Facebook and banks to face lawsuit over IPO

Social networking site Facebook and dozens of banks must face a lawsuit for misleading investors about its health before its $16 billion initial public offer, reports said yesterday.

US district judge Robert Sweet in Manhattan stymied attempts by Facebook and the banks for dismissal of the case and cleared the way for action.

He said claims against the company could be pursued and the company could have disclosed internal projections on how increased mobile usage and product decisions could have hurt future cash.

In his 83-page ruling, the judge held that the company's risk warnings misleadingly claimed that mobile revenue cuts were possible when, these had, in fact, already materialised and had been a cause for worry for the firm.

Facebook said it would contest the suit, as it believed, the suit lacked merit.

Investors, which included pension funds in Arkansas, California and North Carolina, are suing for damages for having sold or holding onto the shares as they fell below IPO price, bottoming at $17.55 on 4 September 2012.

The proceedings were brought against 40 defendants, which included Facebook chief executive Mark Zuckerberg, chief operating officer Sheryl Sandberg, lead underwriter Morgan Stanley, Goldman Sachs Group and JPMorgan.

The defendants had argued in court papers that Facebook was under no obligation to make the requested disclosures, which, they termed immaterial and that Facebook's actual results exceeded original projections.

According to the US Securities and Exchange Commission and other agencies, revenue projections need not be disclosed before an IPO as they were "inherently speculative and unreliable."

Law firms Bernstein Litowitz Berger & Grossmann, and Labaton Sucharow represented the lead plaintiffs.

Reports quoted Thomas Dubbs, a Labaton Sucharow partner, as saying that both firms were quite pleased with the thorough and detailed opinion by the court and that the firm looked forward to vigorous prosecution of the action.

According to Dubbs, US securities laws allowed damages to be pursued by IPO investors who sold shares at a loss, as also by investors who held on while the share price remained below what it would have been without the alleged violations.