Lightman v. Facebook, Inc. et al

Filing 1

COMPLAINT against Allen & Company LLC, Marc L. Andreessen, BMO Capital Markets Corp., Barclays Capital Inc., Blaylock Robert Van LLC, Erskine B. Bowles, James W. Breyer, C.L. King & Associates, Inc., Cabrera Capital Markets, LLC, Castleoak Securities, L.P., Citigroup Global Markets Inc., Cowen and Company, LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities, Inc., ETrade Securities LLC, David A. Ebersman, Facebook, Inc., Goldman, Sachs & Co., Donald E. Graham, Reed Hastings, ITAU BBA USA Securities, Inc., J.P. Morgan Securities LLC, Lazard Capital Markets, LLC, Lebenthal & Co., LLC, Loop Capital Markets LLC, M.R. Beal & Company, Macquarie Capital (USA) Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, Muriel Siebert & Co., Inc., Oppenheimer & CO., Inc., Pacific Crest Securities LLC, Piper Jaffray & Co., RBC Capital Markets, LLC, Raymond James & Associates, Inc., Samuel A. Ramirez & Company, Inc., David M. Spillane, Stifel, Nicolaus & Company, Incorporated, The Williams Capital Group, L.P., Peter A. Thiel, William Blair & Company, L.L.C., Mark Zuckerberg. (Filing Fee $ 350.00, Receipt Number 9346)Document filed by Douglas M. Lightman.(ama)

12 eN 4

GRlFSA

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

DOUGLAS M. LIGHTMAN, individually and
on behalf of all others similarly situated,
Plaintiff,­

v.
FACEBOOK INC., MARK ZUCKERBERG,
DAVID A. EBERSMAN, DAVID M.
SPILLANE, MARC L. ANDREESSEN,
ERSKINE B. BOWLES, JAMES W. BREYER,
DONALD E. GRAHAM, REED HASTINGS,
PETER A. THIEL, MORGAN STANLEY &
CO. LLC., J.P. MORGAN SECURITIES LLC,
GOLDMAN, SACHS & CO., MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, BARCLA YS CAPITAL
INC., ALLEN & COMPANY LLC, CITIGROUP
GLOBAL MARKETS INC., CREDIT SUISSE
SECURITIES (USA) LLC, DEUTSCHE BANK
SECURITIES, INC., RBC CAPITAL
MARKETS, LLC, BLAYLOCK ROBERT V AN
LLC, BMO CAPITAL MARKETS CORP., C.L.
KING & ASSOCIATES, INC., CABRERA
CAPITAL MARKETS, LLC, CASTLEOAK
SECURITIES, L.P., COWEN AND COMPANY,
LLC., E*TRADE SECURITIES LLC, ITAU
BBA USA SECURITIES, INC., LAZARD
CAPITAL MARKETS LLC, LEBENTHAL &
CO., LLC, LOOP CAPITAL MARKETS LLC,
M.R. BEAL & COMPANY, MACQUARIE
CAPITAL (USA) INC., MURIEL SIEBERT &
CO., INC., OPPpNHElMER & CO. INC.,
PACIFIC CREST SECURITIES LLC, PIPER
JAFFRA Y & CO., RAYMOND JAMES &
ASSOCIATES, INC., SAMUEL A. RAMIREZ
& COMPANY, INC., STIFEL, NICOLAUS &
COMPANY, INCORPORATED, THE
WILLIAMS CAPITAL GROUP, L.P., and
WILLIAM BLAIR & COMPANY, L.L.C.,
Defendants.

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Civil Action No.

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CLASS ACTION COMPLAINT

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JURY TRIAL DEMANDED

Plaintiff Douglas M. Lightman ("Plaintiff'), individually and on behalf of all other
persons similarly situated, by his undersigned attorneys, for his Class Action Complaint against
defendants, alleges upon personal knowledge as to himself and his own acts, and upon
information and belief as to all other matters, based on, inter alia, the investigation conducted by
and through his attorneys, which included, among other things: a review of the defendants'
public documents; conference calls and announcements made by defendants; Securities and
Exchange Commission ("SEC") filings; wire and press releases published by and regarding
Facebook Inc. ("Facebook" or the "Company"); securities analysts' reports and advisories about
the Company; and information readily obtainable on the Internet.
NATURE OF THE ACTION
1.

This is a securities fraud class action on behalf of persons or entities who

purchased securities of Facebook pursuant and/or traceable to the Company's Registration
Statement and Prospectus (collectively, the "Registration Statement") issued in connection with
the Company's May 18, 2012 initial public offering (the "IPQ" or the "Offering") seeking to
pursue remedies under the Securities Act of 1933 (the "Securities Act"). This class action is
brought under Sections 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C. §§ 77k, 771 and 770.
2.

On May 17, 2012, the Company announced the pricing of its IPQ of 421,233,615

shares of its common stock at a price of $38.00 per share.

In connection with the IPQ,

180,000,000 shares were offered by the Company and 241,233,615 shares were offered by certain
selling shareholders. The total price to the public in connection with this offering was over $16
billion, with underwriters' discounts and commissions totaling over $176 million, shares sold by
the selling shareholders totaling over $9 billion, and shares sold by the Company totaling $6.8
billion. In connection with the IPQ, the Company filed the Registration Statement with the SEC

which provided the Company's financial results for the fiscal years ended December 31,2007,
2008; 2009; 2010 and 2011, as well as certain financial information for the Company's quarterly
periods ended March 31, 2011 and March 31, 2012.
3.

