Facebook IPO May Have Set a Strange Record

On May 22nd the Los Angeles law firm of Glancy Binkow & Goldberg LLP filed a lawsuit (Lazar v. Facebook, Inc., et al.) in California Superior Court against Facebook and others involved in their highly publicized IPO.  The following morning on the opposite coast in New York a similar case was filed in US District Court (Brian Roffe Profit Sharing Plan et al v. Facebook Inc et al.) by Robbins Geller Rudman & Dowd.

The Facebook IPO was May 17th.  I don’t think anybody keeps such records, but this may be the shortest time ever between having public stockholders and being sued by them.

The apparent impetus of the case is a Reuters story regarding how eight days before the filing on May 9th Facebook submitted an amended prospectus with the SEC.  In the amended prospectus Facebook expressed caution regarding future revenue growth as users were rapidly transitioning from computers to mobile devices for accessing Facebook.  The company gets 80 percent of its revenue from advertising and smaller screens mean less room for ads and thus lower revenue per visitor.  How to maintain ad revenues as users switch to mobile is a problem that has faced all advertising-centered web companies, not just Facebook.  When you are pricing an IPO at such a sky high P/E ratio, concerns regarding the rate of future revenue growth are not insignificant.

The new prospectus caused one Morgan Stanley analyst to revise downward his revenue projections.  However according to the Reuters story only a select few of Morgan Stanley’s clients were made aware of the change and neither the amended prospectus nor the revised projections were mentioned during the ‘roadshow’ events that were trying to build up interest in the IPO.

Should the cases gain the class-action status that they are seeking and the courts find against the companies the potential damages may be huge.  Billions of dollars of value were lost in the days immediately following the IPO.

UPDATE: The Associated Press is reporting that the Senate Banking Committee is considering investigating the Facebook IPO.

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