Morgan Stanley, Goldman Sachs Sued Over Facebook IPO

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and other underwriters along with Facebook Inc. (FB) were sued by investors who claimed they were misled in the purchase of the social network firm’s stock.

The plaintiffs, who are seeking to proceed on behalf of a class of Facebook investors, said the company and the banks didn’t disclose lower revenue estimates before the share sale. The members of the proposed class have lost more than $2.5 billion since the initial public offering last week, according to a complaint filed today in Manhattan federal court.

“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” the plaintiffs said in the complaint.

Also sued were units of Bank of America Corp. and Barclays Plc (BARC), as well as Facebook Chief Executive Officer Mark Zuckerberg and Chief Financial Officer David Ebersman.

Facebook went public at $38 a share and plunged 19 percent over two days. Facebook rose 3.2 percent, or $1, to $32 at 4:22 p.m. New York time in Nasdaq trading.

“We believe the lawsuit is without merit,” Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail. He said the company would fight the claims.

Pen Pendleton, Michael DuVally and Mark Lane, spokesmen for New York-based Morgan Stanley, New York-based Goldman Sachs and London-based Barclays, respectively, declined to comment on the lawsuit. Representatives of New York-based JPMorgan and Charlotte, North Carolina-based Bank of America didn’t immediately return calls for comment.

Revenue Growth

The complaint states that Facebook’s revenue growth is declining because its greatest expansion is coming from users of mobile devices rather than personal computers. The company hasn’t shown advertisements to people who log on through mobile applications, according to the complaint. Facebook booked 85 percent of its revenue from advertising in 2011, according to the complaint.

The banks named in the lawsuit reduced their estimates for Facebook for the second quarter and full year of 2012 and didn’t inform potential investors in presentations before the IPO, according to the complaint.

“The underwriters took down their earnings estimates dramatically during the road show and only told a select group of investors,” Samuel Rudman, a lawyer for the plaintiffs, said today in a phone interview.

Difficult Time

The plaintiffs may have a difficult time proving the case if it’s based on the presentation made to potential investors, according to a securities lawyer.

“It’s going to depend on who knew what when,” Jeremy Garvey of Buchanan Ingersoll & Rooney in Pittsburgh said in a phone interview. “The real question is, based on the final prospectus, were the statements complete and correct?” Garvey said. “If they have enough cautionary language in the prospectus, they do have a bit of a disclaimer.”

A Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock, which resulted in delays and a failure to complete customer orders.

That investor is also seeking class-action status for the lawsuit on behalf of investors who lost money because their buy, sell and cancellation orders weren’t properly processed.

The U.S. Securities and Exchange Commission has said it will review the first day of trading in Facebook shares.

The underwriter case is Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, and the Nasdaq case is Goldberg v. Nasdaq OMX Group Inc., 12-cv-04054, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Don Jeffrey in Manhattan federal court at djeffrey1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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