In connection with the Company's IPQ, defendants, in the Registration Statement

failed to disclose at the time of the IPQ that: (1) the Company was then experiencing a severe
and pronounced reduction in revenue growth due to an increase of users of its Facebook app or
website through mobile devices rather than a personal computer such that the Company told the
Undenvriter Defendants (as defined below) to materially lower their revenue forecasts for 2012;
(2) during the IPO roadshow conducted in connection with the IPO, certain underwriters,
including Morgan Stanley, J.P. Morgan, and Goldman Sachs, reduced their second quarter and
full year 2012 earnings forecasts for Facebook; (3) the revised financial forecasts were
selectively disclosed by defendants to certain preferred investors; (4) defendants had not
conducted an adequate due diligence investigation into Facebook; and (5) as a result of the
above, the Company's financial statements were materially false and misleading.
4.

On May 19, 2012, Reuters revealed in an article that Facebook "altered its

guidance for research earnings last week, during the road show, a rare and disruptive move."
5.

On this news, Facebook shares declined $4.20 per share or nearly 11 %, to close

at $34.03 per share on May 21,2012.
6.

On May 22, 2012, Reuters revealed that, in the middle of Facebook's IPQ

roadshow, several of the lead underwriters, including Morgan Stanley reduced their revenue
estimates for the Company's second quarter 2012 and full year 2012 and 2013. Significantly, these
reduced estimates were only "relayed to big investors through phone calls and conference calls."

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7.

On this news, Facebook shares declined an additional $3.03 per share or nearly

9%, to close at $31.00 per share on May 22,2012
8.

As a result of defendants' wrongful acts and omissions, and the precipitous declines

in the market value of the Company's securities, Plaintiff and the other Class members have
suffered significant losses and damages.
JURISDICTION AND VENUE

9.

The claims asserted herein arise under Sections 11, 12(a)(2) and 15 of the

Securities Act, 15 U.S.C. §§ 77k, 771 and 770.
10.

This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. § 1331 and Section 22 of the Securities Act, 15 U.S.C. § 77v.
11.

Venue is proper in this District pursuant to Section 22 of the Securities Act, 15

U.S.C. § 77v, and 28 U.S.C. § 1391(b) and (c). Facebook shares are traded on the NASDAQ
National Securities Market ("NASDAQ") which is located in the Southern District of New York.
The acts and conduct complained of herein occurred in substantial part in this District and the
Underwriter Defendants maintain their principal places of business in this District.
12.

In connection with the challenged conduct, defendants, directly or indirectly,

used the means and instrumentalities of interstate commerce, including, but not limited to, the
United States mails, interstate telephone communications and the facilities of the national
securities markets.
PARTIES

13.

Plaintiff as set f01ih in the accompanying certification, incorporated by reference

herein, purchased Facebook common stock pursuant and/or traceable to the Company's
materially false and misleading Registration Statement issued by defendants in connection with

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the May 2012 IPO, and suffered damages as a result of the federal securities law violations and'
false and/or misleading statements and/or material omissions alleged herein.
14.

Defendant Facebook is a Delaware corporation with its principal executive

offices located at 1601 Willow Road, Menlo Park, California 94025. The Company operates a
social networking website. The Company's website allows people to communicate with their
family, friends, and coworkers. Facebook develops technologies that facilitate the sharing of
information, photographs, website links, and videos. Facebook users have the ability to share
and restrict information based on their own specific criteria. Facebook is actively traded on the
NASDAQ exchange under the ticker symbol "FB."
15.

Defendant Mark Zuckerberg ("Zuckerberg") is the founder of the Company and

was, the time of the Offering, Chairman of the Board of Directors (the "Board") and Chief
Executive Officer of Facebook.

Zuckerberg signed the materially false and misleading

Registration Statement.
16.

Defendant David A. Ebersman ("Ebersman") was at the time of the Offering the

Company's Chief Financial Officer.

Ebersman signed the materially false and misleading

Registration Statement.
17.

Defendant David M. Spillane ("Spillane") was at the time of the Offering the

Company's Chief Accounting Officer.

Spillane signed the materially false and misleading

Registration Statement.
18.

Defendant Marc L. Andreessen ("Andreessen") was at the time of the Offering a

member of the Board.

Andreessen signed the materially false and misleading Registration

Statement.

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19.

Defendant Erskine B. Bowles ("Bowles") was at the time of the Offering a

member of the Board.

Bowles signed the materially false and misleading Registration

Statement.
20.

Defendant James W. Breyer ("Breyer") was at the time of the Offering a member

of the Board. Breyer signed the materially false and misleading Registration Statement.
21.

Defendant Donald E. Graham ("Graham") was at the time of the Offering a

member of the Board.

Graham signed the materially false and misleading Registration

Statement.
22.

Defendant Reed Hastings ("Hastings") was at the time of the Offering a member

of the Board. Hastings signed the materially false and misleading Registration Statement.
23.

Defendant Peter A. Thiel ("Thiel") was at the time of the Offering a member of

the Board. Thiel signed the materially false and misleading Registration Statement.
24.

The defendants referenced above in ,;,; 15-23 are collectively referred to herein

as the "Individual Defendants."
25.

Defendant Morgan Stanley & Co. LLC. ("Morgan Stanley") served as a lead

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
26.

