Goldman Sachs Gets to Keep Profit From Facebook IPO

  • U.S. appeals court upholds dismissal of short-swing lawsuit
  • Investors sued to force securities firms to cough up profits

Goldman Sachs Group Inc. and other underwriters in Facebook Inc.’s trouble-ridden 2012 initial public offering didn’t violate securities rules with their trades and don’t have to give up their combined $100 million in profits they made on the deal, a federal appeals court ruled.

A three-judge panel in Manhattan on Thursday upheld a 2014 decision throwing out an investor suit in which underwriters, including units of Morgan Stanley and JPMorgan Chase & Co., were accused of wrongfully cashing in on short-swing profits by using non-public information about Facebook’s finances.

As with other disputes over the Facebook IPO that have been dealt with by appeals courts and the Supreme Court, Thursday’s ruling affirms that underwriters have broad protection from liability when their IPOs encounter problems and trigger lawsuits, as long as the offerings are done in good faith. The ruling affirms that IPOs fall under an exception to a rule barring company insiders from profiting from short-swing trades.

In the latest complaint, Facebook stockholder Robert Lowinger claimed the firms were bound by the terms of lock-up agreements that restricted the trading of shares obtained before the world’s biggest social-media company went public.

The appeals court disagreed, saying the lock-up deals didn’t subject the group to federal securities law that would restrict their trading. Applying such a standard would impair the market for IPOs, the panel said.

“As parties to lock-up agreements, the underwriters are not acting as investors seeking to buy low and sell high,” the panel ruled.

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Lowinger’s lawyer Jeffrey Abraham declined to comment on the ruling when reached by phone, and didn’t say whether he’d appeal.

James Rouhandeh, a lawyer for Goldman Sachs, didn’t immediately return a call for comment. Morgan Stanley’s lawyer, Andrew Brian Clubok, declined to comment.

Facebook spokeswoman Vanessa Chan also declined to comment on the decision.

The previous lawsuits over the IPO that failed involved theories that Facebook’s officers had mismanaged the offering and that directors had engaged in insider trading. At least one other case is still pending over trading losses, with claims that Menlo Park, California-based Facebook didn’t adequately inform investors that a shift to mobile might hurt them.

Nasdaq was largely blamed for botching the IPO, and it paid more than $26 million to settle a lawsuit by retail investors. The class action against Nasdaq and its executives involved pre-IPO statements regarding the exchange’s technical capabilities as well as the failures that occurred on the day of the IPO.

The case is In Re Facebook Inc. IPO Sec, 14-3800, U.S. Court of Appeals, Second Circuit (New York).

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