Class action suit filed against Facebook, JPMorgan
SAN FRANCISCO Investor ire over "false and misleading representations and omissions" during the run-up to the $16 billion IPO, saw two lawsuits being filed by shareholders in federal district court in New York against Facebook, Nasdaq OMX Group Inc., and its underwriters.
Investors and regulators raised new concerns about the IPO after Facebook shares fell a second straight day Tuesday, extending losses to 18 per cent below the $38 offer price.
After a dismal start, in early trading Wednesday, Facebook shares were however up more than 2.6% at $31.84 after hitting a low of $31 on Tuesday.
One of the lawsuit by Brian Roffe, Jacob Salzmann and Dennis Palkon pointed to reports by news agency Reuters that Morgan Stanley and the other lead underwriters including Goldman Sachs and JPMorgan Chase Co had lowered their revenue forecasts for Facebook during the IPO roadshow, after the company amended its filings to indicate that its user growth had continued to outpace revenue growth in the second quarter.
Those estimate reductions by the underwriters were not shared widely with investors participating in the IPO last Thursday, though it remains unclear how many people had access to those reports.
"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," the lawsuit by the shareholders read.
Another law firm Lieff Cabraser, specializing in shareholder litigation, also announced a lawsuit against Facebook and its underwriters on Wednesday.
In a brief statement, Facebook spokesman Andrew Noyes said, "We believe the lawsuit is without merit and will defend ourselves vigorously."
Morgan Stanley, the lead underwriter, released a statement defending its handling of the May 17 IPO after the Massachusetts securities division Tuesday subpoenaed the investment bank over its communications with clients.
Both the US Securities and Exchange Commission and the brokerage industry's watchdog Financial Industry Regulatory Authority said they may review the offering
The company may face regulatory review over claims that an analyst shared negative news about Facebook with institutional investors before the IPO, said Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority.
Offsetting the news of the lawsuits, Laura Martin of Needham Co. initiated coverage on Facebook on Wednesday with a buy rating and $40 price target.
In a note to clients, Martin cited the 900 million monthly unique of the social networking site as a key component on how to value the stock.
Michael Holland, chairman of Holland Co., a New York- based investment firm that oversees more than $4 billion assets, however felt "the valuation was the truly unfathomable part of what's causing this frenzy."
William F. Galvin, Massachusetts' secretary of the commonwealth, said separately that his securities division subpoenaed Morgan Stanley to learn more about talks between Scott Devitt, the research analyst, and the firm's institutional investors about Facebook's revenue.
"There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook," SEC Chairwoman Mary Schapiro told reporters in Washington Wednesday.
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