Defendant J.P. Morgan Securities LLC. ("J.P. Morgan") served as a lead

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
27.

Defendant Goldman, Sachs & Co. ("Goldman Sachs") served as a lead

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.

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28.

Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill

Lynch") served as a lead underwriter of the Company's IPO and assisted in the preparation and
dissemination of the false Registration Statement.
29.

Defendant Barclays Capital Inc. ("Barclays") served as a lead underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
30.

Defendant Allen & Company LLC ("Allen") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
31.

Defendant Citigroup Global Markets Inc. ("Citigroup") served as an underwriter

of the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
32.

Defendant Credit Suisse Securities (USA) LLC ("Credit Suisse") served as an

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
33.

Defendant Deutsche Bank Securities Inc. ("Deutsche Bank") served as an

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
34.

Defendant RBC Capital Markets, LLC ("RBC") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.

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35.

Defendant Blaylock Robert Van LLC ("Blaylock") served as an underwriter of

the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
36.

Defendant BMO Capital Markets Corp. ("BMO") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
37.

Defendant C.L. King & Associates, Inc. ("C.L. King") served as an underwriter

of the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
38.

Defendant Cabrera Capital Markets, LLC ("Cabrera") served as an underwriter

of the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
39.

Defendant Castle Oak Securities, L.P. ("CastleOak") served as an underwriter of

the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
40.

Defendant Cowen and Company, LLC. ("Cowen") served as an underwriter of

the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
41.

Defendant E*TRADE Securities LLC. ("E&TRADE") served as an underwriter

of the Company's IPO and assisted in the'preparation and dissemination of the false Registration
Statement.

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42.

Defendant Itau BBA USA Securities, Inc. ("Itau") served as an underwriter of

the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
43.

Defendant Lazard Capital Markets LLC. ("Lazard") served as an underwriter of

the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
44.

Defendant Lebenthal & Co., LLC ("Lebenthal") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
45.

Defendant Loop Capital Markets LLC ("Loop") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
46.

Defendant M.R. Beal & Company ("M.R. Beal") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.
47.

Defendant Macquarie Capital (USA) Inc. ("Macquarie") served as an

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
48.

Defendant Muriel Siebert & Co., Inc. ("Muriel") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of Facebook's IPO materials.
49.

Defendant Oppenheimer & Co. Inc. ("Oppenheimer") served as an underwriter

of the Company's IPO and assisted in the preparation and dissemination ofthe false Registration
Statement.

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50.

Defendant Pacific Crest Securities LLC ("Pacific Crest") served as an

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
51.

Defendant Piper Jaffray & Co. ("Piper Jaffray") served as an underwriter of the

Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.

52.

Defendant Raymond James & Associates, Inc. ("Raymond James") served as an

underwriter ofthe Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
53.

Defendant Samuel A. Ramirez & Company, Incorporated ("Samuel Ramirez")

served as an underwriter of the Company's IPO and assisted in the preparation and dissemination
of the false Registration Statement.
54.

Defendant Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus") served

as an underwriter of the Company's IPO and assisted in the preparation and dissemination of the
false Registration Statement.
55.

Defendant The Williams Capital Group, L.P. ("Williams") served as an

underwriter of the Company's IPO and assisted in the preparation and dissemination of the false
Registration Statement.
56.

Defendant \Villiam Blair & Company ("William Blair") served as an underwriter

of the Company's IPO and assisted in the preparation and dissemination of the false Registration
Statement.

57.

The defendants referenced above in ,,25-56 are collectively referred to herein

as the "Underwriter Defendants."

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58.

The Individual Defendants, together with Defendant Facebook and the

Underwriters Defendants are collectively referred to herein as "Defendants."
SUBSTANTIVE ALLEGATIONS

Background
59.

Facebook operates as a social networking company worldwide. The Company (1)

builds tools that enable users to connect, share, discover, and communicate with each other; (2)
enables developers to build social applications on Facebook or to integrate their websites with
Facebook; and (3) offers products that enable advertisers and marketers to engage with its users.
As of February 2, 2012, it had 845 million monthly active users ("MAU") and 443 million daily
active users ("DAU").

Defendants' False and Misleading Statements
60.

On or about February 1,2012, the Company filed an initial registration statement

with the SEC on a Form S-1. Thereafter, the Company repeatedly amended the Form S-I,
including on or about May 16,2012, when Facebook filed with the SEC the final Form S-l/A for
the IPO.
61.

On or about May 18,2012, the Company filed with the SEC its IPO Prospectus,

which forms part of the "Registration Statement" that was declared effective on May 17, 2012.
62.

In the IPO, the Company offered for sale 421,233,615 shares of common stock at

a price of$38.00 per share, of which 180,000,000 shares of Class A common stock were offered
by the Company and 241,233,615 shares of Class A common stock were offered by existing
shareholders, thereby valuing the total size of the IPO at more than $16 billion. According to the
Company, it expected to receive net proceeds of approximately $6.8 billion from its IPO after
deducting underwriting discounts and commissions, and offerings expenses.

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63.

The Registration Statement was negligently prepared and, as a result, contained

untrue statements of material facts or omitted to state other facts necessary to make the
statements made not misleading and were not prepared in accordance with the rules and
regulations governing their preparation.
64.

