Facebook Inc. and the underwriters of its May 2012 initial public offering must face a class-action lawsuit by investors claiming the company misled them about its financial condition, a judge ruled.
U.S. District Judge Robert Sweet in Manhattan rejected arguments by Facebook and banks including Goldman Sachs Group Inc. that investors were adequately warned about the effect increased use of mobile devices might have on revenue. The ruling came in an opinion dated Dec. 11 that was filed publicly yesterday.
The investors, led by a group of public pension funds and an investment fund, claim the defendants, including Facebook co-founder and Chief Executive Officer Mark Zuckerberg and other company executives, overstated the prospects for earnings and growth in the mobile market before the May 2012 IPO.
The plaintiffs are seeking to proceed on behalf of investors who lost money trading in Facebook stock in connection with the offering.
The other banks seeking dismissal of the suit include Morgan Stanley and JPMorgan Chase & Co.
Sweet ruled that Facebook “used generalized and indefinite terms” in its registration and so-called free writing prospectus when describing the effect of increased mobile use on revenue. While the trend was already affecting sales, Facebook’s revenue statement failed to disclose its extent, he said.
“Facebook should have disclosed more of this relationship to investors,” Sweet said in the opinion.
Sweet is overseeing 41 suits related to Facebook, which operates the world’s biggest social network. The suits include claims against Facebook and the underwriters, suits against Nasdaq OMX Group Inc. and shareholder derivative claims against Facebook executives and directors on behalf of the company.
The case is In re Facebook Inc. IPO Securities and Derivative Litigation, 12-md-02389, U.S. District Court, Southern District of New York (Manhattan).