Rentea v. Facebook, Inc. et al

Filing 1

PETITION to Perpetuate Testimony of Facebook, Inc., Mark Zuckerberg, David A. Ebersman, David M. Spillane, Morgan Stanley & Co., LLC, J.P. Morgan Securities, LLC and Goldman Sachs & Co.( Filing fee $ 46 receipt number 100014104), filed by Bogdan Rentea. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Civil Cover Sheet /Receipt)(klw, )

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UNITEE) STATES DISTRICT COURT
cOIF{}IERN DISTRICT OF NEW YORK
x

KATHY REICHENBAUM, Individually and On

Civil Action

No

Behalf of All Others Similarly Situated.
CI SS ACTION COMPLAINT
FOR VIOLATIONS OF
....

Plaintiff.

SECURITIES

LAWS

vs.

FACEBOOK, INC., MARK ZUCKERBERG. DAVID:
A. EBERSMAN, DAVID M. SPILLANE, MORGAN
STANLEY & CO. LLC. J.P. MORGAN
SECLRITILS LL( AND GOl DMAN SACHS &

JURY TRIAL DEMANDED

CO.,
Defendants,

EXHIBIT

A

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Plaintiff alleges the following based upon the investigation of plaintiff's counsel, which
included a review of United States Securities and Exchange Commission ('SEC") filings by
Facebook, Inc. (Facebook" or the Company"), as well as regulatory filings and reports,

securities analysts reports and advisories about the Company, press releases and other public

statements issued by the Company, and media reports about the Company, and plaintiff believes
that substantial additional evidentiary support will exist for the allegations set fbrth herein after a
reasonable opportunitY for discovery.

NATURE OF THE ACTION
1.

This is a securities class action on behalf of purchasers of Class A common stock

of Facebookpursuant to Facebook's May 12, 2012 Initial Public Offering (IPO") other than the
Defendants, their related parties and certain entities that were privately advised of the

information concealed from the registration statement and prospectus for the IPO (the 'Class ")

Plaintiff seeks to pursue remedies under the Securities Exchange Act of 1933 (the Securities
Act"),

JURISDICTION ANI) VENUE
2.

The claims asserted herein arise under and pursuant to Sections

and 15 of the Securities Act [15 U.S.C.
3.

and 12(a)(2)

§77k. 771(a)(2) and 77o]..

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

Section 22 of the Securities Act, [15 U.S.C.
4.

11

§

77v] and 28 LLS.C.

§l331.

Venue is proper in this District pursuant to Section 22 of the Securities Act and 28

U.S.C. §1391(b), as many of the acts and practices complained of herein occurred in substantial

part in this District.

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In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the NASDAQ
market.

PARTIES
6.

Plaintiff Kathy Reichenbaum. as set forth in the accompanying certification,

incorporated by reference herein, purchased Class A common stock of Facehook on the IPO.
Her purchases were made through one of the underwriter defendants

Morgan Stanley Smith

Barney LLC, a wholly owned subsidiary of defendant Morgan Stanley & Co. LLC, and she has
been damaged thereby.
7.

Defendant Facebook provides a social networking platform over which users

share a variety of information. The Company's principal place of business is located in Menlo
Park, CA.
8.

Defendant Mark Zuckerbcrg (Zuckerberg") has served as Facebook's Chief

Executive Officer CCEO") and a member of the Facebook board since July 2004 and has been
Chairman of the board since January 2012. Zuckerberg signed the registration

stateentfor the

IPO, filed with the SEC on May 16, 2012 (the 'Registration Statement"). Zuckerberg was also a

selling shareholder on the IPO selling 125,995,713 shares on the IPO.
9.

Defendant David A. Ebersman ("Ebersman") has served as Facebook's Chief

Financial Officer ("CFO") since September 2009. Ebersman signed the Registration Statement.
10.

Defendant David M. Spillane ("Spiilan&') has served as Facebook's Chief

Accounting Officer since prior to the IPO. Spillane signed the Registration Statement.

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Defendants Zuckerberg. Ebersman and Spillane are collectively referred to herein

as the 1ndividual Defendants,"
12.

Defendant Morgan Stanley & Co, LLC ('Morgan Stanley") was a co-lead

underwriter for the IPO and also served as representative of all of the other underwriters of the
IPO. The principal executive offices of Morgan Stanley are at 1221 6th Avenue New York. NY.
13.

Defendant J.P. Morgan Securities LLC

(J.P. Morgan) was a co-lead underwriter

for the IPO. The principal executive offices of J.P. Morgan are at 345 Park Avenue, New York,

14,

Defendant Goldman Sachs & Co. C'Goldman Sachs") was a co-lead underwriter

for the IPO. The principal executive offices of Goldman Sachs are at 200 West Street, New

York, NY.
15.

Defendants Morgan Stanley, J.P. Morgan and Goldman Sachs are collectively

referred to herein as the "Underwriter Defendants." The IPO was conducted by means of a firm
commitment underwriting.

PLAINTIFF'S CLASS ACTION ALLEGATIONS
16.

Plaintiff brings this action pursuant to Federal Rule of Civil Procedure 23(a) and

(b)(3) on behalf of a class consisting of all persons who suffered damage as a result of their

purchase of Facebook Class A common stock on the IPO pursuant to the Registration Statement
and Prospectus dated May 17, 2012. Excluded from the Class are defendants and members of

their immediate families; any entity in which a defendant has a controlling interest; Capital
Research & Management, Fidelity Investments (and other as of yet unknown entities that were

privately informed by an Underwriter Defendant of Facebook's lowered projections for the
second quarter), the heirs, successors and assigns of any excluded party.