The Company represented in the Registration Statement, in relevant part, the

following:
Based upon our experience in the second quarter of 20 12 to date, the trend we saw
in the first quarter of DAUs increasing more rapidly than the increase in number
of ads delivered has continued. We believe this trend is driven in part by
increased usage of Facebook on mobile devices where we have only recently
begun showing an immaterial number of sponsored stories in News Feed, and in
part due to certain pages having fewer ads per page as a result of product
decisions.
65.

In addition, the Registration Statement purported to warn investors that the

Company's revenues could be negatively affected by the rate of growth in mobile users.
Specifically, the Registration statement represented the following, in relevant part:

Growth in use of Facebook through our mobile products, where our ability to
monetize is unproven, as a substitute for use on personal computers may
negatively affect our revenue and financial results.
We had 488 million MAUs who used Facebook mobile products in March 2012.
While most of our mobile users also access Facebook through personal
computers, we anticipate that the rate of growth in mobile usage will exceed the
growth in usage through personal computers for the foreseeable future, in part due
to our focus on developing mobile products to encourage mobile usage of
Facebook. We have historically not shown ads to users accessing Facebook
through mobile apps or our mobile website. In March 2012, we began to include
sponsored stories in users' mobile News Feeds. However, we do not currently
directly generate any meaningful revenue from the use of Facebook mobile
products, and our ability to do so successfully is unproven. We believe this
increased usage of Facebook on mobile devices has contributed to the recent trend
of our daily active users (DAUs) increasing more rapidly than the increase in the
number of ads delivered. If users increasingly access Facebook mobile products
as a substitute for access through personal computers, and if we are unable to
successfully implement monetization strategies for our mobile users, or if we

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incur excessive expenses in this effort, our financial performance and ability to
grow revenue would be negatively affected.
66.

Also, the Registration Statement purported to warn investors that the Company's

revenues from advertising could be negatively affected by, among other things, the "increased
user access to and engagement with facebook" through mobile devices.

Specifically, the

Registration Statement represented the following, in relevant part:

We generate a substantial majority ofour revenue from advertising. The loss of
advertisers, or reduction in spending by advertisers with Facebook, could
seriously harm our business.
The substantial majority of our revenue is currently generated from third parties
advertising on Facebook. In 2009, 2010, and 2011 and the first quarter of 2011
and 2012, advertising accounted for 98%, 95%, 85%, 87%, and 82%,
respectively, of our revenue. As is common in the industry, our advertisers
typically do not have long-term advertising commitments with us. Many of our
advertisers spend only a relatively small portion of their overall advertising
budget with us. In addition, advertisers may view some of our products, such as
sponsored stories and ads with social context, as experimental and unproven.
Advertisers will not continue to do business with us, or they will reduce the prices
they are willing to pay to advertise with us, if we do not deliver ads and other
commercial content in an effective manner, or if they do not believe that their
investment in advertising with us will generate a competitive return relative to
other alternatives. Our advertising revenue could be adversely affected by a
number of other factors, including:
• decreases in user engagement, including time spent on Facebook;
• increased user access to and engagement with Facebook through our mobile
products, where we do not currently directly generate meaningful revenue,
particularly to the extent that mobile engagement is substituted for engagement
with Facebook on personal computers where we monetize usage by displaying
ads and other commercial content;
• product changes or inventory management decisions we may make that reduce
the size, frequency, or relative prominence of ads and other commercial content
displayed on Facebook;
• our inability to improve our analytics and measurement solutions that
demonstrate the value of our ads and other commercial content;
• decisions by advertisers to use our free products, such as Facebook Pages,
instead of advertising on Facebook;

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• loss of advertising market share to our competitors;
• adverse legal developments relating to advertising, including legislative and
regulatory developments and developments in litigation;
• adverse media reports or other negative publicity involving us, our Platform
developers, or other companies in our industry;
• our inability to create new products that sustain or increase the value of our ads
and other commercial content;
• the degree to which users opt out of social ads or otherwise limit the potential
audience of commercial content;
• changes in the way online advertising is priced;
• the impact of new technologies that could block or obscure the display of our
ads and other commercial content; and
• the impact of macroeconomic conditions and conditions
industry in general;

III

the advertising

The occurrence of any of these or other factors could result in a reduction in
demand for our ads and other commercial content, which may reduce the prices
we receive for our ads and other commercial content, or cause advertisers to stop
advertising with us altogether, either of which would negatively affect our
revenue and financial results.
67.

The statements referenced above were materially false and/or misleading because

they misrepresented and failed to disclose the following adverse facts, which were known to
defendants or recklessly disregarded by them at the time of the IPO, that: (1) the Company was
then experiencing a severe and pronounced reduction in revenue growth due to an increase of
users of its Facebook app or website through mobile devices rather than a personal computer
such that the Company told the Underwriter Defendants to materially lower their revenue
forecasts for 2012; (2) during the IPO roadshow conducted in connection with the lPO, certain
underwriters, including Morgan Stanley, J.P. Morgan, and Goldman Sachs, reduced their second
quarter and full year 2012 earnings forecasts for Facebook; (3) the revised financial forecasts

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were selectively disclosed by defendants to certain preferred investors; (4) defendants had not
conducted an adequate due diligence investigation into Facebook; and (5) as a result of the
above, the Company's financial statements were materially false and misleading.

The Truth Begins to Emerge
68.

On May 19, 2012, Reuters reported in an article that Facebook "altered its

guidance for research earnings last week, during the road show, a rare and disruptive move."
69.

Also, on May 19, 2012, noted Wall Street analyst Henry Blodget ("Blodget")

published an article discussing Facebook's alteration of its guidance.

