On Friday, Facebook Inc and its underwriters offered some clues about how they intend to defend the more than 40 suits filed so far in state and federal court that accuse them of deceiving investors in their initial public offering. From a brief asking the Judicial Panel on Multidistrict Litigation to consolidate the Facebook IPO securities litigation in federal court in Manhattan, we learned, first off, who's going to be collecting defence fees for years to come in this case.
Facebook has Willkie Farr & Gallagher and Kirkland & Ellis. (Facebook's general counsel is an former Kirkland partner, and Kirkland has close ties to Facebook lead underwriter Morgan Stanley.) Morgan Stanley and Goldman Sachs are represented by Davis Polk & Wardwell.
The brief was unusually feisty for a consolidation request, which is usually a matter of procedural housekeeping. The complaints filed so far against Facebook and the underwriters center on whether the offering materials adequately disclosed Facebook's declining advertising revenue prospects, given that Facebook's oral communications with some analysts (and the analysts' subsequent conversations with favoured investors) seemed to be gloomier than the prospectus.
Facebook and the underwriters contend in Friday's brief that the offering materials were just fine and there was nothing wrong with after-the-fact analyst buzz. "Plaintiffs rely heavily on post-IPO articles as sources for their allegations but they ignore that what Facebook and the underwriter defendants allegedly did both followed customary practices and did not violate any rules," the brief said. The Securities and Exchange Commission specifically exempts oral conversations from disclosure requirements, Facebook and the underwriters said, and besides, media reports before the IPO disclosed Facebook's lowered projections.
The brief also suggests that Facebook and the underwriters (like many investors) will blame Nasdaq trading errors for the deflation in Facebook's share price. It wasn't the revelation of undisclosed bad news that sent the stock tumbling, the brief implies, but rather a Nasdaq-created backlog that prompted "a rash of stock sales that ... drove down the price of Facebook shares."
What we don't yet know, of course, is who will lead the securities class action for the plaintiffs. (I'm talking only about the federal-court claims against Facebook and the underwriters under the Securities Act of 1933, not investor cases against Nasdaq or derivative suits against Facebook's board.) I've previously explained why the Facebook IPO cases are such a magnet for plaintiffs' lawyers: There's strict liability for material misstatements in offering documents under sections 11 and 12 of the Securities Act, so there's no need for shareholders to show fraudulent intent. There's also the potential for eye-popping damages, since investors who bought directly from underwriters are entitled to demand that the shares be repurchased at the offering price. A virtual directory of the securities class action bar - with some notable exceptions I'll talk about below - has already appeared in the Facebook IPO litigation. I'm not going to name every firm that's filed a case, but here are some with previous big-case lead counsel experience: Robbins Geller Rudman & Dowd; Milberg; Berger & Montague; Abbey Spanier Rodd & Abrams; Kessler Topaz Meltzer & Check; Schiffrin & Barroway; Pomerantz Haudek Block Grossman & Gross; Kaplan Fox & Kilsheimer; Berman DeValerio; Susman Godfrey; and Hausfeld have all signed complaints filed in Manhattan federal court, most of which have been transferred to US District Judge Robert Sweet. Girard Gibbs & De Bartolomeo; Wolf Haldenstein Adler Freeman & Herz; and Hagens Berman Sobol Shapiro have filed in San Francisco federal court, where US District Judge Maxine Chesney is overseeing the litigation. That's an impressive list, but so far the potential lead plaintiffs aren't so formidable.