After months of hype when Facebook finally went public earlier this week, it was expected that either the IPO would turn out to be a cash rich ride for Facebook insiders as well as for several of its investors, or else the hype might land the shareholders in trouble. Well, even though the company is now valued at $104 Billion, the IPO might not have been such a big success story for some of Facebook’s investors.
There are reports that Facebook and its lead adviser Morgan Stanley are being sued by shareholders for concealing from them a “severe and pronounced reduction” in revenue growth forecasts. One of the most successful class action law firms in the US Robbins Geller is co-ordinating a class action lawsuit against Facebook and its bankers for misleading investors about the true state of their business while at the same time informing the company’s privileged investors about the situation at hand.
Facebook shares kept crashing on Wednesday. Touching an all time low of $30.98 on Tuesday, finally improving its position and closing at $31.87 per share. Ever since Zuckerberg rang the bells at Nasdaq Facebook’s IPO has been riddled with trouble and has not taken to the hype as expected. Opening at $38, the shares touched a high of $45 and then took a free fall. Having failed to live up to the predicted market expectations of $60 per share, Facebook and Morgan Stanley have been in the firing line since then.
The lawsuit filed in New York named Mark Zuckerberg, Marc Andreessen, Peter Thiel, Goldman Sachs, JP Morgan and Barclays Capital as defendants. And the bad news is that even more shareholder lawsuits are expected. Now the interesting point claimed by Robbins Geller in the lawsuit is that Facebook bankers and executives including founder Mark Zuckerberg met analysts and potential investors and decided to cut their forecasts for the company’s revenue growth during the middle of their IPO roadshow.
Another point that could land Morgan Stanley in trouble was reported by Reuters earlier this week that in the run-up to the IPO Morgan Stanley told some major clients that consumer internet analyst Scott Devitt had cut his revenue forecasts for the Facebook. On Tuesday Massachusetts’ secretary of commonwealth William Galvin demanded more details from Morgan Stanley and sent them a subpoena. Those of you who might have followed the dot com bubble scandal would know that as per Wall Street’s settlement with US regulators, Analysts are supposed to work independently of investment bankers but the lawsuit notes that this wasn’t the case with Facebook’s historic IPO.
Just few days back, I highlighted how Facebook was worried about the growth of its mobile users. Well it now seems that when Facebook amended its prospectus (known as an S-1 filing) and informed us all about its ever growing mobile customers and the company’s inability to properly monetize their mobile usage, Facebook might have been concealing the larger issue at hand, which was that Facebook might have been experiencing a severe and pronounced reduction in revenue growth. According to Robbins Geller’s suit :
“The true facts at the time of the IPO were that Facebook was then 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 such that the company told the underwriter defendants to materially lower their revenue forecasts for 2012,”
The suit also alleges that the defendants “selectively disclosed” to “certain preferred investors” the cuts in their own forecasts for Facebook. In response to these allegations Morgan Stanley have issued their own statement :
“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. After Facebook released a revised S-1 filing on May 9 providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of MS’s institutional and retail investors and the amendment was widely publicized in the press at the time.In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO.”
If you have the billions you might overlook the loss of a few millions, which is true in Facebook’s case, but then again this could turn out to be some serious trouble for the world’s favorite social network because the firm pursuing this lawsuit is no pushover. Just for the record Robbins Geller has an impressive track record, they have previously helped Enron investors recover over $7bn from the institutions that helped finance the Texan energy company ahead of its collapse.
It was only yesterday that I urged our readers to keep in mind that every success story has an ending or at least a decline, is this the start of either of those two for Facebook? or are we reading too much into these lawsuits, we will find out soon enough. keep watching this space for more on this new startling development.