Blodget noted the

following, in relevant part:
If this really happened, anyone who placed an order for Facebook who was
unaware that 1) Facebook had issued any sort of earnings guidance, and 2)
reduced that guidance during the roadshow, has every right to be furious.
70.

On this news, Facebook shares declined $4.20 per share or nearly 11 %, to close

at $34.03 per share on May 21,2012.
71.

On May 22,2012, Reuters published an article entitled, "Insight: Morgan Stanley

cut Facebook estimates just before IPO." The article stated the following, in relevant part:
In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter
on the deal, unexpectedly delivered some negative news to major clients: The
bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts
for the company.
The sudden caution very close to Facebook's initial public offering - while an
investor road show was under way - was a big shock to some, said two investors
who were advised of the revised forecast.

***
The change in Morgan Stanley's estimates came on the heels of a May 9
Facebook filing of an amended prospectus with the U.S. Securities and Exchange
Commission, in which the company expressed caution about revenue growth due
to a rapid shift by users to mobile devices. Mobile advertising to date has been
less lucrative than advertising on desktops.

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"This was done during the road show - I've never seen that before in 10 years,"
said a source at a mutual fund firm who was among those called by Morgan
Stanley.
JPMorgan Chase and Goldman Sachs, which were also major underwriters on the
IPO but had lesser roles than Morgan Stanley, also revised their estimates in
response to Facebook's SEC filing, according to sources familiar with the
situation.

***
Typically, the underwriter of an IPO wants to paint as positive a picture as
possible for prospective investors. Investment bank analysts, on the other hand,
are required to operate independently of the bankers and salesmen who are
marketing stocks. That was stipulated in a settlement by major banks with
regulators following a scandal over tainted stock research during the dot-com
boom.
The people familiar with the revised Morgan Stanley projections said Devitt
lowered his revenue estimate for the second quarter and also cut his full-year
2012 revenue forecast.
The new revenue forecast was $4.85 billion for 2012, versus more than $5 billion
earlier, one ofthe people said.
For the second quarter of 2012, the new revenue estimate was $1.111 billion,
down from about $1.175 billion previously, the person added.
The second-quarter revenue forecast suggested that Facebook's year-aver-year
revenue growth might slow from the first quarter of 2012, one of the investors
said.
"VERY UNUSUAL"

Sweet said analysts at firms that are not underwriting IPOs often change forecasts
at such times. However, he said it is unusual for analysts at lead underwriters to
make such changes so close to an IPO.
"That would be very, very unusual for a book runner to do that, II he said.
The lower revenue estimate came shortly before the IPO was priced at $38 a
share, the high end of an already upwardly revised projected range of $34 to $38,
and before Facebook increased the number of shares being sold by 25 percent.

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"It's very rare to cut forecasts in the middle of the IPO process," said an official
with a hedge fund firm who received a call from Morgan Stanley about the
reVISlon.
72.

On this news, Facebook declined an additional $3.03 per share or nearly 9%, to

close at $31.00 per share on May 22,2012.
73.

After the market closed on May 22, 2012, Blodget published an article entitled

"Exclusive: Here's The Inside Story of What Happened on the Facebook IPO." The article
stated the following, in relevant part:
In early May, as Facebook prepared to kick off its IPO roadshow, the research
analysts at the company's lead underwriters developed financial forecasts to
facilitate the marketing and pricing of the IPO.
Such estimates are usually developed through close collaboration between the
underwriters' research analysts and company management. These estimates are
viewed by sophisticated investors as having been "blessed" by the company: They
are perceived as revenue and earnings targets that the company has reviewed and
is confident it will hit. Sophisticated investors use these estimates when they are
developing "bids" for the stock, as a tool with which to help determine the price
they are willing to pay.
Importantly, these estimates are not published anywhere.
Rather, in conjunction with industry convention, these estimates are conveyed
verbally to institutional investors who are considering investing in the IPO.

***
As the Facebook roadshow began, institutional investors who were considering
investing in the stock were verbally given the underwriters' initial estimates for
the company. And, initially, there was a lot of institutional enthusiasm for the
stock.
Several days later, however, on May 9th, Facebook filed an amended IPO
prospectus with the SEC.

***
The appearance of this language unnerved some sophisticated investors and
analysts, who took it as a sign that Facebook's business might have deteriorated.
The language was vague, however, and it did not make clear that Facebook's

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second quarter was weaker than expected. (To infer that message from the

language, you had to know that Facebook's first quarter had been weak--and that

the cause had been the divergence between user growth and revenue growth.)

Soon after Facebook amended its prospectus, all three analysts at the company's

lead underwriters-Morgan Stanley, JP Morgan, and Goldman Sachs--cut their

estimates for Facebook's Q2 and the full year.

These estimate cuts were conveyed verbally to sophisticated institutional

investors.

And, not surprisingly, these investors viewed the estimate cuts as a startling and

negative development.

One important question, of course, was why all three underwriter analysts cut

their estimates.

Had they all read the new sentence in the prospectus above and realized that the

second quarter was weak? Or had they been tipped off?

It seemed inconceivable that all three analysts could have read the language above

and concluded independently that Facebook's Q2 was weak and therefore decided

to take the highly unusual step of cutting estimates in the middle of a company's

IPO roadshow.

More likely, it seemed, someone had directed the analysts to cut their estimates­

most likely someone with inside knowledge of how Facebook's Q2 was

progressing.

