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Facebook, Morgan Stanley face class-action suit over IPO

May 23, 2012|By Jim Puzzanghera
  • A pedestrian is reflected on a window with the Facebook logo on display at the Nasdaq headquarters in New York on Friday.
A pedestrian is reflected on a window with the Facebook logo on display at… (Andrew Gombert / EPA )

WASHINGTON -- A class-action lawsuit was filed Wednesday against Facebook Inc., Morgan Stanley & Co., and the other Wall Street banks that underwrote the Facebook's initial public offering, alleging they misled most shareholders about revenue projections for the social network.

The suit, filed in federal court in New York, alleged that the IPO prospectus and registration statement were "false and misleading" and violated the Securities Act. As a result, many people who bought Facebook stock when it began trading Friday lost money as the price of the shares tumbled in recent days.

Facebook stock was up about 3% in early trading Wednesday. But its price of about $32 a share was well below its initial offering price of $38.

"To have what was perceived as a watershed IPO result in this kind of harm is deeply troubling,” said Darren Robbins, a partner in the Robbins Geller Rudman & Dow law firm, which filed the suit.

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.

The complaint focuses on what it says 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." 

San Diego-based Robbins Geller, which specializes in securities suits, recovered $7.2 billion for Enron shareholders in 2008 in the largest-ever class-action settlement.

Wednesday's suit, which seeks class-action status, names Facebook, including Chief Executive Mark Zuckerberg and Chief financial Officer David Ebersman, along with Morgan Stanley & Co., JPMorgan Securities, Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Inc., and Barclay's Capital Inc.

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.

"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs.  These procedures are in compliance with all applicable regulations," the company said. 

Morgan Stanley said that after Facebook released a revised securities filing on 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."

RELATED:

Facebook IPO flop drawing increased scrutiny

Regulators looking into Morgan Stanley role in Facebook IPO

Facebook shares fall 11% as investors question revenue prospects

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