Mark Zuckerberg has been extremely busy with a lot happening around him, like his marriage to long-term girlfriend Priscilla Chan and the Facebook IPO. A recent report now reveals that investors have filed a class action lawsuit against Mark Zuckerberg, as they claim that he allegedly hid from most investors the fact that Facebook business model wasn’t ready to sustain enough advertising revenue to support and IPO at $38 per share. Apparently, he had the inside information about the company’s stock being overvalued. Underwriters Morgan Stanley, J.P. Morgan Chase, and Goldman Sachs warned Zuckerberg about the overvaluation of the company, even before the IPO, but apparently this information was 'selectively disclosed' only to its largest investors.
Facebook shares fell 18.4 percent from their $38 IPO price in first three trading days and went up by mere $1.08, or 3.5 percent, at $32.08 in Wednesday afternoon trading. The lawsuit claims that defendants, who include, Facebook Chief Executive Mark Zuckerberg, Goldman Sachs Group Inc. and JPMorgan Chase & Co., concealed "a severe and pronounced reduction" in revenue growth forecasts that results from greater use of Facebook's app or website through mobile devices. The lawsuit accuses Facebook of telling bank underwriters to "materially lower" their forecasts for the company, and the underwriters disclosed the lowered forecasts to "preferred" investors only, instead of all investors.
"If Facebook told analysts to materially lower their forecasts, it should have told the entire market," said Antony Page, a professor at the Indiana University Robert H. McKinney School of Law. "We need to know what exactly was said to the analysts, and determine how different Facebook's public story was from its private story."
The lawsuit seeks class-action status, and is filed in U.S. District Court in Manhattan, asking for compensatory damages and other remedies. Nasdaq OMX Group Inc. is also sued by an investor, alleging that the exchange operator was negligent in handling orders for Facebook shares. Morgan Stanley says that it is reviewing Facebook trades and would adjust prices for some retail customers who overpaid.
Underwriters Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America Corp. cut their forecasts after the May 9 prospectus was filed, which were not publicly revealed before the IPO. Bank of America and Barclays Plc. are also defendants in the New York case, as are Facebook Chief Financial Officer David Ebersman and several Facebook directors. The New York lawsuit was brought on behalf of Dennis Palkon and Brian Roffe, who said they respectively bought 1,800 and 200 Facebook shares at the IPO price, and Jacob Salzmann, who said he paid more than $123,000 on May 18 for 2,961 shares at an average $41.77 each.