Last Friday, Facebook’s board approved a new class-Action lawsuit that could have a huge impact on future IPO deals. The Class Action Lawsuit complaint was brought forward by a group of Facebook shareholders who claimed they were duped into buying shares of the social networking giant at its public offering in April of 2021.
The lawsuit names Mark Zuckerberg, Eduardo Saverin, Dustin Moskovitz, Chris Hughes, John Stewart and Wade Phillips as well as other top executives as well as accredited investors as the “plaintiffs.” The complaint states that the company concealed information regarding the fact that the underwriters had intentionally excluded many qualified buyers from the IPO offering.
Facebook IPO Class Action Lawsuit
As noted above, the Class Action Lawsuit claims that the investors were improperly excluded from the Facebook offering when they should have been included. The class-action lawsuit further claims that the companies later “filed fraudulent Securities Exchange Commission paperwork” after they received the complaint. The plaintiffs further claim that these paperwork contains material misstatements and omissions which resulted in investors being improperly excluded from the offering.
In addition, the plaintiffs further claim that the current leadership is “ignorant of basic business principles.” In essence, this means that the current management is either totally ignorant of the rules-or totally unaware that they are rules.
This is a very litigious case, meaning that it is both highly complicated and highly expensive for the plaintiffs.
Right now, the case has been set for trial in the Southern District of New York. However, if no settlement agreement is reached by the end of the August docket date, the case will move to the full court. Attorneys involved in the lawsuit include Paul A. Ginsberg and Andrew D. Ginsberg of Cooney and Conway; John J. Griswold of Gloag, LLP; and Michael C. Phillips of Atkins, Liebig, Schriver & Frick. The current litigation is being facilitated by the law firm of Belknap & Essex, Lasko and Goldman, specializing in securities and commercial lending.
The current arguments presented by the plaintiffs and their attorneys deal with two basic issues.
First, is whether or not the Facebook IPO class action lawsuit is legitimate? Second, is there a basis for an IPO at Facebook given the fact that the company has already admitted that it did not disclose material financial information during its IPO?
The plaintiffs contend that they met all of the disclosure requirements as required by the Securities Exchange Commission when they applied for the IPO and therefore, entitled to damages for fraud.
The second issue revolves around the validity of the securities exchange commission’s class action lawsuit against Facebook.
There have been numerous studies, including by the SEC, that conclude that Facebook did not properly disclose financial information on its web site leading to the SEC’s investigation. Additionally, the SEC found that Facebook failed to adequately control and regulate its advertising activities, which resulted in many consumers purchasing items from websites associated with the company without knowing such affiliation.
The SEC also found that Facebook did not make sufficient filings with the SEC to give its shareholders adequate notice of the IPO proceedings. The class action lawsuit was filed on behalf of Class Action Capital, LLC, Greenfield Asset Management LLC, and Zilkha R. Prabhu, an individual who is a non-resident of the United States. These investors are seeking damages on the basis of breach of contract, fraud and negligence.
The third fundamental issue revolves around whether or not investors will be able to recover damages if they bring suit against Facebook and the presently listed companies associated with the IPO.
The answer to this question will determine if the class action lawsuit continues to move forward. Currently, it appears that the answer is yes. Most likely, the IPO will not be overturned, and it is highly unlikely that one of the companies listed would find itself in a position in which it would become unable to raise additional capital.
However, it is possible that investors will be able to sue Facebook if they discover that the IPO set up Facebook as a devious scheme to circumvent state and federal securities laws.