And we have now heard from one source that that is what happened.

One of the underwriter's analysts has said he was told by a Facebook financial

executive to cut his estimates.

According to another source with insight into the Facebook IPO process, until the

underwriters' analysts cut their estimates, demand for Facebook's stock among

sophisticated institutional investors was high. Once these investors heard about

the estimate cut, however, they became more cautious about the IPO.

***

The estimate cut, moreover, was followed by three additional pieces of
information that were interpreted negatively by some institutional investors:
1) The price range for the deal was increased, which made the deal even less
attractive in light of the estimate cut,
2) The size of the deal was increased, which meant that more stock would be sold,
and

17

3) Many smart institutional Facebook shareholders like Goldman Sachs decided
to sell more stock on the deal-the "smart money," in other words, was cashing
out.
Meanwhile, during private roadshow meetings, Facebook executives were
reportedly "signaling" to some sophisticated investors that Facebook's advertising
revenue would not grow as rapidly as some potential investors had hoped.
Facebook's advertising business is driven primarily by company-to-company sales
efforts, not by the self-serve ads that drive Google's business. Facebook
executives reportedly made clear to sophisticated investors that this would limit
the rate at which Facebook's ad business could grow.
By the second week of the roadshow, after the estimate cut and price increase,
some institutional investors became more cautious about the IPQ. According to
one investor who looked at the deal, institutions "got the willies" and started to
talk about paring back their stock orders.
Meanwhile, out in the real world, demand for Facebook stock was hitting a fever
pitch. Qne senior stockbroker at a major brokerage firm reported that he "had
never seen such demand" for an IPQ.
These individual investors, needless to say, were not likely aware that the research
analysts at the company's lead underwriters had cut their estimates for the
company. They were also, presumably, unaware that Facebook's Q2 was weaker
than expected.
At the end of last week, the time came to decide on the IPQ price for Facebook's
stock.
This process was handled by Facebook's lead underwriter, Morgan Stanley, and
Facebook executives.
According to one source (unconfirmed--this really is just scuttlebutt), based on the
book of orders submitted by both institutional and retail investors, Morgan
Stanley found that there were two distinct price levels at which investors were
interested in buying stock.
Institutional investors, having digested the news of the underwriter estimate cut,
were comfortable buying Facebook stock at $32 a share.
Retail investors, meanwhile, who were presumably unaware of the estimate cut,
were comfortable buying Facebook at $40 a share.
Knowing that a big percentage of the IPQ stock could be sold to retail investors
instead of institutional investors, Facebook and Morgan Stanley decided to price
the IPQ at $38.

18

Although the precise allocations could not be learned, a source says that Morgan
Stanley allocated a far larger percentage of the Facebook deal to individual
investors than is nOlmally the case in an IPO like this.
74.

Also, on May 22,2012, Reuters published the reduced financial estimates of four

of Facebook's lead underwriters, Defendants Morgan Stanley, Goldman Sachs, J.P. Morgan and
Bank of America. The article stated the following, in relevant part:
While Facebook did not provide any specifics in its amended S-1 filing, the four
underwriters reduced their earnings and revenue estimates for both the second
quarter of 2012 and the full year within the next two days, according to sources.
The new estimates highlighted a continued slowdown in Facebookts growth, with
the banks forecasting 30.4 percent year-on-year 2012 revenue growth on average,
instead of the 36.7 percent growth previously expected. In 2011, Facebook's
revenue grew 87.9 percent year-on-year to $3.71 billion.
The new numbers were relayed to big investors through phone calls and
conference calls, according to investors. Bank of America held a conference call
on May 10 with analyst Justin Post, where the underwriter revealed the lowered
estimates.
Here are the detailed figures from the four banks, according to one of the

investors who received the new numbers.

Lowered fun year revenue estimate for 2012

Morgan Stanley -- $4.854 bIn (new) from $5.036 bin (old)

Bank of America -- $4.815 bIn (new) from $5.040 bIn (old)

JPMorgan -- $4.839 bIn (new) from $5.044 bIn (old)

Goldman Sachs -- $4.852 bIn (new) from $5.169 bIn (old)

Lowered estimates for second-quarter 2012

Morgan Stanley -- $1.111 bIn (new) from $1.175 bln (old)

Bank of America -- $1.100 bIn (new) from $1.166 bIn (old)

JPMorgan -- $1.096 bIn (new) from $1.182 bIn (old)

19

Goldman Sachs -- $1.125 bin (new) from $ 1.207 bIn (old)
Lowered 2013 Earnings per share estimate

Morgan Stanley -- 83 cents (new) from 88 cents

Bank of America -- 64 cents (new) from 66 cents

JPMorgan -- 66 cents (new) from 70 cents

Goldman Sachs -- 63 cents (new) from 68 cents

CLASS ACTION ALLEGATIONS

75.

Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf a Class, consisting of all those who purchased Facebook
securities pursuant andlor traceable to the Company's Registration Statement issued in
connection with the Company's May 2012 IPO. Excluded from the Class are defendants herein,
the officers and directors of the Company, members of their immediate families and their legal
representatives, heirs, successors or assigns, and any entity in which defendants have or had a
controlling interest.
76.

The members of the Class are so numerous that joinder of all members is

impracticable. Over 420 million shares were issued in the lPO. While the exact number of Class
members is unknown to Plaintiff at this time and can be ascertained only through appropriate
discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed
Class.

