Trial lawyers smell blood as furious investors begin filing suits over losses on Facebook’s disastrous $US16 billion ($A16.46 billion) IPO, with billions of dollars possibly at stake in coming litigation.
More than a half-dozen law firms specialising in investor complaints said on Wednesday they were launching class action suits against the social networking giant and its underwriters.
The suits alleged that Facebook, and Morgan Stanley, Goldman Sachs and other big Wall Street banks that distributed the shares withheld from smaller investors crucial forecasts that pointed to weaker growth for Facebook, while sharing the information with big institutional clients.
A separate lawsuit against the Nasdaq exchange said its massive technical problems on the first day of Facebook trade on Friday also resulted in losses to investors.
All told the claims could come to billions: more than $US15 billion has been wiped from the company’s value since the initial public offering gave it a market capitalisation of $US104 billion.
Facebook vehemently defended itself in its first public comment since the initial public offer (IPO), as the first suit, from the Brian Roffe Profit Sharing Plan and two other investors, was lodged in the New York District Court.
“We believe the lawsuit is without merit and will defend ourselves vigorously,” a Facebook spokesperson said.
The class-action suits all said US securities laws were violated when the company and its main IPO bankers allegedly provided information to large clients, but not others.
They “failed to disclose that during the IPO roadshow, the lead underwriters … cut their earnings forecasts and that news of the estimate cut was passed on only to a handful of large investor clients, not to the public”, said law firm Glancy Binkow & Goldberg.
On the same grounds the Massachusetts state government issued a subpoena for the lead underwriter, Morgan Stanley, over how it shared information ahead of the massive share sale.
Morgan Stanley is being blamed for cutting its own internal Facebook earnings forecasts even while supporting the company in increasing the size of the IPO by 25 per cent to 421 million shares, and raising the issue price sharply to $US38 a share.
Investors had hoped to turn quick and easy profits on the shares when they hit the market on Friday, given the lengthy buildup and how previous IPOs by tech giants like Google and LinkedIn rocketed upward.
But the launch flopped, the price barely staying up above the $US38 level in the first day of trade and then plunging 18 per cent over the next two sessions.
The price rebounded slightly in trade on Wednesday, climbing 3.2 per cent to $US32, but remained well below the $US38 that the initial IPO investors paid.
The episode cast a dark cloud over what was supposed to be the brightest market opportunity for investors in years and over a company with nearly one billion users, but which still faces questions on whether it cares what investors think.
“The Facebook debacle is coming off as an insult to individual investors. It looks like the worst of Wall Street hype with a dose of chicanery to boot,” said Dick Green at Briefing.com.
“Insiders certainly look like the winners and individual investors the losers.”
On Tuesday, Morgan Stanley insisted it followed all appropriate procedures in the IPO, including disseminating the updated Facebook filing, the “S1”, to all of the company’s institutional and retail investors.
“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,” the banks said in a statement.
As the lawyers took action in the courts, major retail brokers said they were trying to sort out investor complaints of losses caused by Nasdaq’s inability on Friday to process trading orders correctly.
“We understand that Nasdaq is working with federal regulators to determine what, if any, accommodation might be made,” Fidelity, the giant retail broker, told its clients, hinting that some compensation for losses might be available.
Regulators were also reported to be examining what happened with the underwriters, and the banking committee of the US Senate was also informally gathering information on the case.
“If true, the allegations are a matter of regulatory concern to FINRA and the SEC,” Rick Ketchum, the chief executive of the Financial Industry Regulatory Authority, said in a statement.