Social media company Facebook debuted on Wall Street to great fanfare on May 18, but following the initial public offering the company's stock has tumbled from its $38 IPO price to $32.50 as of early May 24, a more than 14 percent drop.
On the surface, it may sound to readers in Nevada like the normal up-and-down of the stock market. But a number of investors are accusing Facebook of committing fraud by concealing important information from all but some elite clients and lying on the company's IPO documents.
Several of the lawsuits contend that the banks that underwrote the IPO, including lead underwriter Morgan Stanley, lowered their forecasts for Facebook's earnings in the second quarter of 2012 and for the year overall, but only disclosed this information to a few clients. If true, a lack of transparency like this could expose Facebook to fraud liability.
One lawsuit alleges that IPO documents submitted by Facebook contained untrue statements and that the company omitted certain facts. Among the most pertinent omissions was a "severe reduction in revenue growth" according to the suit. Like in the other lawsuits, the plaintiffs contend they lost money by purchasing Facebook stock without knowing all relevant information prior to the price dropping the following week.
The suits could turn on whether the underwriters tried to defraud investors or simply did a poor job of setting the IPO price. "No one gets it perfect, as far as saying what the financial results are," said one business professor interviewed in an article about the lawsuits. He predicted that whether either Facebook or Morgan Stanley withheld information could turn out to be the key to the litigation.
Source: Christian Science Monitor, "Facebook lawsuits: Did all shareholders get same data in IPO?" Barbara Ortutay, May 24, 2012