Record owners and other members of the Class may be identified from records

maintained by Facebook or its transfer agent and may be notified of the pendency of this action
by mail, using the form of notice similar to that customarily used in securities class actions.

20

77.

Plaintiffs claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants' wrongful conduct in violation of
federal law that is complained of herein.
78.

Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.
PlaintifThas no interests antagonistic to or in conflict with those of the Class.
79.

Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
• whether the Securities Act was violated by defendants' acts as alleged herein;
• whether statements made by defendants in the Registration Statement
misrepresented material facts about the business, and operations of Facebook;
and
• whether the members of the Class have sustained damages and, if so, what is
the proper measure of damages.
80.

A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
CLAIMS FOR RELIEF

COUNT I

(Against All Defendants

For Violation of Section 11 of the Securities Act)
81.

Plaintiff repeats and realleges each and every allegation contained above, except

any allegations of fraud, recklessness or intentional misconduct.
21

82.

This claim is predicated upon Defendants' strict liability for making false and

materially misleading statements in the Registration Statement.
83.

This claim is brought pursuant to Section 11 of the Securities Act on behalf of

Plaintiff and other members of the Class who purchased or otherwise acquired Facebook
common stock traceable to the IPO against Facebook, the Individual Defendants and the
Underwriter Defendants and were damaged thereby.
84.

As set forth above, the Registration Statement when it became effective,

contained untrue statements of material fact and omitted to state material facts required to be
stated therein or necessary to make the statements therein not misleading.
85.

Facebook is the registrant for the IPO shares sold to Plaintiff and the other

members of the Class. Facebook issued, caused to be issued and participated in the issuance of
materially false and misleading statements andlor omissions of material facts to the investing
public that were contained in the Registration Statement. As such, Facebook is liable to the
Class.
86.

The Individual Defendants, as directors and/or officers of Facebook and

controlling persons of the issuer, owed to the holders of the securities obtained through the
Registration Statement the duty to make a reasonable and diligent investigation of the statements
contained in the Registration Statement at the time they became effective to ensure that such
statements were true and correct, and that there was no omission of material facts required to be
stated in order to make the statements contained therein not misleading.

The Individual

Defendants knew, or in the exercise of reasonable care should have known, of the material
misstatements and omissions contained in or omitted from the Registration Statement as set forth
herein. As such, the Individual Defendants are liable to the Class.

22

87.

The Underwriter Defendants owed to the holders of the securities obtained

through the Registration Statement the duty to make a reasonable and diligent investigation of
the statements contained in the Registration Statement at the time they became effective to
ensure that such statements were true and correct, and that there was no omission of material
facts required to be stated in order to make the statements contained therein not misleading. The
Underwriter Defendants knew, or in the exercise of reasonable care should have known, of the
material misstatements and omissions contained in or omitted from the Registration Statement as
set forth herein. As such, the Underwriter Defendants are liable to the Class.
88.

None of the defendants made a reasonable investigation or possessed reasonable

grounds for the belief that the statements contained in the Registration Statement were true or
that there was no omission of material facts necessary to make the statements made therein not
misleading.
89.

Defendants issued and disseminated, caused to be issued and disseminated, and

participated in the issuance and dissemination of, material misstatements to the investing public
which were contained in the Registration Statement, which misrepresented or failed to disclose,
inter alia, the facts set forth above. By reason of the conduct herein alleged, each defendant

violated and/or controlled a person who violated Section 11 of the Securities Act.
90.

As a direct and proximate result of Defendants' acts and omissions in violation

of the Securities Act, the market price of Facebook's securities sold in the IPO was artificially
inflated, and Plaintiff and the Class suffered substantial damage in connection with their
ownership of Facebook's securities pursuant to the Registration Statement.

23

91.

At the times they obtained their shares of Facebook, Plaintiff and members of the

Class did so without knowledge of the facts concerning the misstatements or omissions alleged
herein.
92.

This action is brought within one year after discovery of the untrue statements

and omissions in and from the Registration Statement which should have been made through the
exercise of reasonable diligence, and within three years of the effective date of the Prospectus.
93.

By virtue of the foregoing, Plaintiff and the other members of the Class are

entitled to damages under Section 11 as measured by the provisions of Section 11 (e), from the
defendants and each of them, jointly and severally.
COUNT II
Against All Defendants

for Violations of Section 12(8)(2) of the Securities Act

94.

Plaintiff repeats and realleges each and every allegation contained above, except

any allegations of fraud, recklessness or intentional misconduct.
95.

For purposes of this action, Plaintiff expressly disclaims and excludes any

allegations that could be construed as alleging fraud or intentional or reckless misconduct as this
cause of action is based expressly on claims of strict liability andlor negligence under the
Securities Act.
96.

Defendants were sellers, offerors, underwriters andlor solicitors of sales of the

Facebook securities offering pursuant to the May 2012 IPO.
97.

The Registration Statement contained untrue statements of material facts,

omitted to state other facts necessary to make the statements made not misleading, and concealed
and failed to disclose material facts. Defendants' actions of solicitation included participating in
the preparation ofthe false and misleading Registration Statement.

24

98.

Defendants owed to the purchasers of Facebook securities which were sold in the

May 2012 IPO, the duty to make a reasonable and diligent investigation of the statements
contained in the Registration Statement, to insure that such statements were true, and that there
was not omission to state a material fact required to be stated in order to make the statements
contained therein not misleading. These Defendants knew of, or in the exercise of reasonable
care should have known of, the misstatements and omissions contained in the Offering materials
as set forth above.
99.

