On Friday, Facebook and its underwriters offered some clues
about how they intend to defend the more than 40 suits filed so
far in state and federal court that accuse them of deceiving
investors in Facebook's May 18 initial public offering. From a brief asking the Judicial Panel on Multidistrict Litigation to
consolidate the Facebook IPO securities litigation in federal
court in Manhattan, we learned, first off, who's going to be
collecting defense fees for years to come in this case. Facebook
has Willkie Farr & Gallagher and Kirkland & Ellis. (Facebook's
general counsel is an former Kirkland partner, and Kirkland has
close ties to Facebook lead underwriter Morgan Stanley.) Morgan
Stanley and Goldman Sachs are represented by Davis Polk &
Wardwell.
The brief was unusually feisty for a consolidation request,
which is usually a matter of procedural housekeeping. The
complaints filed so far against Facebook and the underwriters
center on whether the offering materials adequately disclosed
Facebook'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."
What we don't yet know, of course, is who will lead the
securities class action for the plaintiffs. (I'm talking only
about the federal-court claims against Facebook and the
underwriters under the Securities Act of 1933, not investor
cases against Nasdaq or derivative suits against Facebook's
board.) I've previously explained why the Facebook IPO cases are
such a magnet for plaintiffs' lawyers: There's strict liability
for material misstatements in offering documents under sections
11 and 12 of the Securities Act, so there's no need for
shareholders to show fraudulent intent. There's also the
potential for eye-popping damages, since investors who bought
directly from underwriters are entitled to demand that the
shares be repurchased at the offering price.
A virtual directory of the securities class action bar --
with some notable exceptions I'll talk about below -- has
already appeared in the Facebook IPO litigation. I'm not going
to name every firm that's filed a case, but here are some with
previous big-case lead counsel experience: Robbins Geller Rudman
& Dowd; Milberg; Berger & Montague; Abbey Spanier Rodd & Abrams;
Kessler Topaz Meltzer & Check; Schiffrin & Barroway; Pomerantz
Haudek Block Grossman & Gross; Kaplan Fox & Kilsheimer; Berman
DeValerio; Susman Godfrey; and Hausfeld have all signed
complaints filed in Manhattan federal court, most of which have
been transferred to U.S. District Judge Robert Sweet. Girard
Gibbs & De Bartolomeo; Wolf Haldenstein Adler Freeman & Herz;
and Hagens Berman Sobol Shapiro have filed in San Francisco
federal court, where U.S. District Judge Maxine Chesney is
overseeing the litigation.
That's an impressive list, but so far the potential lead
plaintiffs aren't so formidable. All of the federal-court suits
on file against Facebook and the underwriters are on behalf of
small investors. Facebook sold more than 421 million shares when
it went public on May 18; if you tally up the purchases by the
two dozen plaintiffs who've filed 1933 Act suits, the total
comes to fewer than 20,000 shares, and no investor who's filed a
suit bought more than 4,000 shares. Those aren't the kinds of
holdings that typically lead to lead plaintiff appointments in
megabillion-dollar cases.
But there's still about a month to go before the statutory
cutoff for lead plaintiff bids. My guess is that institutional
investors that lost big in the Facebook IPO are still talking to
plaintiffs' lawyers at firms like Bernstein Litowitz Berger &
Grossmann; Grant & Eisenhofer; Labaton Sucharow; and Cohen
Milstein Sellers & Toll -- those notable absentees I mentioned
above -- about jumping into the case. In another hot securities
class action, the case against JPMorgan for allegedly deceiving
investors about the London whale, Labaton filed the first
complaint for a big pension fund just this week, a month after
the first suit was filed. (Incidentally, I'd previously
speculated about who would be representing JPMorgan; the class
action docket indicates Sullivan & Cromwell has received that
particular plum.)
It's still early, in other words, in both the Facebook and
JPMorgan cases, with cutoffs for lead plaintiff filings not
coming until next month. I'm looking forward to some fierce lead
counsel battles.
(Reporting by Alison Frankel)
Follow us on Twitter @AlisonFrankel, @ReutersLegal | Like us on Facebook