Stephen: This whole Facebook IPO is very, very odd. Not even with what is the world’s largest customer base and the world’s most invasive marketing tools has the social networking site been able to fulfill the original public offering price.
The questions keep coming about the concealment of important information by Facebook and the underwriters as shareholders’ losses – which are in the billions – continue to rise. As does their anger and the number of calls they are making to their lawyers…
Facebook, Wall Street Banks Under Fire from Lawmakers and Lawyers
Two US congressional committees said they would conduct preliminary inquiries into Facebook’s IPO, and attorneys filed two separate lawsuits alleging that average investors were misled.
By Jim Puzzanghera and Stuart Pfeifer, Los Angeles Times – May 23, 2012
WASHINGTON — Already grappling with regulatory reviews of its troubled initial public offering, Facebook Inc. and the Wall Street banks that shepherded the deal are now under fire from lawmakers and lawyers.
Two congressional committees said Wednesday that they would conduct preliminary inquiries into the IPO. And attorneys filed two separate lawsuits alleging that average investors were misled in the days before Facebook shares began trading Friday.
“Shareholders suffered billions of dollars in losses,” said Darren Robbins, a partner in the San Diego law firm of Robbins Geller Rudman & Dow, which filed one of the suits. “To have what was perceived as a watershed IPO result in this kind of harm is deeply troubling.”
Facebook has vowed to defend itself vigorously against shareholder suits.
And the Menlo Park, Calif., company reportedly was considering moving its stock listing to the New York Stock Exchange from the Nasdaq Stock Market, whose technical glitches executing trades Friday added to the IPO’s woes.
Facebook shares rose $1 on Wednesday to close at $32, a 3.2% gain. But the shares still were trading well below the IPO price of $38.
A revised revenue forecast issued by Facebook only days before its initial public offering has become a flash point for investors, regulators and lawyers.
Robbins Geller, which recovered $7.2 billion for Enron shareholders in 2008 in the largest-ever class-action settlement, sued on behalf of three Facebook shareholders. It was the most high-profile of at least three suits seeking class-action status filed this week.
The suits alleged that Facebook Chief Executive Mark Zuckerberg and the banks underwriting the IPO concealed crucial information shortly before the social networking company went public.
The Robbins Geller lawsuit, filed in the U.S. District Court in Manhattan, accused the defendants of failing to disclose fully before last Friday’s IPO a revised forecast showing that revenue would not be growing as anticipated because users were moving to mobile devices that can’t display as many ads.
Meanwhile, regulators are examining whether investment banker Morgan Stanley, the lead underwriter, selectively informed clients of an analyst’s negative report about the company before the stock started trading.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority, the self-policing body for the securities industry, said their agencies are looking into the events surrounding the IPO. Rick Ketchum, the head of FINRA, said Tuesday that the question is “a matter of regulatory concern.”
Neither the SEC nor FINRA would provide additional details.
“Until we unwind the facts and circumstances surrounding this situation, it is inappropriate to speculate about what potential violations may have occurred,” a FINRA spokesperson said Wednesday.
The Robbins Geller suit focuses on what it alleged was the failure of the companies to disclose to all investors that Facebook was “experiencing a severe and pronounced reduction in revenue growth due to an increase of users of its Facebook app or website through mobile devices rather than a traditional PC.”
The suit alleges that Facebook had told the lead underwriters of the IPO to reduce their 2012 estimates for the company and that information was “selectively disclosed” to preferred investors and left out of the prospectus and registration statement.
“The notion that the lead underwriters would contemporaneous with a road show and a filing of the registration statement receive information and thereafter materially reduce revenue projections for the very period the IPO occurred is nothing less than shocking,” Robbins said.
“You’re telling one group of folks and giving them access to one thing while people are putting up more than $15 billion worth of cash,” he said. “There’s a reason why you have multiple investigations.”
Facebook spokesman Andrew Noyes said the company would fight the suit. “We believe the lawsuit is without merit and will defend ourselves vigorously,” he said.
A spokesman for Morgan Stanley, which has taken the most heat for the IPO’s problems, declined to comment on the suit.
But the firm addressed the suit’s main issue in a statement Tuesday, saying its procedures complied “with all applicable regulations.”
Morgan Stanley said that after Facebook released a revised securities filing May 9 “providing additional guidance with respect to business trends,” a copy was forwarded to all of the bank’s institutional and retail investors and “was widely publicized in the press at the time.”
Jill Fisch, a law professor at the University of Pennsylvania, said underwriting an IPO and analyzing its stock are supposed to be separate. But there’s no obligation for analysts to share their conclusions with everyone and often provide better information to their favored clients.
“That’s standard operating practice on Wall Street,” she said. “That’s why analysts provide information to the big institutional investors. Those are the preferred customers.”
Plaintiff attorneys may have a difficult time prevailing in the lawsuit, in part because Facebook’s registration statement disclosed that revenues were down because of customers’ increasing use of mobile devices, said Thomas Hall, who is co-head of litigation at the New York law firm Chadbourne & Parke.
“The issue in the case will be: Was that enough or do they have to make more specific disclosures?” Hall said. “It certainly is not on its face what I would call a very strong case.”
The Senate Banking Committee and House Financial Services Committee are both looking into the
Facebook IPO, though neither has started a formal investigation or set hearings, aides said.
“Effective capital markets require transparency and accountability, not one set of rules for insiders and another for the rest of us,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking subcommittee on financial institutions and consumer protection.
Brown said the SEC “must fully investigate and take appropriate action if it discovers any violations.”
SEC Chairwoman Mary Schapiro said Tuesday that there are issues related to the Facebook IPO that the agency needed to look into.
Senate Banking Committee Chairman Tim Johnson (D-S.D.) said his staff is setting up briefings with Facebook, regulators and other stakeholders.
The House Financial Services Committee staff also is gathering information about Facebook’s IPO, said Marisol Garibay, a committee spokesperson.