Plaintiff and other members of the Class purchased or otherwise acquired

Facebook securities pursuant to and traceable to the defective Registration Statement. Plaintiff
did not know, or in the exercise of reasonable diligence could not have known of the untruths
and omissions.
100.

Plaintiff, individually and representatively, hereby offers to tender to Defendants

those securities which Plaintiff and other class members continue to own, on behalf of aU
members of the Class who continue to own such securities, in return for the considerations paid
for those securities together with interest thereon.
101.

By reason of the conduct alleged herein, these Defendants violated, andlor

controlled a person who violated, section 12(a)(2) of the Securities Act. Accordingly, Plaintiff
and members of the Class who hold Facebook securities purchased pursuant and/or traceable to
the May 2012 IPO have the right to rescind and recover the consideration paid for their Facebook
securities and, hereby elect to rescind and tender their Facebook securities to the Defendants
sued herein. Plaintiff and class members who have sold their Facebook securities are entitled to
rescissionary danlages.

25

102.

Less than three years elapsed from the time that the securities upon which this

count is brought were sold to the public to the time of the filing of this action. Less than one
year elapsed from the time when Plaintiff discovered or reasonably could have discovered the
facts upon which this count is based to the time of the filing of this action.
COUNT III
Violation of Section 15 of The Securities Act

Against the Individual Defendants

103.

Plaintiff repeats and realleges each and every allegation contained above,

excluding all allegations above that contain facts necessary to prove any elements not required to
state a Section 15 claim, including without limitation, scienter.
104.

This count is asserted against Individual Defendants and is based upon Section

15 of the Securities Act.
105.

Individual Defendants, by virtue of their offices, directorship and specific acts

were, at the time of the wrongs alleged herein and as set forth herein, controlling persons of
Facebook within the meaning of Section 15 of the Securities Act. The Individual Deftmdants
had the power and influence and exercised the same to cause Facebook to engage in the acts
described herein.
106.

Individual Defendants' position made them privy to and provided them with

actual knowledge of the material facts concealed from Plaintiff and the Class.
107.

By virtue of the conduct alleged herein, the Individual Defendants are liable for

the aforesaid wrongful conduct and are liable to Plaintiff and the Class for damages suffered.

26

PRAYER :FOR RELIEF
WHEREI;'ORE, Plaintiff demands judgment against defendants as follows:
A.

Determining that the instant action may be maintained as a class action lUldef'

Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class
representative;
B.

Awarding compensatory damages in favor of Plaintiff and the other class

members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
Awarding Plaintiff and the other members of the Class prejudgment and

post~

judgment interest, as well as their reasonable attorneys' fees, expert fees and other costs;
D.

Awarding rescissionary damages; and

E.

Awarding such equitable, injunctive or other relief as this Court may deem just

and proper.

DEMAND FOR TRIAL BY JURY
Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff hereby dern:mds
trial by jury of all issues that may be so tried.

/St/ //~/\

Dated: May 25, 2012

POMERA~ II
By:

I

JD)t'K _ /

G/lJ~,_.~_":_/
Gusta~o F./Bro/Kner

Marc 1. Gross I /
Jeremy A. Liekiman
100 Park Avenue - 26 th Floor
New York, New York 10017
Telephone: [phone]
Facsimile: 212-661-8665

27

)

POMERANTZ HAUDEK
GROSSMAN & GROSS LLP
Patrick V. Dahlstrom
10 South LaSalle Street, Suite 3505
Chicago, IL 60603
Phone: [phone]
Fax: [phone]

Counsel/or Plaintiff

28

CERTIFICATION PURSUANT

TO FE])ERAL SECURITIES LAWS

1.

I,.

~~M.

11. L \:s htm,Q.11
t

, mal<e this declaration pursuant to Section

27(a)(2) ofthe Securities Act of 1933 as amended by the Private Securities Litigation Refonll Act of 1995.

2. I have reviewed a Complaint against Faceboo k Inc. (CCFace bo 0k"), and authorize the filing of
a compat'd.ble complaint on my behalf.
3.

I did not purchase Facebook securities at the direction of plaintiffs counselor in order to

participate in any private action arising under the Securities Act of 1933.
4.

I am willing to serve as a. representative party on behalf of a Class of investors who purchllSed

Facebook pursuant and/or traceable to the Company's May 2012 initial public offering,
including providing testimony at deposition and trial. if necessary. I understand that the Court has the authority

to select the most adequate lead plaintiff in this action.
5. To the best of my current knowledge~ the attached sheet lists all of my transactions in Facebook
securities.
6.

During tne three-year pedod preceding the date on which this Certification is signed, I have not

sought to serve as a representative party on behalf of a class under the federal securities laws, ex()ept as

fonows:

7. I agree not to accept any payment for serving as a representative party on behalfofthe class as set
forth in the Complaint, beyond my pro rata share ofalty recovery, except such reasonable costs and expenses
directly I'elating to the representation of the class as ordered or approved by the Court.

{00045951;1 }

8.

r declare under penalty of perjury that the foregoing is true and correct.

SUMMARY OF PURCHASES AND SALES

DATE

PURCHASE OR

5117/12

NUMBER OF

SALE

SHARES

Purchase

200

PRICE PER SHARE

$38.00

·l

I

{OOO459.57; 1 }