MANHATTAN (CN) - Investors today filed a federal class action against Facebook, saying the company shared crucial information with preferred investors before the company's already contentious Initial Public Offering.
The class claims that Facebook, Mark Zuckerberg and the banks that underwrote the company's IPO downgraded earnings expectations before the offering, but shared the bad news only with "certain preferred investors," and omitted it from the registration statement and prospectus.
The class claims: "The Registration Statement and Prospectus contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and were not prepared in accordance with the rules and regulations governing their preparation."
They claim that though Facebook warned that its income from mobile apps was not as healthy as it expected, or would like, "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. And defendants failed to disclose that during the roadshow conducted in connection with the IPO, certain of the Underwriter Defendants reduced their second quarter and full year 2012 performance estimates for Facebook, which revisions were material information which was not shared with all Facebook investors, but rather, was selectively disclosed by defendants to certain preferred investors and omitted from the Registration Statement and/or Prospectus."
Lead plaintiff Brian Roffe Profit Sharing Plan and investors Jacob Salzmann and Dennis Palkon are the named plaintiffs. Defendants include Facebook and its CEO Zuckerberg, CFO David Ebersman, CAO David Spillane, six other board members, all of whom signed the registration statement, and Morgan Stanley & Co., JP Morgan Securities, Goldman Sachs, Merrill Lynch, and Barclays Capital.
After opening at $38 a share at its May 18 IPO, Facebook's share price fell by more than 18 percent in the first three days of trading, knocking billions of dollars off the company's market cap.
The complaint, filed by Samuel Rudman with Robbins Geller Rudman & Dowd, of Melville, N.Y., paraphrased up a Tuesday, May 22 Reuters article by saying that "Reuters reporters that Facebook's lead underwriters, Morgan Stanley, JP Morgan and Goldman Sachs, all cut their earnings for the Company in the middle of the IPO roadshow and that only a handful of preferred investor clients were told the news of the reduction."
Quoting that Reuters article at length, the complaint states that Facebook shares sank 10 percent below the IPO price on Monday, the second day of trading.
With the company's shares valued at $104 billion at $38 a share, a 10 percent drop would knock more than $10 billion off the company's value, according to the Reuters article.
The complaint states: "As of the date of the filing of this complaint, the 421 million shares of Facebook common stock sold in the IPO are trading at approximately $31 per share, or $7 per share below the price where plaintiffs and the class purchased $16 billion worth of Facebook stock while defendants pocketed billions of dollars. Plaintiffs and the class have suffered losses of more than $2.5 billion since the IPO."
The class seeks damages for violations of Sections 11 and 12 of the Securities Act.
On Wednesday in the same court, a single investor, Phillip Goldberg, filed a class action against the Nasdaq Stock Market, claiming it bungled and delayed transactions in the first days of the Facebook IPO. Goldberg is represented by Douglas Thompson Jr. with Finkelstein Thompson, of Washington, D.C.