Facebook, Wall Street Banks Sued Over Pre-IPO Financial Forecasts

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Shannon Stapleton / Reuters

Facebook CEO Mark Zuckerberg is seen on a screen televised from company headquarters in Menlo Park moments after their IPO launch in New York May 18, 2012.

Just days after its controversial IPO, Facebook and its Wall Street bankers have been hit by shareholder lawsuits alleging that the social networking giant and its underwriters concealed the company’s decelerating revenue growth from investors. The lawsuits come amid a growing furor about whether Facebook’s banks selectively disclosed information that gave favored clients an unfair advantage over other investors. Top U.S. regulators have begun examining the IPO, and now the U.S. Senate Banking Committee and other lawmakers want answers from Facebook about issues raised in the offering’s aftermath, according to The Hill newspaper.

In one of the lawsuits, filed against Facebook and CEO Mark Zuckerberg in U.S. District Court in Manhattan on Wednesday and cited by Reuters, shareholders charged that analysts at Facebook’s underwriters lowered their financial forecasts for big, favored clients, but didn’t inform the investing public at large. Another lawsuit charges that the company’s IPO documents “were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects.” Specifically, the lawsuits charge that Facebook hid the financial impact of challenges to its mobile advertising business — challenges that would have been material information for prospective Facebook investors.

(More: Facebook IPO Furor: Feds Probing Deal Over Insider Bank Warnings)

According to a series of reports that emerged Tuesday, Facebook’s Wall Street investment banks warned top clients of new doubts about the social network’s financial prospects just days before the company’s IPO. After receiving briefings from Facebook executives, analysts at the banks lowered their financial forecasts for big clients, some of whom scaled back plans to buy Facebook stock, even as the banks raised the IPO price and number of shares amid a hype-fueled frenzy.

Although Facebook had publicly disclosed mobile advertising challenges, the new revelations raise questions about whether Facebook’s underwriters selectively disclosed more detailed information that gave favored clients an unfair advantage over other investors. The flurry of lawsuits further tarnishes Facebook’s highly-anticipated IPO — which should have been a shining moment for the social network, as well as its lead banker Morgan Stanley. In a statement, Facebook said: “We believe the lawsuit is without merit and will defend ourselves vigorously.”

Meanwhile, lawmakers from both political parties want more information about Facebook’s contested IPO, according to The Hill. “The Banking Committee is seeking to learn more about issues raised in the news regarding Facebook’s IPO by conducting staff briefings with Facebook, regulators and other stakeholders,” committee spokesman Sean Oblack told the Capitol Hill newspaper.

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