PayPal co-founder and Facebook pre-IPO stockholder Peter Thiel
Facebook's tainted public offering, which has attracted the attention of federal securities investigators, has grown a bit darker with the filing of a class-action lawsuit. Los Angeles-based law firm Glancy Binkow & Goldberg filed the suit Tuesday in state court in San Mateo County, Calif., on behalf of all investors who lost money in the IPO.
The suit rides on allegations that days before Facebook raised the price range on its soon-to-be-public stock, executives warned the lead underwriters that their financial estimates for the company were too high. The bankers, which included Morgan Stanley, J.P. Morgan Securities and Goldman Sachs, lowered their estimates and then told a handful of large investor clients, leaving everyday investors in the dark.
"At best, this 'selective disclosure' of the estimate cut is grossly unfair to investors who bought Facebook stock on the IPO (or at any time since) and didn't know about it," said Henry Blodget, Wall Street observer and Business Insider founder. "At worst, it's a violation of securities laws."
During the height of the pre-IPO frenzy, individual investors clamored for more Facebook stock, while more knowledgeable institutional investors were talking about paring back stock orders. For investors who didn't know about the revised estimates, Facebook's opening stock price last Friday was a sucker's deal.
The losers, and potential plaintiffs, were the millions of individual investors who bought the stock for $38 a share or more and were looking at an investment worth $32 as of the close of trading Wednesday.
The winners included venture capital firms Accel Partners and Greylock Partners and PayPal co-founder Peter Thiel, who were among the pre-IPO stockholders that collectively received about $9 billion in the offering, according to the law firm.
While no one has said any crimes have been committed, the smoke from the dealings before the IPO has prompted the Securities and Exchange Commission and the Financial Industry Regulatory Authority to consider an investigation to look for the fire. The lead securities regulator in Massachusetts has reportedly subpoenaed Morgan Stanley.
Facebook has yet to clearly state why estimates had to be lowered. But the company's amended SEC filing before the IPO hints it's related to the growing number of users accessing the site through mobile devices and Facebook's failure to date of monetizing the shift through advertising.
While many questions remain, the Facebook IPO is pointing to what many Occupy Wall Street supporters have said: Banks pull the financial strings, and the rest of us are the puppets.