updated 04:52 pm EDT, Wed May 23, 2012
Suit alleges insufficient warning on earnings estimate reductions
The imbroglio over Facebook's initial public offering continued today with the announcement of a class-action lawsuit alleging wrongdoing on the part of Facebook and its underwriters. The lawsuit, filed in Manhattan federal court, claims that Facebook, Morgan Stanley, Goldman Sachs, and JPMorgan Chase, among others, misled investors and caused them to lose more than $2.5 billion in the wake of the IPO. As Bloomberg reports, the plaintiffs have yet to specify the amount sought for damages. The case comes in the wake of the revelation yesterday that the Securities and Exchange Commission will be looking into the Facebook IPO to determine whether some investors received privileged information ahead of the opening.
The new lawsuit centers on declines in Facebook's estimated revenue growth. Even as more and more users are accessing the social network from mobile devices, Facebook's ability to advertise to those users is virtually nil. While Facebook has assured investors that it will be making a push in mobile advertising, such a move has yet to materialize.
The reality of Facebook's mobile advertising difficulties led to its underwriters reducing estimates for Facebook's 2012 earnings before the IPO. The suit alleges that, as the underwriters lowered their own earnings estimates, they only informed a select few investors of these reductions, effectively giving privileged information to a handful of investors. When the stock opened, trading was chaotic before it closed back at its opening price, and the second day saw the stock drop 11 percent, partly due to technical glitches, and partly due to an initial overvaluation.
The new suit isn't the only legal action stemming from the Facebook IPO. Another class-action lawsuit seeks damages from the Nasdaq index on behalf of investors who lost money due to the aforementioned technical glitches accompanying the stock opening. Facebook itself faces additional cases, including an ongoing struggle with erstwhile strategic partner Yahoo over alleged patent infringement. The social network is also facing a $15 billion lawsuit from subscribers, who allege that the site continued to track their Internet activity even after they had indicated they did not want to be tracked.