Lawsuits filed around the country have accused Facebook or its underwriters of withholding information that might have affected investors’ decisions to purchase shares, especially at a price that was at the top of a range forecast in the weeks before the public offering.
"If this were just a matter of the price going down after the IPO, no one should be suing anybody,’’ said Todd Collins, a partner at the Philadelphia law firm Berger & Montague, which filed a federal lawsuit Wednesday against Facebook and its lead underwriters. “This was a matter of a breach of trust — a situation where the insiders knew things that all the rest of us didn’t know."
Collins, whose firm is known for its claims on behalf of shareholders, said he heard from dozens of disgruntled Facebook investors Thursday after the firm announced its suit. He said that because of Facebook’s huge reach the company’s stock was attractive to small, retail investors who were especially vulnerable if crucial information was withheld or selectively disclosed.
"There were a lot of people who don’t regularly invest in the stock market who wanted in here. Those people have been badly disappointed, and they’ve lost a lot of money," Collins said.
Collins said that during the middle of the company’s "roadshow" with large investors, analysts for the underwriters reduced their projections for Facebook’s earnings in coming quarters, but shared that information only with a handful of large clients.
Investment experts say it’s too soon to tell if any market rules or laws were violated, even if some investors heard more details than others. But they say that a combination of decisions by Facebook and its underwriters helped turn Facebook’s IPO from a celebration into a investment-grade buzzkill.
One was the stock price itself. As recently as May 9, Facebook had predicted an opening price between $28 and $35. A week later, it projected a range of $34 to $38. The next day, it chose the top of the range.
Another was the number of shares offered — especially those offered by venture firms and other early investors who saw the IPO as a chance to cash out.
Early this month, Facebook said it planned to offer more than 157 million shares owned by early investors, in addition to 180 million new shares. But when it raised the projected price range, it also upped the number of shares coming from early investors to 241 million — enough for a payday worth about $8 billion to $9 billion.
Experts say the aggressive pricing and extra shares both contributed to the stock’s weak opening. So did the fact that brokers reported getting a larger fraction of the shares they requested — in contrast to the hottest IPOs, where demand far exceeds supply. That undermined another factor that usually contributes to a post-IPO "pop" in share prices: demand from investors shut out of the advance subscription.
Weak demand, and a rush to the exits by IPO participants, also apparently led to a breakdown at NASDAQ, where some trades last Friday were delayed for hours.
"One of the reasons that NASDAQ couldn’t handle it is likely that original investors were trying to flip as quickly as possible," said John C. Coffee, a securities-law expert at Columbia University law school. "You’re being given free money if you get an allocation of a hot IPO."
Brokerages said they were still trying to address complaints. Morgan Stanley may even be willing to compensate some of its own investment clients if they paid more than $38 during Friday’s confusion, according to a source cited by the Associated Press. The AP said the investment bank "will make price adjustments if the clients paid too much."
Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.
