Back to top

Analyst Blog

Facebook (FB - Analyst Report) and a number of banks are likely to face a lawsuit for providing misleading information to investors prior to the social media giant’s initial public offering (IPO).

In a recent statement issued by a U.S. District Judge, it has been clearly mentioned that Facebook investors can pursue loss claims, arising from non-disclosure of some material information, related to internal projections on how an increase in mobile usage could lower revenues of the company.

U.S. Judge Robert Sweet is of the opinion that the company’s risk warnings should have included the revenue cut as it had already materialized. This according to the judge was a clear case of material misrepresentation, which misguided investors.

Facebook investors include pension funds in Arkansas, California and North Carolina, who claimed to have suffered from the concealment of the material facts by the company in the IPO registration statement distributed to underwriters' analysts.

These investors are now up against the company and seek damages resulting from the sale or holding of the shares as they fell below the IPO price and bottomed to $17.55 on Sep 4, 2012.

Although the lawsuit does not accuse the company of fraud but more than 40 defendants were sued, which include big names such as Facebook chief operating officer Sheryl Sandberg and lead underwriter Morgan Stanley (MS - Analyst Report), Goldman Sachs Group Inc. (GS - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report)).

Although Facebook stated that the lawsuit lacks merit, only time will tell whether it stands in the court of law.

Although the recent acquisition spree, addition of new features and the recently launched internet.org project go in favor of Facebook, it remains to be seen how the company handles this lawsuit and the ever increasing competition from companies such as LinkedIn Corp. (LNKD - Analyst Report) and Yelp Inc. (YELP - Snapshot Report).

Facebook currently has a Zacks Rank #3 (Hold).

Please login to Zacks.com or register to post a comment.