Facebook faces potential class actions in the future

Facebook’s staggering drop in share price following its initial public offering shook up the company, along with its image. With a reputation as a social media powerhouse, many thought that Facebook’s share price would skyrocket when the company went public. In contrast, Facebook’s stock opened at $38.89 on May 18th 2012, rose to a high of $41.68 and then closed at $38.27 on its first day of trading. The stock has been on a downfall ever since and has recently been trading fairly steadily in the low $30’s.

Capital Research & Management (CR&M) was excited about the prospect of capitalizing on the Facebook IPO up until the night before it opened, when CR&M received an underwriter’s warning of a grim outlook for Facebook’s revenue. CR&M chose to purchase less stock than originally planned, and some fund managers at CR&M chose to avoid the IPO altogether. CR&M was able to avoid significant losses thanks to the information they received from their underwriter source. Unfortunately for the small investor, the negative outlook for Facebook’s IPO was not made publicly available.

Many private investors found it unfair that they did not have access to the same information provided to large investors. In the backlash of unhappy investors, Facebook and three of the IPO underwriters, Morgan Stanley, Goldman Sachs Group Inc., and JPMorgan Chase & Co., were served with a civil lawsuit based on their failure to disclose the drop in analysts’ revenue forecasts that were made at the underwriting banks. The lawsuit is on its way to becoming a class action litigation, in which investors claim that the Facebook offering document released a week before the May 18th IPO did not accurately project the stock’s revenue forecast. Facebook and Morgan Stanley are standing behind their choices, and plan to defend themselves. J.P. Morgan and Goldman Sachs have chosen not to comment.

In addition to the troubles faced by Facebook and their underwriters, NASDAQ has come under heat. During the IPO, the exchange experienced technical issues that made it difficult for investors to sell their shares. This resulted in losses that were much higher than they should have been for some people, as they were unable to ditch the stock and watched the price drop lower and lower. This technical failure has opened the door for litigation against NASDAQ.

The controversies surrounding the Facebook IPO may signal potential roadblocks for other social media sites contemplating a public offering. Facebook is arguably the most prominent social media site, and the uncertainty of its stock price does not set a promising precedent for other social media sites planning to go public. The recently filed lawsuits are the first step in a long process of civil and potential class action litigation against Facebook. It will be interesting to track the Facebook story to see what securities class actions may result in the wake of the IPO.  With a partner like Financial Recovery Technologies, you can be sure the Facebook issue and all other securities class action trends will be closely monitored on your behalf.

Contact FRT today to find out how we stay up-to-date with all securities class actions and trends to help ensure your firm never misses a case.

To learn more about the Facebook IPO and lawsuits that have been filed, click the following links:
Some Big Firms Got Facebook Warning  – Wall Street Journal
Morgan Stanley Revisits Facebook Trades; Investors File Suit – Wall Street Journal
Securities Class Action Lawsuit Filed Against Facebook – NASDAQ