Wednesday, Facebook’s fourth official day of trading as a public company showed an increase in stock price, and along with it came shareholder lawsuits related to Facebook's IPO, according to CBS.
The increase Wednesday was about $1/share, or 3.2%, a small consolation for disgruntled shareholders. On Friday the initial offering got off to an unexpectedly rough start and prices continued to decline on both Monday and Tuesday. The stock is currently trading nearly 16% below its $38 IPO price.
There are several issues that surrounded Friday's initial IPO as there was an intial 1/2 hour delay caused by glitches on the Nasdaq Stock Market as the market opened Friday. Further, investors accused the banks that set up the IPO of sharing important information about Facebook’s business prospects with certain clients and not others.
Accordingly, a number of shareholders who bought stock in the IPO have filed lawsuits against Facebook, its executives and Morgan Stanley, the IPO’s lead underwriter.
The issue surrounding the potential lawsuits is whether the banks informed select clients about the company's financial forecasts related to the IPO, and disclosed the forecasts to only a select group of clients.
One of the lawsuits, filed in U.S. District Court in New York, alleges that Facebook’s IPO documents contained untrue statements and failed to disclose important facts, such as a “severe reduction in revenue growth” that Facebook was experiencing at the time of the offering.
As a result, the 3 plaintiffs in the suit contend that they were damaged in the process of buying stock during the IPO.
Morgan Stanley has yet to comment, while officials at Facebook believe that the lawsuit is meritless.
Another lawsuit in San Mateo, CA similarly contends that Facebook and its underwriters misled investors. Both of the suits are seeking to become class action certified so that those misled can recover their monetary losses.
“No one gets it perfect, as far as saying what the financial results are,” said Anthony Michael Sabino, professor at John’s University’s Peter J. Tobin College of Business.
Sabino further stated that the bottom line is whether Facebook or the underwriter had material information about Facebook’s finances that it did not disclose publicly.
“At this moment, it’s still too early to say,” he said. “We don’t know enough, but this could turn out to be an issue.”
In March, Facebook began meeting with analysts at the underwriting firms, which is a routine part of the IPO process and is designed to help analysts understand the company’s business so they can make accurate financial projections.
Further, in early May, the third day of Facebook’s pre-IPO roadshow to meet with prospective investors, the company filed an amended IPO document, which stated that its mobile users were growing faster than revenue.
According to a anonymous person familiar with the matter, Facebook subsequently had another meeting with analysts and told them that based on the new information in the filings, the analysts’ forecasts should be at the low end of the range that the company gave them in their April meetings.
The person wished to remain nameless because they were not publicly authorized to discuss the matter.
Other reports indicate that Facebook was in talks with the NYSE to move its stock from the Nasdaq Stock Market after the substandard offering, according to a person familiar with the matter who also wished to remain nameless.
Nevertheless, NYSE spokesman Rich Adamonis said: “There have been no discussions with Facebook regarding switching their listing in light of the events of the last week, nor do we think a discussion along those lines would be appropriate at this time.”
As more facts come to light during the impending litigation it will become more evident as to whether the plaintiffs have viable claims against the social networking giant and its underwriters. The first step will be becoming class action certified.
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