Can Facebook Inc. manage another pre-trial win in litigation over the social networking giant’s bumpy initial public offering?
In a 61-page brief filed on Wednesday, Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss consolidated securities litigation over the IPO. Contrary to a slew of complaints filed by plaintiffs lawyers, they argued that Facebook adequately warned investors in the run-up to the IPO that increased mobile usage might erode ad revenue. The dismissal motion was filed jointly with Davis Polk & Wardwell, which represents Facebook’s underwriters, including lead underwriter Morgan Stanley.
After Facebook went public on May 18, 2012, its shares quickly plummeted from an offering price of $38 to $20. Plaintiffs lawyers piled on with more than 30 securities class actions, primarily alleging that Facebook and its underwriters hid that the company was losing ad revenue as users increasingly switch from PCs to mobile devices. (Unlike Facebook’s Web site, the Facebook application for smartphones didn’t run ads at the time of the IPO.)
The plaintiffs also relied heavily on press reports that Morgan Stanley and other Facebook underwriters reduced their own revenue forecasts for the company in the weeks before the IPO, and then selectively told large investors about the estimate cut. The securities class actions were consolidated before U.S. District Judge Robert Sweet in Manhattan, who named Bernstein Litowitz Berger & Grossmann and Labaton Sucharow lead counsel.
In Wednesday’s dismissal motion, Facebook and its underwriters argued that the pre-IPO was handled with great care–perhaps even more transparently and conservatively than it needed to be. According to the defense lawyers, Facebook repeatedly warned investors that mobile usage might negatively affect revenue. "What plaintiffs apparently seek is Facebook’s quantification of how the company thought increased mobile usage and product decisions might affect future revenue growth," Kirkland, Willkie, and Davis Polk wrote. "But the SEC and courts throughout the country have uniformly agreed that internal calculations and projections need not be disclosed before an IPO. . .Plaintiffs would have this Court impose–retroactively–a rule which the SEC has for decades thoughtfully rejected."
The defendants may have reason for optimism. As we explained here, Sweet seemed sympathetic to their arguments about the adequacy of Facebook’s disclosures back in February, when he dismissed without prejudice shareholder derivative claims against Facebook and the underwriters.
An oral argument on Facebook’s motion to dismiss is slated for Sept. 18. Facebook’s lead counsel is Andrew Clubok of Kirkland. Facebook’s defense lineup includes Kirkland’s Brant Bishop and Susan Engel of Kirkland, as well as Willkie’s Richard Bernstein and Todd Cosenza. The underwriter defendants’ team is led by James Rouhandeh of Davis Polk.