Facebook Misled Investors, Class Action Lawsuit Says

Facebook has been hit with another post-IPO class action lawsuit, this time by investors who claim the company and Wall Street banks underwrote Facebook’s initial public offering. The investors claim Facebook misled most shareholders about revenue projections for the social network and only shared the bad news with “certain preferred investors.”

According to the class action lawsuit, Facebook’s IPO prospectus and registration statement were “false and misleading” and violated the Securities Act. As a result, many people who bought Facebook stock when it began trading last Friday lost money as the price of the shares went down in recent days.

The crux of the class action lawsuit is the allegation that the companies failed to disclose to investors that Facebook was “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.”

The class action lawsuit further alleges that Facebook told the lead underwriters of the IPO to reduce their 2012 estimates for the company and that information was “selectively disclosed” to preferred investors and left out of the prospectus and registration statement.

After opening at $38 a share at its May 18 IPO, Facebook’s share price fell by more than 18 percent in the first three days of trading, knocking billions of dollars off the company’s market cap.

“As of the date of the filing of this complaint, the 421 million shares of Facebook common stock sold in the IPO are trading at approximately $31 per share, or $7 per share below the price where Plaintiffs and the class purchased $16 billion worth of Facebook stock while defendants pocketed billions of dollars. Plaintiffs and the class have suffered losses of more than $2.5 billion since the IPO,” the class action lawsuit states.

The proposed Facebook IPO class action lawsuit names as Defendants Mark Zuckerberg and Facebook CFO David Ebersman, along with Morgan Stanley & Co., JPMorgan Securities, Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Barclay’s Capital, Inc.

A Facebook spokesman said the company would fight the lawsuit, saying “we believe the lawsuit is without merit and will defend ourselves vigorously.”

A single investor, Phillip Goldberg, also filed a class action lawsuit this week against the Nasdaq Stock Market, claiming it mishandled and delayed transactions in the first days of the Facebook IPO, causing losses for investors. A technical glitch delayed Facebook’s market debut by roughly 30 minutes, and later delayed order confirmations.