Facebook Inc and banks involved in the company’s IPO were sued by the social networking leader’s shareholders, who claimed the defendants hid Facebook’s weakened growth forecasts ahead of its $16-billion initial public offering.
The defendants, who also include Facebook Chief Executive Officer Mark Zuckerberg, were accused of concealing from investors during the IPO marketing process “a severe and pronounced reduction” in revenue growth forecasts, resulting from increased use of its app or website through mobile devices. Facebook went public last week.
Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co are being sued along with other underwriters. Also sued were units of Bank of America Corp and Barclays Plc and Facebook’s top executives and directors, according to the filing.
The investors said the members of a proposed class action, or group lawsuit, have lost more than $2.5 billion since the initial public offering last week, in a complaint filed on Wednesday. They claimed Facebook and the banks didn’t disclose lower revenue estimates.
The lawsuit was filed in US District Court in Manhattan on Wednesday, according to a law firm for the plaintiffs. A day earlier, a similar lawsuit by a different investor was filed in a California state court, according to a law firm involved in that case.
In the New York case, shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were “selectively disclosed by defendants to certain preferred investors” rather than to the public generally.
“The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result,” the complaint said.
Representatives of Facebook and Morgan Stanley did not immediately respond to requests for comment.
Facebook went public at $38 a share. While the stock rose 1.5 per cent and raised $16 billion in the IPO, it plunged 19 per cent over two days. On Wednesday, Facebook rose 4.7 per cent, or $1.45, to $32.45 at 10:29 a.m. New York time in Nasdaq trading.
The shares fell 18.4 per cent from their price in the first three days of trading, reducing the value of stock sold in the IPO by more than $2.9 billion.
“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” the plaintiffs said in the complaint.
Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail: “We believe the lawsuit is without merit and will defend ourselves vigorously.”
Pen Pendleton, Michael Duvally and Mark Lane, spokesmen for Morgan Stanley, Goldman Sachs and Barclays, respectively, declined to comment. Representatives of JP Morgan and Bank of America didn’t immediately return calls for comment.
The complaint states that Facebook’s revenue growth is declining because its greatest growth is coming from users of mobile devices rather than personal computers. The company hasn’t shown advertisements to people who gain access to the website through mobile applications, according to the complaint. Facebook booked 85 per cent of its revenue from advertising in 2011, according to the suit.
The banks named in the suit reduced their estimates for Facebook for the second quarter and full year of 2012 and didn’t inform potential investors in presentations before the IPO, according to the complaint.
“The underwriters took down their earnings estimates dramatically during the road show and only told a select group of investors,” Samuel Rudman, a lawyer for the plaintiffs, said on Wednesday in a telephone interview.
In a separate action, a Facebook investor sued Nasdaq OMX Group Inc yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock, which resulted in delays and a failure to complete customer orders.
The investor is seeking class-action status for the suit on behalf of investors who lost money because their buy, sell and cancellation orders weren’t properly processed.
The US Securities and Exchange Commission has said it will review the first day of trading in Facebook shares.