Investors Sue Facebook CEO Mark Zuckerberg and Banks Over IPO

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

Facebook Inc and banks including Morgan Stanley were sued by the social networking leader's shareholders, who claimed the defendants hid Facebook's weakened growth forecasts ahead of its $16 billion initial public offering. Photo: Esther Vargas/Flickr

A group of Facebook investors accused the company and the five banks – JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America and Barclays – that “selectively disclosed” revisions to Facebook’s earnings outlook to “certain preferred investors,” reports Financial Times.

The lawsuit comes as Facebook and the banks that took it public face questions about the IPO, which culminated in a May 18 stock market debut plagued by technical glitches, according to Yahoo.

Facebook shares fell 18.4 percent from their $38 IPO price in three trading days. The shares rose 3.2 percent, or $1, to $32 at 4:22 p.m. New York time in Nasdaq trading.

The defendants, who also include Facebook Chief Executive Officer Mark Zuckerberg and Chief Financial Officer David Ebersman, were accused of concealing from investors during the IPO marketing process “a severe and pronounced reduction” in revenue growth forecasts, resulting from increased use of its app or website through mobile devices, tells The Huff Post.

The lawsuit also accused Facebook of telling its bank underwriters to “materially lower” their forecasts for the company, reports Reuters. According to the lawsuit, the underwriters disclosed the lowered forecasts to “preferred” investors only.

“The main underwriters in the middle of the roadshow 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.”

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

Morgan Stanley did not comment on the matter. On Tuesday it said that Facebook IPO procedures complied with all applicable regulations and were the same as in any initial offering.

The lawsuit was filed in U.S. District Court in Manhattan. Moreover, on Tuesday, law firm Glancy Binkow & Goldberg filed its own Facebook lawsuit in California state court on behalf of an investor.

Wednesday’s lawsuit was brought on behalf of Dennis Palkon and Brian Roffe, who said they respectively bought 1,800 and 200 Facebook shares at the IPO price, and Jacob Salzmann, who said he paid more than $123,000 on May 18 for 2,961 shares at an average $41.77 each.

The complaint claims that Facebook’s revenue growth is declining because of its greatest expansion that is coming from users of mobile devices, tells Bloomberg.

Facebook hasn’t shown advertisements to people who log on through mobile applications. Facebook booked 85 percent of its revenue from advertising in 2011, complaint says.

“The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result,” the complaint said.

“If Facebook told analysts to materially lower their forecasts, it should have told the entire market,” said Antony Page, a professor at the Indiana University Robert H. McKinney School of Law. “We need to know what exactly was said to the analysts, and determine how different Facebook’s public story was from its private story.”

Bank of America and Barclays Plc are also defendants in the New York case. Bank of America spokesman Bill Halldin, Barclays spokesman Mark Lane and Goldman spokesman Michael DuVally declined to comment on the lawsuit. JPMorgan also did not respond to requests for a comment.

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