls immediately for this story, although it told Reuters today that "the lawsuit is without merit and will defend ourselves vigorously."

"The substance of both complaints is extremely similar," Silicon Valley attorney Tom Ewing told TechRepublic. Both refer to anonymously sourced reports from Reuters that claimed that lead underwriters Morgan Stanley and JP Morgan cut the earnings forecast for the company during the IPO roadshow -- but never revealed this to other investors.

"If the allegations in the complaints are true, the problem is that Facebook -- not the media -- should've alerted investors to this critical information about projected revenue, which moves markets," Ewing said. "Again, if the allegations are true, then the underwriters had information that potential investors did not. These lawsuits are first to reveal to the public financial information on Facebook that some bankers allegedly knew beforehand."

Both law firms are representing investors who purchased the stock at $38 or higher on the first day. At the close of trading, Facebook shares were at $32, 25 percent down from its high of $43 on May 18.

One plaintiff investor in the New York suit purchased 2,961 shares at nearly $41.77 each.

This graphic, from kissmetrics.com, shows ownership in Facebook pre and post its IPO on May 18.

A number of state and federal agencies reportedly also are investigating the matter, including the Securities and Exchange Commission (SEC) and the U.S. Senate Banking committee, as well as a litany of stage agencies.

Both suits are soliciting individuals to join their class actions, which specifically target: CEO Mark Zuckerberg and board members David Ebersman, David Spillane, Marc Andreesen, Erskine Bowles and Jim Bryer (an Accel Partners venture capitalist), Donald Graham, Reed Hastings (CEO, Netflix), Peter Thiel. They both also name the following underwriters of the IPO: Morgan Stanley, JP Morgan, Goldman Sachs, Merrill Lynch, Barclays Capital and others.

Both suits allege violation of securities laws. We'll update this story as it develops.

Read the entire complaints in both cases in place below.

"The fact that there are so many governmental agencies that are looking at this seriously .. in addition to the two or more suits filed Tuesday and today -- indicates that this is more than just the typical phenomenon of investors suing an IPOed company to make a quick buck," Ewing said.

Here is the California complaint, filed in the California Superior Court for San Mateo County, which is where Facebook is based.

[scribd id=94595460 key=key-1f880l8r0aac4ifszofh mode=list]

California Complaint against Facebook (TECHREPUBLIC)

The New York federal complaint is here.

About

Gina Smith is a NYT best-selling author of iWOZ, the biography of Steve Wozniak. She is a vet tech journalist and chief of the geek tech site, aNewDomain.net.

12 comments
da philster
da philster

Imagine thinking that buying shares at 100 times earnings in a company that doesn't actually manufacture anything will be the next "Big Score". Well yes, FB is an advertising medium. So newsflash campers - there is so much advertising around that an awful lot of people are starting to simply ignore it. There's stupendous growth in that? You didn't become rich overnight with FB? Well "Boo-Hoo!", what did you expect? So now it's everybody else's fault and your friendly litigator will make it all well. Compared to all this foolishness, Disneyland is a real place and the "Market" makes Las Vegas look like a bunch of amateurs! Interesting times indeed.......

den010
den010

They are not required to tell anything. It is the investors responsibility to dig up the issues if there is one.It is your bad if you invested and did not know what you needed to know.

wcb111
wcb111

Facebook users are redirected through a hackers network this has been going on for almost a year now and facebook and or search engines do nothing about it it is a joke I'm filing a major lawsuit next week you investors got screwed....

sysop-dr
sysop-dr

But it was common knowledge before the IPO that Facebook was not meeting income targets because they had not yet figured out how to do ads on mobile. It was all over the web for weeks. Anyone who missed it (and apparently that means people with money who apparently can't read) should lose money on this.

Bomber1JZ
Bomber1JZ

I find it more than a little suss that Zuckerberg cashed out / dumped $1 Billion worth of shares on the opening day. Isn't this the same Mark Zuckerberg that was alleged to have stolen the whole Facebook idea from his friends / schoolmates in the first place? His silence is deafing also. Well people, when these sorts of investments come along, do as Public Enemy once did and "Don't believe the hype!".

dvanduse
dvanduse

Looks like there is more than one way to make money off Facebook. If the IPO purchase doesn't work-sue because they lied.

preferred user
preferred user

what about Goldman Satan ,JP Morgan ,AIG ,etc they paid pennies on the dollar in settlements wrecked the US economy and most of the developed world with their clever ponzi schemes got a get out of jail card taxpayer bailouts and are prospering at others expense the FB thing is nothing in comparison

sperry532
sperry532

a classic Pump-and-Dump. Except it was at the IPO. There seem to be a lot of questions surrounding this whole matter. It will be interesting to hear the answers.

syedtariq25
syedtariq25

I am not an advocate or something of Facebook, but think its too early to decide that its a collapse situation. The fluctuation in stock prices is common and I expect this to be stable (or at least some favorable for share holders) in days to come. However, looking at the sudden fall of share value, $38 as an IPO was probably not a wise step.

djchillsnyc
djchillsnyc

I'm honestly amazed at How a billionaire like facebook ceo Mark,Z. , Knowing about and living through a recent historic catastrophic wall street collapse, Why?. It just boggles the mind and more because of the elite investors advantage and exploitation stradegies. Clearly It's not wise to gamble away your lifes saving and amazing money generating proven platform. Yet the most interesting thing is facebook itself, a rather large entertianment, gossip community explioting everything from street brawls to homicide; suicides and other strange anomolies. Besides all the day to day gossip, i "liked" this page myself btw; Where was everyone few years ago people lost their entire life fortunes and savings?. Didn't the wall street collasp demonstrate anything to people. These stock market guys are sinister stradegist, individuals who fill their pockets come hell or high water. Yes woe to Facebook they should've learned by now..

stevew
stevew

Of course it was. All investors are looking for is the next *big* score. They hyped FB shamelessly before the big day. Unfortunately (for them), the FB initial price was set properly and now they are infuriated they did not reap their windfall (they counted their chickens before they hatched). The stock market is just another form of gambling and they lost. Did you notice the people who did NOT buy FB stock are not whining?

mongocrush
mongocrush

Not trying to be mean but you rambled everywhere and nowhere. I totally agree with you though. Facebook owners, should have known better then to pull this stunt. And, investers should have known better then to invest in something that is unproven.

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