Wednesday, May 23, 2012

Facebook IPO Flop Launches Lawsuits

Last week's headlines were primarily dominated by one thing, the initial public offering of Facebook stocks. The IPO was seen as one of the biggest initial offerings ever and by far the biggest in the tech industry in years. Fast forward a few days and that stock, which was initially offered at $38, has fallen steadily and now sits down nearly 20% at $32.

The handling of the IPO has been seen by many as a major flop and by some as grounds for lawsuits. Investors have filed lawsuits against not only Facebook but the company's CEO, lead underwriters—Morgan Stanley, Goldman Sachs, and JP Morgan and now Nasdaq OMX Group Inc., the company that manages the Nasdaq exchange which handles the Facebook stock.

Shareholders Wednesday filed a class action lawsuit against Facebook, CEO Mark Zuckerberg, Morgan Stanley, Goldman Sachs, and JP Morgan. The lawsuit alleges that that Facebook executives, including Zuckerberg, CFO David Ebersman, company board members, underwriter Morgan Stanley and others intentionally hid negative views of the company's revenue growth prior to last week's IPO. The analysts at Facebook's IPO underwriters had cut their estimates for the company in the middle of the IPO roadshow, however that information was seemingly not passed down to investors.

According to several reports the information about the estimate cut was conveyed to several major institutional investors who were considering buying Facebook stock, but not to smaller investors. These estimate cuts may have influenced the investment decisions of some these major players, weakening their position on the Facebook stock, and crucially, affecting the price at which they were willing to buy. This "selective disclosure" and the possibility that it weakened the stock position is at the heart of many of the lawsuits.

At the heart of it investors feel they should have had access to the same information the major investors had. Many feel that had they had access to that information they wouldn't have taken the gamble on the stock and subsequently wouldn't have lost money.

On top of the current class action lawsuit, the IPO also is reportedly being investigated by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, an independent securities regulator. Both agencies are siding with investor and asking exactly what information was disclosed, when and to whom.

But the questions regarding the estimate and earrings cuts is hardly the only one surrounding the  Facebook IPO.

According to Bloomberg, Phillip Goldberg, a Maryland investor, filed a lawsuit against NASDAQ this week alleging that it "badly mishandled" the opening hours of the IPO, effectively making it impossible for some traders to know if they owned Facebook stock or not. In his complaint filed yesterday in Manhattan federal court Goldberg alleges that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. (SCHW) account the morning after the May 17 IPO.

He claims that he tried to make a series of buy orders online, which failed to go through at the time. Meanwhile, one of his trades was processed several hours later when Facebook's stock price had already dropped by more than $3. Goldberg believes that Nasdaq was negligent in failing to ensure trades were executed quickly and correctly, in not exercising effective quality control and in failing to oversee employees and contractors involved in executing the trades.

Goldberg is seeking unspecified damages and is seeking to move the lawsuit to class action status on behalf of investors who lost money because their buy, sell or cancellation orders for Facebook stock weren’t properly processed.

No matter how you look at it one thing is for certain, the Facebook IPO was a major disaster for everyone but Facebook's initial stock holders. The IPO netted the company a valuation in excess of $100 billion and turned several people into billionaires and several more into millionaires.

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