Facebook Inc.’s initial public offering has prompted a dash to the courthouse by plaintiffs attorneys representing shareholders who invested in the social-media giant.
Meanwhile, the company faced uncommonly swift regulatory scrutiny on multiple fronts.
At least six securities class action firms said on May 23 that they were in the process of filing lawsuits in the U.S. District Court for the Southern District of New York on behalf of Facebook shareholders.
Robbins Geller Rudman & Dowd already has filed suit, naming Facebook, its executives and the IPO’s underwriters, including Morgan Stanley, JPMorgan Chase & Co. and The Goldman Sachs Group Inc. The IPO was issued on May 18 at $38 a share, which valued Facebook at $104 billion. The plaintiffs allege that the defendants misled investors about Facebook’s financial health, resulting in the loss of billions of dollars as the stock’s price fell.
Six other law firms announced investigations into alleged wrongdoing by the same parties. Among them were Lieff Cabraser Heimann & Bernstein and Bernstein Liebhard.
On May 22, another plaintiffs shop, Los Angeles-based Glancy Binkow & Goldberg, filed a securities class action in San Mateo County, Calif., Superior Court over the Facebook IPO. The same day, Miami’s Criden & Love said it was investigating The Nasdaq OMX Group Inc.’s alleged failure to properly execute trades following the IPO.
Facebook issued a comment regarding the prospects for litigation through a spokesman: “We believe the lawsuit is without merit and will defend ourselves vigorously.”
Goldman Sachs declined to comment. Morgan Stanley said in a formal statement that its conduct had been in compliance with “all applicable regulations.” JPMorgan did not respond to requests for comment.
The plaintiffs allege that the disclosures to the public about Facebook’s business operations were insufficient, and that it should have disclosed to everyone — not just the underwriting banks that invested in the company leading up to the IPO — that analysts were aware of the risks.
The plaintiffs firms were operating under a deadline to determine which attorneys would lead the charge to pursue those claims. Under federal securities litigation rules, the law firm representing the client with the biggest potential loss serves as lead counsel, and those clients are usually institutional investors. Generally, law firms have 60 days after announcing a lawsuit to amass all potential clients.
But it’s not necessary that any of the law firms pursuing the Facebook matter have institutional investors at this point, said Kevin LaCroix, an attorney and executive vice president of OakBridge Insurance Services, a directors’ and officers’ liability insurance firm.
Robbins Geller represents the Brian Roffe Profit Sharing Plan in the New York action, but other law firms could file on behalf of consumer investors and acquire larger clients during the 60-day period, LaCroix said.
In addition, the Facebook situation is unusual in that the biggest investors in company — the underwriter banks — were those that the plaintiffs allege knew about the company’s lower value. LaCroix added, however, pension fund investors could emerge as the lead plaintiffs.
LaCroix predicted that the federal cases eventually would be consolidated before a single federal court. But the California state case may well stay there, under a quirk in securities litigation rules that provides for parallel state and federal litigation within the Ninth Circuit.
Wherever any of the cases proceed, a pivotal point is unlikely to occur until at least a year from now, LaCroix said.
“The name of the game for the plaintiffs is to get past a motion to dismiss,” he said.
Regarding scrutiny from regulators, the IPO was being probed by the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority and the state of Massachusetts. The U.S. Senate Banking, Housing, and Urban Affairs Committee and House Financial Services Committee plan to hold a hearing on it as well, according to the Associated Press.
However, securities lawyers said it was unlikely Facebook and Morgan Stanley would face serious penalties.
“It’s on the front page of the newspapers — the SEC had no choice but to launch an investigation,” said Adam Pritchard, a securities law professor at the University of Michigan Law School. “But I’m skeptical whether anything will come of it.”
When a company is publicly traded, selective disclosure is a problem, Pritchard said — but Facebook wasn’t public until May 18. Instead, the issue was whether “something in the registration statement or prospectus is misleading.” Facebook on May 9 amended its prospectus to warn of lower advertising revenue as more users access the site from mobile devices.
David Deitch, who heads the financial services practice at Ifrah Law, said regulators will look at “the quality and completeness of information available to the buying public prior to the IPO;…anything that will lead people to have a misimpression of the ultimate value of the stock.”
He, too, believes that regulators were reacting to the general outcry after Facebook share prices sank and Nasdaq technical glitches prevented traders from knowing if orders were completed.
Regulators “like big cases with a lot of zeroes,” he said. “It was in the press and people were upset, so there’s pressure — and incentive — for them to act.”
James Cox, a securities professor at Duke Law School, said via e-mail that another question may be “whether stabilization that kicked in when stock initially dropped to the offering price was guided by needs of the underwriters’ to keep their institutions into the ‘flipping’ mode, which they may not have had enough time to flip before it first slipped, then rose, then the flip, and it fell again. Hence the concern here is manipulation.”
He added that it was “very uncommon for either, let alone both [the SEC and the Financial Industry Regulatory Authority] to jump into an investigation related to an IPO.”
Robert Steinberg, co-chairman of the mergers and acquisitions group at Jeffer, Mangels, Butler & Mitchell, found the timing unusual as well. “They’re starting the investigation two or three days after the IPO,” he said. “Usually things don’t fall apart so quickly.”
Earlier IPO investigations by the SEC have more often involved abusive practices relating to the allocation of stock in “hot” IPOs, such as the $100 million settlement in 2002 by Credit Suisse First Boston Corp., or civil fraud cases, such as the NewAlliance Bancshares Inc. IPO involving illegal stock purchases.
It’s not clear who would represent Facebook and Morgan Stanley in the inquiries. Facebook turned to Fenwick & West as IPO counsel. The company and the firm did not respond to requests for comment on whether Fenwick would represent Facebook in the regulatory proceedings.
Morgan Stanley’s counsel for the IPO was Simpson Thacher & Bartlett. The company and the firm did not respond to requests for comment. In prior SEC matters, Morgan Stanley has turned to Debevoise & Plimpton and Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer.
Facebook “did everything right up until a month ago,” Steinberg said. “It’s a strange thing to see. It seems so contrary to their reputation.”