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Lawsuit claims Facebook hid revenue forecast reduction
A Facebook logo is seen through the windows of the NASDAQ stock exchange as people walk by in Times Square in New York. Yesterday shareholders filed a suit against Facebook and underwriters over alleged improprieties during the IPO.
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David Brancaccio: Facebook investors are suing the company claiming there were improprieties associated with its stock offering. The suit also names Zuckerberg and the main investment bank that took the company public, Morgan Stanley.
Marketplace's Scott Tong reports.
Scott Tong: The lawsuit argues that Facebook and its banking partners made a "severe and pronounced reduction" in the company's revenue forecasts but hid it from the public. In the days before the stock started trading Friday, Facebook reportedly cut its earnings outlook and told its investment banker Morgan Stanley then told its preferred investor customers. There was pessimism on the inside, and the stock tanked.
Georgetown Finance professor Jim Angel says a big question is whether Morgan Stanley misled anyone.
Jim Angel: If they're putting out projections to one set of investors that says X, and to another set of investors that say Not X, then they're in deep legal trouble.
Federal agencies are looking into the IPO, and last night Massachusetts' secretary of state said it issued a subpoena to Morgan Stanley. Angel is watching for a flurry of additional lawsuits.
Angel: And even if the evidence is really weak they'll try to use it as a legalized shake down to try to extort some money out of the company.
For its part, Morgan Stanley says its analysts did reduce their earnings views, but that it complied with all applicable regulations.
I'm Scott Tong for Marketplace.
Investors have every right to sue Facebook and the investment banks they worked with when offering the stock to the public. Hiding anything before going public is grounds for legal action. It's almost like hiding debt before going bankrupt or stealing profits from the company. When investors decide to put money in a company, its almost like a marriage if either spouse hides something monumental that can be grounds to sue and have it annulled.
