Facebook prevailed in a lawsuit filed by shareholders, who alleged that the social network giant did not disclose the risks to its growth prospects prior to its initial public offering in May 2012.
The 2nd U.S. Circuit of Appeals ruled that shareholders lacked standing to file charges against Facebook Inc (NASDAQ:FB), its directors including Mark Zuckerberg. They cannot also file charges against the social network giants’ underwriters led by Morgan Stanley and Goldman Sachs Group.
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Circuit Judge Dennis Jacobs emphasized that the complainants could not demonstrate “contemporaneous” ownership while the directors of Facebook Inc (NASDAQ:FB) were violating their fiduciary duties.
“A proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired,” Jacobs wrote for a 3-0 panel,” according to Judge Jacobs.
The Appeals Court upheld the decision of U.S. District Judge Robert Sweet in Manhattan to dismiss the derivative litigations against Facebook. In his ruling, Judge Sweet concluded that the social network giant “repeatedly made extensive warnings” regarding a potential revenue decline as users shift from desktop computers to mobile devices. Judge Sweet also handled the shareholders’ class action lawsuit against Facebook related to the IPO.
Allegations against Facebook (FB)
The shareholders who filed the lawsuit lost money from their investment in Facebook Inc (NASDAQ:FB) shares during the IPO. They argued that the social network giant is responsible for publicly disclosing its internal projections regarding the impact of mobile usage to its future revenue.
They claimed that Facebook quietly warned its underwriters regarding the issue. Morgan Stanley and Goldman Sachs reduced their earnings forecast on Facebook while the company was on a road show promoting its IPO. The shareholders argued that the stock price of the social network giant was negatively impacted after the news came out.
Facebook Inc (NASDAQ:FB) started trading its stock at $38 per share on May 18, 2012. The stock price of the social network giant declined to $17.55 per share on September 4, 2012. The shares of the company traded below its IPO price for more than one year.
The shares of the social network giant recovered following the improvement of its mobile revenue. Facebook’s stock is trading $96.95 per share, up by nearly 2% at the time of this writing around 2:07 in the afternoon in New York.