Faltering Facebook IPO sparks class action
By Arthur Piper
Facebook’s initial public offering (IPO) on 18 May this year could not have seemed more Web 2.0. At 0630 that morning, the social networking business’s 28-year-old founder, Mark Zuckerberg, was already wearing his trademark hoodie. Surrounded by smiling employees from Facebook’s Menlo Park HQ in California, he triggered the remote connection that would ring the starting bell on NASDAQ’s trading floor, 3,000 miles east, on Wall Street. The world’s biggest ever technology IPO had begun.
Immediately, it ran into trouble. Technical glitches at NASDAQ meant that the stock opening took place at 1130 in New York, rather than the scheduled 1100. According to CNBC News, NASDAQ had problems delivering the so-called ‘opening print’, meaning that traders reported having difficulty cancelling or changing orders before the stock sale began.
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With an opening price of $38 per share, the stock peaked at $45, and then sank back to $38.23. When Wall Street closed that Friday, the company had sold 421.2 million shares, raised $16bn, and had a value of more than $104bn, according to Bloomberg. Apart from the initial hiccup, it had been a great success.
By Wednesday 23 May – as the price of shares slid further - retail investors began to see it differently. They filed class action complaints against Facebook – not just because of losses they claimed to have suffered from the delays on NASDAQ, but because of the way the company itself had handled the IPO process. They alleged the business had misrepresented the stock value.
‘No-one wants to be the person who didn’t buy Apple back in December 1980, But how many of these retail investors would have put their cash into a less high-profile business that could have made them more money?
John Halton
Cripps Harries Hall
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Class action plaintiffs argued that Facebook and its underwriters – including Morgan Stanley and Goldman Sachs – told only a select group of institutional investors about its weakened growth forecast.
In particular, Facebook’s defence brief shows that the majority (28) of the 40-plus actions brought against it assert that the company violated the Securities Act of 1933 by having such private discussions. Since there is strict liability for material misstatements in offering documents under sections 11 and 12 of the Securities Act, there is no need for shareholders to show fraudulent intent.
Facebook rejects these claims. Its defence brief says: ‘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.’
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In the 1990s, investors saw large falls in their IPO investments overnight |
Joost Schutte, partner at De Brauw Blackstone Westbroek in the Netherlands, says that the hype around the sale of Facebook shares was reminiscent of the bad old days of the dot-com bubble – as is the growing class action that followed the slump in the share value.
‘Investors on the retail side had a very typical dot-com bubble reaction to the sale, saying “I don’t care, I want the opportunity to invest in Facebook", but this attitude has been on the decline since 2000,’ Schutte says. ‘Perhaps people have forgotten what it was like back then.’
In the late 1990s, investors saw tumbles of 100 to 200 per cent in their IPO investments overnight. So far, the drop in Facebook shares has been modest – estimated at about 10 to 16 per cent by lawyers representing the plaintiffs.
Any payouts are likely to be modest. For example, the Thomson Reuters legal pundit Alison Frankel has calculated that the total number of shares bought by plaintiffs in the claims comes to fewer than 20,000, with no single investor holding more than 4,000. But there is time for larger investors to bring their own actions. Whatever the size of the eventual suit against Facebook, it is likely to be dwarfed by the giant multidistrict Initial Public Offering Securities Litigation, which approved the settlement of 309 class actions for about $1bn, closing in February this year.
However, what has not changed, according to John Halton, a partner in Cripps Harries Hall’s advertising, technology and media practice, is that retail investors are particularly vulnerable to the hype surrounding such exceptional, high-tech offerings. While institutions are likely to realise that they are taking a huge gamble on Facebook, they will set that off by having more secure stocks in their portfolios.
‘It’s true that no-one wants to be the person who didn’t buy Apple back in December 1980,’ Halton says. ‘But how many of these retail investors would have put their cash into a less high-profile business that could have made them more money?’
Wendy Hambleton, a partner in the capital markets practice at BDO USA, agrees that Facebook should be regarded as an exceptional IPO, but for other reasons. According to research published by BDO in mid-June – The 2012 BDO IPO Halftime Report – that single offering pushed the average value of a company going to market this year from $176m to $405m. Post-May averages are expected to be worth $221m for the rest of 2012, with Facebook stripped out.
She says the fact that Facebook’s shares didn’t double on 18 May shows that the market for internet stock has matured. ‘These companies have a lot more substance than in the dot-com years,’ Hambleton explains, ‘and they are not generally in their first round of funding.’
Although Facebook may have shaken the IPO market, most investment bankers believe that it is the uncertainties in the global economic and political landscape that will continue to depress share performance in 2012. Concerns over a dot-com style bubble are likely to be the last thing on the minds of the few technology stocks that decide to brave an IPO this year.
Arthur Piper is a freelance journalist and can be contacted at arthurpiper@btconnect.com