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On May 18th, Facebook was able to raise over $16 billion in its initial public offering (“IPO”). The money that Facebook was able to raise during its IPO made it the second largest IPO in U.S. history. Facebook’s revenue for 2011 was $3.7 billion and it had a net profit of $1 billion, but the investment banks that helped Facebook go public valued the company at $104 billion. Facebook was listed on the NASDAQ stock exchange at $38. After its first full week of trading, Facebook is now trading at $31.91 (down 18.7% from its opening).
Now, shareholders have filed a lawsuit against Facebook, its CEO Mark Zuckerberg, and Facebook’s underwriter’s Morgan Stanley, Goldman Sachs, and JP Morgan Chase. The shareholders filed their suit in Manhattan, where the NASDAQ is listed, and they are seeking class action status. The lawsuit claims that the defendants concealed a “pronounced reduction” in revenue growth forecasts, and that Facebook told its underwriters to “materially lower” their forecasts for the company. The lawsuit goes on to claim that the underwriters revealed the lowered forecasts to certain preferred investors, but not to all investors.
Research analysts at several underwriters lowered their forecasts in a May 9 prospectus to investors cautioning against the possible impact of users shifting to mobile platforms because Facebook does not make much money from mobile ads. Shareholders are calling Facebook’s disclosures of business risks inadequate. Shareholders believe that analysts knew more about these risks and cut their outlooks accordingly, but only to the benefit of some investors. Facebook plans to defend the lawsuit vigorously and claims that the suit is without merit. Of course, if it turns out to be true there may be a colorable claim against Facebook for breaching its duty to its shareholders.
I think that with three major underwriters, and one of the biggest public offerings in history, it is likely that Facebook and the investment banks that brought it to market dotted all their “i’s” and crossed all their “t’s.” Additionally, it is hard to project the growth of a company like Facebook. Facebook is in uncharted waters. While its revenue is being compared to Google, LinkedIn, and Apple, Facebook has a business model unlike any of these companies. Facebook has the potential to tap into targeted advertising markets in ways that no company ever has. It sounds to me like shareholders were upset that the stock they bought did not double or triple in price in the first week, as some people expected. In today’s litigious society this lawsuit sounds to me like a way to recoup on an investment that shareholders are beginning to question. What do you think?
– Talor Bearman
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