Facebook shareholders have filed a class action lawsuit against the social network, as well as underwriting banks including Morgan Stanley, over its first-day trading slide, the law firm Robbins Geller Rudman & Dowd announced this morning.
The suit alleges that Facebook hid “a severe and pronounced reduction” in revenue forecasts from its investors, due to a more widespread use of Facebook via mobile devices. Yesterday, Reuters reported that some investors were shocked when lead underwriter Morgan Stanley reduced its revenue forecasts of the company shortly before Facebook’s IPO, supposedly following an amendment to its S-1 filing on May 9 over increased mobile risk.
Even more scandalous, Business Insider’s Henry Blodget reported last night that a Facebook executive actually told the underwriting banks to cut their estimates, but didn’t share that information with smaller investors. If true, Facebook could be on the hook for violating securities laws.
The situation is admittedly confusing, because Facebook’s amended S-1 was quite pessimistic about revenues from mobile devices, as we reported at the time. Since the S-1 is a public document, it’s hard to argue that Facebook was hiding anything, unless it was privately giving different information to the underwriters.
That’s exactly what the complaint alleges: That Facebook was giving even more pessimistic revenue guidance to its underwriters.
“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 … such that the Company told the Underwriter Defendants to materially lower their revenue forecasts for 2012,” the complaint reads.
The underwriters then subsequently lowered their estimates for 2012, “which revisions were material information which was not shared with all Facebook investors, but rather, was selectively disclosed by defendants to certain preferred investors.” That’s exactly how an IPO process is not supposed to work.
Meanwhile, those same underwriters earned a bonus $100 million last week by selling their extra allotment of shares in order to stabilize the price on the IPO day, an option known as the “greenshoe.” How does that work? Essentially by shorting the stock, as Reuters writer Felix Salmon explains in a lucid post on the Facebook greenshoe.
Separately, the NASDAQ has admitted that it had trouble processing all the orders for Facebook shares, delaying the opening of trading by about half an hour. That glitch has bankers hopping mad, and at least one has even sued NASDAQ over the delays.
The suit was filed in in a Manhattan U.S. District Court this morning, and it comes on the heels of a suit filed yesterday in California as well as a subpoena filed in Massachusetts yesterday. We’ve asked Facebook for further comment and will report if we hear back. Find the full complaint below.