Lost in the economic turmoil concerning the fiscal cliff and the initial stock market rally occasioned by the compromise (notwithstanding prior assertions that this was “priced into the market already”), is the ongoing substantial litigation concerning Facebook’s May IPO.
The United States District Court (Southern District NY) finally has appointed lead counsel in the various class actions. One measure of the complexity and magnitude of the allegations: two law firms have been named lead counsel for actions under the ’33 Act and the ’34 Act, a third firm as lead counsel for securities actions against NASDAQ, and a fourth and fifth firm were approved as co-lead counsel for allegations against NASDAQ based in negligence.
The NASDAQ actions lack the juiciness of the SEC-based claims against Facebook. They are fundamentally technical, alleging improper execution and confirmation of transactions on the IPO date by reason of failed NASDAQ systems. Interestingly, some claimants had sued NASDAQ based upon traditional state law negligence, while others alleged material misrepresentations and omissions.
The sexier claims are against Facebook, based upon facts that have been generally reported. Did Facebook alter its earnings guidance at the road show and yet fail improperly to amend its SEC offering materials? Did major investment banks reduce their earnings forecast but then keep that reduction secret from all but a limited number of preferred clients?
The issues presented in the securities claims against Facebook are in many ways fundamentally directed at the efficacy of our regulatory scheme. A company involved in a huge IPO, working with major underwriting firms, and everyone represented by top-notch legal counsel, is alleged to have violated a pretty simple and fundamental rule: on the date that you go public, information about the IPO company must be both accurate and broadly disseminated.
How could these major players fail to adhere to this non-too-subtle basic rule? We are talking SEC 101 here, involving none of the subtleties that haunt asset backed securities or auction rate securities, nor involving fine line-distinctions of whether overseas payments to murky people in murky circumstances were permissible “facilitating” payments or ran afoul of the Draconian provisions of the Foreign Corrupt Practices Act.
A review of Facebook’s SEC filings reveals that the Company considers all this litigation to be without merit, and intends to vigorously defend the suits. The Company also notes pending governmental investigations concerning the IPO, and pledges cooperation with such investigations.
Allegations, no matter how widely reported or pleaded, are not proof. We do not really “know” what happened. It is unprofessional to conclude there is fire behind the smoke, although one can be tantalized by the huge quantity of that smoke. I suspect these cases will be negotiated and not tried. In a way it is a shame; one might have a voyeur’s fascination with a granular recitation of what actually happened.