Market Overview

Here Come the Lawsuits: Shareholders Sue Zuckerberg, Facebook, Morgan Stanley and Other Underwriters

In the wake of Facebook's (NASDAQ: FB) extremely disappointing IPO, three shareholders filed a lawsuit against CEO Mark Zuckerberg, Facebook itself, Morgan Stanley (NYSE: MS) and other underwriters of the deal on Wednesday. The suit alleges that the company withheld negative information in marketing the IPO. "It appears as though material information was not disclosed," said Robert Weiser, one of the plaintiff lawyers in the class action suit. "We believe that the offering was conducted unfairly and it harmed public stockholders." The suit was filed in the U.S. District Court for the Southern District of New York in Manhattan.

Yesterday, it was widely reported that a Morgan Stanley internet analyst cut his revenue targets on FB ahead of the IPO. The lawsuit states that the "revisions were material information which was not shared with all Facebook investors, but rather, was selectively disclosed by defendants to certain preferred investors and omitted from the registration statement and/or prospectus."

The full list of underwriters targeted in the suit includes Barclays Capital, Goldman Sachs (NYSE: GS), JP Morgan Chase (NYSE: JPM), and Merrill Lynch. The plaintiffs are investors Brian Roffe, Jacob Salzmann, and Dennis Palkon. Attorney Robert Weiser said that more plaintiffs may join the lawsuit. This news, while unsurprising, underscores the disappointment, and losses, that FB initial public offering investors are experiencing right now. The stock is trading at $31.76 on Wednesday after the deal was priced at $38.00.

Given the hype that surrounded this deal, it is likely that a large number of retail investors took big positions in the IPO and are now really hurting. The same can be said for institutional investors that participated in the deal, but they are much more sophisticated and well-versed in stock market losses.

Unlike the many investors who have been burned, the Wall Street Journal is reporting that the underwriters may have made around $100 million trading in FB shares through their stabilization efforts. Morgan Stanley was the stabilization agent for the IPO, so they likely reaped most of the profits.

Essentially, the underwriters, led by Morgan Stanley, were short the stock due to a 15% over-allotment. In the case of FB, this means that the underwriters bought the offering's 421,233,615 shares, but sold an extra 15%, or 484,418,657 shares, into the market. This created a short position in FB, which has been profitable. According to the WSJ, these gains are anticipated to be offset to some extent by reimbursing investor losses resulting from technical problems at the Nasdaq Stock Market on the first day of trading.

By being short FB as a result of the over-allotment, the underwriters were able to buy back shares in order to support the deal and try to stabilize the share price. According to the WSJ's sources, Morgan Stanley was buying FB stock at around $38.00 last Friday, effectively covering part of their short position, in an effort to keep FB above the deal price. When the stock plunged on Monday, MS likely made tidy profits on whatever amount of stock they were still short.

Posted-In: News IPOs Events Global Media

 

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