Twitter Inc. (TWTR) was sued for $124 million by two financial firms that claim the Internet company engineered a failed private sale of its shares in 2012 to strengthen its hand in preparation for its initial public offering.
The firms, Precedo Capital Group Inc. and Continental Advisors SA, sued today in Manhattan federal court, claiming Twitter fraudulently used the aborted sale, planned for as much as $278 million worth of shares, to set a $10 billion valuation for itself and a floor price for the IPO that’s just days away.
“Twitter never intended to complete the private sale of Twitter stock,” the firms said in their complaint. “Twitter’s intention was to induce Precedo Capital and Continental Advisors to create an artificial private market wherein Twitter could maintain that a private market existed at or about $19 per share for the Twitter stock.”
Twitter, based in San Francisco, is seeking as much as $1.4 billion in its IPO, which is scheduled to price Nov. 6. At the top of the proposed range, Twitter would be valued at $10.9 billion. While the company has more than doubled revenue annually, it hasn’t yet turned a profit and the pace of user growth is slowing.
“We’ve never had a relationship with these plaintiffs,” said Jim Prosser, a spokesman with Twitter. “Their claim is completely without merit.”
In their suit, Precedo Capital and Continental Advisors claim they agreed with GSV Asset Management Inc., a Woodside, California-based Twitter shareholder, to market an “@GSV Fund LP” limited partnership that was set up to buy Twitter shares from employees, contractors and early investors, with the approval of the company. The firms then set up road shows for potential investors in the U.S., Europe and Asia.
Continental Advisors, a boutique investment advisory and consultant firm based in Luxembourg, organized an 18-day international road show, involving 47 presentations in eight countries, according to the complaint. Precedo Capital, a broker-dealer firm based in Scottsdale, Arizona, made presentations in five U.S. states, according to the plaintiffs.
The two firms had gotten more than $50 million in commitments and indications of interest, they claimed. They were prevented from finalizing the transactions after GSV twice postponed closings, then canceled the offering entirely, according to the complaint.
Stephen Bard, a co-founder and partner in GSV, declined to comment on the allegations. GSV isn’t a defendant in the suit.
Precedo Capital and Continental Advisors allege that it was Twitter that prevented the deals from going forward.
“This private market transaction, which upon information and belief was interrupted by Twitter, permitted Twitter to establish a sales floor for a large amount of Twitter stock among multiple buyers, as well as a $10 billion dollar market value for Twitter, in order to use this information in negotiations with underwriters and investment banks to establish a market value of Twitter stock for filing their IPO,” Precedo Capital and Continental Advisors claimed in the complaint.
Precedo Capital and Continental Advisors claim they lost $24.2 million in fees, commissions and expenses. They’re seeking an additional $100 million in punitive damages.
Twitter’s top holders, including co-founder Evan Williams, whose stake is worth about $1 billion, are keeping their shares as the company goes public, according to a filing last week. This contrasts with Facebook Inc. (FB), whose investors such as Accel Partners and Goldman Sachs Group Inc. (GS) ended up selling more shares than initially planned in that company’s May 2012 IPO, according to filings.
Twitter’s early investors include Rizvi Traverse Management LLC, Union Square Ventures, Spark Capital and Benchmark Capital Partners LP. After the IPO is priced, executive officers, directors and existing shareholders won’t be able to sell their stock for at least six months, a standard waiting period known as a lock-up.
The case is Precedo Capital Group Inc. v. Twitter Inc., 1:13-cv-07678, U.S. District Court, Southern District of New York (Manhattan).