It did not take long for plaintiffs’ lawyers to realize that there was good money to be made by complaining about the Facebook IPO – there are at least two class actions against the company and underwriters so far, not to mention other class-action lawsuits against NASDAQ for screwing up trades.
The securities-fraud lawsuits are the bigger tickets; the one filed in New York today claims $2.5bn in losses though I guess that number is down slightly today. The legal theory here is that Facebook lied in its prospectus, which would entitle buyers in the IPO to “rescission,” that is, to the right to hand their shares back to Facebook in exchange for the price they paid for them. This is a problematic theory in that the only lies that the plaintiffs point to are along the lines of:
21. With regard to the Company’s expectations for the second quarter of 2012, the Registration Statement and Prospectus stated, in pertinent part, as follows:
Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of [daily active users] increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions.
Which was a lie, according to the complaint, because:
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 …
Which … is not exactly a different thing? In other words the lies here are more … vague statements of the truth than actual lies?
But the complaint goes on, of course, to cite news reports that Facebook told its underwriters to change their projections, and that those projections were provided to some buyers but not others.* And that definitely looks shitty! I’m not sure that lowering projections is inconsistent with what Facebook said, but it is at least shady, though maybe not illegal, though also maybe illegal. I sort of give up; this complaint seems pretty unconvincing to me but I guess the plaintiffs will have lots of opportunities to amend it whenever a new article comes out so I’d rather not handicap their chances.
Stock-drop lawsuits like these are pretty automatic – the same lawyers who are suing Facebook today also recently sued JPMorgan for keeping a rogue whale on staff and Walmart for bribing everyone in Mexico – and often viewed as pretty socially wasteful. The problem, ordinarily, is that the winners and losers are the same: a stock drops because a company has bad news that it maybe could have done a better job disclosing; a law firm sues the company on behalf of the shareholders who wish they’d known about the news; the suit is settled, with a settlement more or less paid by the company. The money comes from shareholders (via their ownership in the company), and goes to shareholders (via their class action status), with the plaintiffs’ lawyers just taking a big cut out in the middle. In theory these lawsuits deter misconduct, but since settlements are normally paid by companies (or by D&O insurers whose premiums are paid by companies, or by underwriters who have indemnification agreements with the issuers), that theory is maybe a bit remote.
Here, though, you could criticize the lazy complaint, but the potential flow of funds at least makes sense. Facebook remains 85% owned by insiders, some of whom (Zuckerberg, Goldman Sachs) had some say in the IPO process and its attendant failings, others of whom didn’t but still benefited by a process that, if you believe everything you read, concealed one or two warts in the company’s business model and prospects. Matt Yglesias is not wrong:
The thing of it is that Zuckerberg did in fact succeed at selling [$16bn of stock at a $104bn valuation]. Yes, the stock isn’t worth that much anymore. But that just goes to show that after maximizing his control over Facebook and thumbing his nose at the Wall Street game he nonetheless managed to hustle Wall Street for maximum money. Sure underwriters like a nice post-IPO “pop” that lets them reward key clients, but for people making the initial sales an anti-pop is ideal. It means no money was left on the table. Or, rather, it means that negative money was left on the table. And why should he care what happens here on out?
Maybe he should care because he’s only sold $1.1bn of his stock and has $19bn to go? Certainly he wants the stock to go up over time, but that doesn’t rule out an anti-pop preference: it maybe makes the next offering harder, but in general, you can see the appeal to Zuckerberg and the Facebook insiders generally in selling out at a local maximum, even if that local maximum comes shortly before disclosing weak Q2 revenue numbers. If you were a creative plaintiff’s lawyer you might even imagine that the upsizing of the secondary sale mid-roadshow had to do not only with strong demand from IPO buyers, but also with a strong sense from the secondary sellers that they were in fact top-ticking the market and so should do so in as much size as possible.
The punishment – and deterrent – for blatant top-ticking like that is that your next offering is, in theory, harder: buyers remember the fiasco that was the IPO and ask harder questions along the lines of “how do I know you’re not screwing me again.” In theory. But memories are always shorter than you expect them to be in the midst of being pissed off about a broken offering. So, I guess, why not add the additional deterrent of a multibillion-dollar lawsuit?
Brian Roffe Profit Sharing Plan v. Facebook [SDNY]
Facebook IPO Fizzle Draws Securities Suits [D&O Diary]
* Some of these citations are … hasty:
On May 19, 2012, in an article entitled “Morgan Stanley Was A Control-Freak On the Facebook IPO – And It May Have Royally Screwed Itself,” Reuters reported that “Facebook … altered its guidance for research earnings last week, during the road show, a rare and disruptive move.”
Does that sound like the Reuters headline? No? What does it sound like?