Facebook is facing more than 40 lawsuits filed in state and federal court that accuse the social networking site of deceiving investors in their initial public offering.
The company and its underwriters offered some clues about how they intend to defend the allegations. Facebook’s general counsel and lead underwriter Morgan Stanley will be on the defense table.
The complaints filed so far against Facebook and the underwriters center on whether the offering materials adequately disclosed the company’s declining advertising revenue prospects, given that Facebook’s oral communications with some analysts (and the analysts’ subsequent conversations with favored investors) seemed to be gloomier than the prospectus.
Facebook and the underwriters contend in Friday’s brief that the offering materials were just fine and there was nothing wrong with after-the-fact analyst buzz.
“Plaintiffs rely heavily on post-IPO articles as sources for their allegations but they ignore that what Facebook and the underwriter defendants allegedly did both followed customary practices and did not violate any rules,” the brief said. The Securities and Exchange Commission specifically exempts oral conversations from disclosure requirements, Facebook and the underwriters said, and besides, media reports before the IPO disclosed Facebook’s lowered projections.
The brief also suggests that Facebook and the underwriters (like many investors) will blame Nasdaq trading errors for the deflation in Facebook’s share price. It wasn’t the revelation of undisclosed bad news that sent the stock tumbling, the brief implies, but rather a Nasdaq-created backlog that prompted “a rash of stock sales that … drove down the price of Facebook shares.”
Be ready for a long process that will probably not find any closure to the matter for several months to come.