Morgan Stanley, Goldman Sachs sued over Facebook stock sale

May 23 (Bloomberg) -- Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. were sued along with other underwriters and Facebook Inc. by investors who claimed they were misled in the purchase of the social network firm’s stock.

The investors said the members of a proposed class action, or group lawsuit, have lost more than $2.5 billion since the initial public offering last week, in a complaint filed today in Manhattan federal court. They claimed Facebook and the banks didn’t disclose lower revenue estimates.

Also sued were units of Bank of America Corp. and Barclays Plc and Facebook’s top executives and directors, according to the filing. Facebook went public at $38 a share. While the stock rose 1.5 percent and raised $16 billion in the IPO, it plunged 19 percent over two days. Today, Facebook rose 4.7 percent, or $1.45, to $32.45 at 10:29 a.m. New York time in Nasdaq trading.

“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” the plaintiffs said in the complaint.

Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail: “We believe the lawsuit is without merit and will defend ourselves vigorously.” Pen Pendleton, Michael Duvally and Mark Lane, spokesmen for Morgan Stanley, Goldman Sachs and Barclays, respectively, declined to comment. Representatives of JP Morgan and Bank of America didn’t immediately return calls for comment.

Company Revenue

The complaint states that Facebook’s revenue growth is declining because its greatest growth is coming from users of mobile devices rather than personal computers. The company hasn’t shown advertisements to people who gain access to the website through mobile applications, according to the complaint. Facebook booked 85 percent of its revenue from advertising in 2011, according to the suit.

The banks named in the suit reduced their estimates for Facebook for the second quarter and full year of 2012 and didn’t inform potential investors in presentations before the IPO, according to the complaint.

“The underwriters took down their earnings estimates dramatically during the road show and only told a select group of investors,” Samuel Rudman, a lawyer for the plaintiffs, said today in a telephone interview.

In a separate action, a Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock, which resulted in delays and a failure to complete customer orders.

Class-Action Status

The investor is seeking class-action status for the suit on behalf of investors who lost money because their buy, sell and cancellation orders weren’t properly processed.

The U.S. Securities and Exchange Commission has said it will review the first day of trading in Facebook shares.

Also named as defendants in today’s suit are Facebook’s co- founder and chief executive, Mark Zuckerberg, and its chief financial officer, David Ebersman.

The underwriter case is Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, and the Nasdaq case is Goldberg v. Nasdaq OMX Group Inc., 12-cv-04054, U.S. District Court, Southern District of New York (Manhattan).

Bloomberg News

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