Shareholders sue Facebook over hidden growth forecasts

Facebook and its initial public offering (IPO) underwriters are being sued over allegedly misleading investors prior to Friday’s stock market flotation. What had been envisioned as Facebook’s next step towards worldwide domination as both a business and cultural phenomenon has backfired. Instead, it is fast turning into a legal and public relations nightmare.

The lawsuit was filed in Manhattan District Court on Wednesday on behalf of Facebook stock purchasers, who have lost up to a fifth of their money since investing. Amongst the defendants named are Facebook’s chief executive Mark Zuckerberg, Morgan Stanley, Goldman Sachs Group Inc and JP Morgan Chase.

The stockholders claim that weakened growth forecasts ahead of last Friday’s multi-billion dollar IPO were hidden by the defendants. The lawsuit claims that the underwriters were selective with the information they revealed and that they disclosed the lower forecasts only to “preferred” investors.  “The main underwriters in the middle of the roadshow reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit. 

While the IPO initially valued the social network’s stock at $104 billion, the decline has seen the value decrease by $2.9 billion in just a few days. Tuesday saw Facebook shares fall for a second day, bringing losses to 18% below the $38 offer price, raising concerns amongst investors and regulators. 

Morgan Stanley and the other underwriters, who are rumoured to have made a profit of about $100 million so far, are under pressure for their role in pricing the IPO and may face regulatory review over claims that there were negative predictions from analysts prior to the flotation. 

Antony Page, law professor at Indiana University, said: “If Facebook told analysts to materially lower their forecasts, it should have told the entire market.”

Andrew Noyes, a Facebook spokesman, said in defence: “We believe the lawsuit is without merit and will defend ourselves vigorously.” 

Meanwhile, similar lawsuits have been filed in California and another buyer is suing NASDAQ over glitches in open-day trading. Friday’s stock opening saw computers crashing due to such levels of demand. As a result, many shareholders were only able to purchase hours later, once share prices had changed. 

While Morgan Stanley is reportedly looking into reimbursing clients over Facebook trading issues, the plan to sell more Facebook shares to the public is now being reconsidered by Zuckerberg and his advisers. 

Sophie Mihell-Hale