The party is really over for Facebook. Today, not even a week after Facebook’s IPO offering last Friday, shareholders are suing the company and CEO Mark Zuckerberg, alleging that critical information was withheld from them before the company’s widely anticipated IPO, the biggest ever for a technology company.
Morgan Stanley, the lead underwriter for the IPO, has been subpoenaed by the Massachusetts securities division, over the firm’s communications with its clients. Both the US Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) may review Facebook’s offering.
The Facebook shareholders’ suit (Brian Roffe Profit Sharing Plan v. Facebook, 12-04081) was filed on Wednesday morning in US District Court in Manhattan. According to Reuters, Zuckerberg and Facebok are charged with concealing from investors “a severe and pronounced reduction” in revenue growth forecasts, due to users increasingly accessing the social media site via mobile apps:
…shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were “selectively disclosed by defendants to certain preferred investors” rather than to the public generally.
“The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result,” the complaint said.
According to CNET, there were 488 million monthly average unique users of Facebook in March. Facebook has 900 million registered users so that means over half of its members used the site via a mobile device, on which (due to its smaller size) it is simply harder to push more ads and monetize users.
Facebook’s share price opened at $38 on Friday. It fell over 18 percent on Tuesday; in early trading on Wednesday, it went back up about 3 percent, to $32.
In trying to piece together how Facebook has gone from being fêted to falling very, very far from grace, the Wall Street Journal asks whether Chief Financial Officer David Ebersman’s decision to increase the number of shares the company would offer by 25% was a misstep that “may have doomed any real chance the social-networking company had that its stock would jump on its first day of trading—a hallmark of successful IPOs.” CNET cites a report (based on information from an unnamed source) from “well-known Wall Street watcher Henry Blodget,” who “posits that a Facebook executive was responsible for telling institutional investors, but not smaller investors, about the reduction in revenue estimates.”
Maryland investor Philip Goldberg has also filed a potential class-action suit against the Nasdaq stock exchange, contending that investors lost money due to technical problems which delayed Facebook’s market debut by a half hour.
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