The number of shareholders to sue is growing against Facebook after a disappointing IPO and serious allegations that can turn things upside down. A trading firm has revealed massive losses from a stock exodus and the shareholders want compensation.
The Nasdaq stock exchange also came under further pressure as a source close to the situation told Reuters that NYSE Euronext had opened discussions with Facebook about a potential stock listing there. Nasdaq also faces litigation from angry investors.
Facebook’s listing, envisioned as a crowning moment for an eight-year-old company that has become a business and cultural phenomenon, has instead turned into a legal and public relations fiasco for the company and its lead underwriter, Morgan Stanley.
Serious trading glitches interfered with the stock’s opening on Friday, and subsequent revelations by Reuters that analysts had quietly reduced their revenue forecasts prior to the IPO have led to accusations of selective disclosure of material information. The shares closed at $32 on Wednesday, 15 percent below the IPO price.
A lawsuit filed on Wednesday seeking class-action status alleged that defendants — including Facebook, its Chief Executive Mark Zuckerberg, Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co — concealed “a severe and pronounced reduction” in revenue growth forecasts resulting from greater use of Facebook’s app or website through mobile devices.
It also accused Facebook of telling its bank underwriters to “materially lower” their forecasts for the company. The lawsuit said the underwriters disclosed the lowered forecasts to “preferred” investors only.
“The main underwriters in the middle of the roadshow reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit. The firm is among the leading securities class actions firms in the country.
“I don’t think any investor in Facebook wouldn’t have wanted to know that information.”
Andrew Noyes, a Facebook spokesman, said: “We believe the lawsuit is without merit and will defend ourselves vigorously.”
Morgan Stanley had no comment. It said on Tuesday that Facebook IPO procedures complied with all applicable regulations and were the same as in any initial offering.
Also on Wednesday, Knight Capital Group Inc said its second-quarter results will be hurt by losses related to numerous issues during the listing. The firm, which provides electronic trading services to brokers and retail clients, foresees a pre-tax loss of $30 million to $35 million related to the IPO.
The company has submitted claims for financial compensation from Nasdaq OMX and is considering all legal remedies available, Knight Capital said in a regulatory filing.
Knight Capital’s announcement may be a sign of things to come as other traders and investors tally up losses from the trading problems.
Nasdaq OMX was also sued on Tuesday by an investor who claimed the exchange operator was negligent in handling orders for Facebook shares. Morgan Stanley said it is reviewing Facebook trades and would adjust prices for some retail customers who overpaid.