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

impracticable. Facebook sold over 421 million Class A shares on the IPO. While the exact

number of Class members is unknown to Plaintiff at this time and can only he ascertained
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
identifled 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.
18.

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.
19.

Plaintiff will fairly and adequately protect the interests o:f the members of the

Class and has retained counsel competent and experienced in class and securities litigation.
20.

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:
(a)

whether the federal securities laws were violated by Defendants' acts as

alleged herein;
(b)

whether the Registration Statement and Prospectus misrepresented and/or

omitted material facts about the business of Facebook; and
(c)

to what extent the members of the

proper measure of damages.

lass have sustained damages and the

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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,

inasmuch 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.

SUBSTANTIVE ALLEGATIONS
22.

Defendant Facebook was founded in 2004 and on May 18. 2012 conducted its

initial public offering of 421.233,615 Class A common shares at $38 per share. In the days

leading up to the IPO, the selling shareholders decided to sell an additional approximately 84

million shares. Even with these additional shares, the IPO was oversubscribed with the
Underwriter Defendants exercising their overallotment option to purchase an additional
63.185,042 million shares beyond the initial 421,233.615 shares for a total of 484,418.657 shares

being sold. The IPO closed on or about May 22, 2012 with the Company realizing net proceeds

of approximately $18.4 billion.
23,

The shares began trading on the NASDAQ on Friday, May 18, 2012 at 11:30

A.M. EDT, and briefly reached a high of $45 per share on that day before selling pressure caused

the Underwriter Defendants to engage in a buying campaign that barely left the stock above its

offering price, closing on May 18, 2012 at $38.23 per share. The following Monday, May 21,
the stock closed at $34.03, and on May 22, closed at $$3 1.00 per share, a loss of approximately
1

8.5 percent in value from the IPO price.

24.

Before the market opened on May 22, 2012, Reuters reported that Morgan Stanley

had internally lowered Facebook revenue forecasts before the IPO. Reuters stating:

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Just before Facebooks (FB) $16B 1PO. Morgan Stanley tMS), the deals lead
underwriter, unexpectedly told major clients that the banks consumer Internet
analyst was reducing his revenue forecasts for the company, reports
Later that day, Reuters further reported that analysts at each of the Underwriter

25.

Defendants had lowered their earnings estimates for Facebook and that they had provided this
information only to certain select clients:
In the run-up to Facebooks $16 billion IPO, Morgan Stanley, the lead underwriter
on the deal, unexpectedly delivered some negative news to major clients: The
consumer Internet analyst. Scott Devitt, was reducing his revenue forecasts
for the company, The sudden caution very close to Facebooks 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.
bank1s

They said it might have contributed to the weak performance of Facebook shares,
which sank on Monday and Tuesday - their second and third days of trading - to
end more than 18 percent below the IPO price. The $38-per-share IPO price
valued Facebook at $104 billion.

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 of the people said.

For the second quarter of 2012, the new revenue estimate was $ 1.111 billion,
down from about $1.1 75 billion previously, the person added.
The second-quarter revenue forecast suggested that Facebooks yearover-year
revenue growth might slow from the first quarter of 2012, one of the investors
said.
"That deceleration freaked a lot of people out," the investor added.
26,

Also on May 22, 2012, Reuters reported that "the Financial Tndus'ry Regulatory

Authoritys chairman said on Tuesday that regulators plan to review allegations that Morgan
Stanley shared negative news before Facebooks initial public offering with institutional

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The allegations, if true, are a matter of regulatory concern to FINRA and SEC,"

Ketchurn told Reuters.
27.

After the market closed on May 22, 2012, it was further revealed by Reuters that

Massachusetts Secretary of Commonwealth William Galvin has issued a subpoena to Morgan
Stanley over an analysts discussions with investors on Facebook.
28.

Plaintiff and the members of the Class were not told of the Underwriter

Defendants' lowered earnings estimates in determining whether to purchase shares on the IPO.
29.

As for the reasons why these analysts lowered their earnings estimates for

Facebook, according to the Motley Fool:

During the company's road show, a Facebook exec verbally told underwriters and
institutional investors that Facebook's second-quarter and full-year earnings
would be weaker than expected. Basically. Facebook pre-announced their second
quarter earnings, only instead of his being widely dispersed common knowledge,
it was a whisper into the ears of the big \Vall Street players.
30.

In stark comparison, non-privileged investors like Plaintiff and the members of

the Class were only provided with an obscure statement that was added to Facebook's sixth

amendment to its Form S-I filing fir the iPO, filed with the SEC on May 9, 2012. Specifically,

Defendants added, without any notice that it had been added, the following sentence on page 57
out of the 171 page registration statement:

Based upon our experience in the second quarter of 2012 to date, the trend we saw
in the first quarter of DAUs [Daily Active Users] 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.
31.

This obscure (almost incomprehensible) disclosure did not alert Plaintiff or the

members of the Class that Facebook expected a material decline in projections for its second

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a fact that such investors would have wanted to consider in determining whether to

participate in the Facebook IPO.
32.

Given the ambiguity of this disclosure, it was incumbent on the Underwriter

Defendants to share their respective analysts estimate reductions with all prospective buyers of
Facebook shares on the IPO and not to a selective few,
33.

Given the decision to upsize the offering and sell approximately 84 million

shares, the concealment of this material information from Plaintiff and the members of the Class
required the Underwriter Defendants to sell greater allotments to their retail customers as well as

other investors with whom they chose not to share these revised downward estimates.
34,

Facebook stock closed on the day prior to the filing of this Complaint at $33.03 a

loss of approximately 13 percent from the [P0 price.

COUNT I

Violation of Section 11 of
the Securities Act Against All Defendants
35.

Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.
36.

violations of
37.

This Count is asserted by Plaintiff and the Class against all defendants for
11

of the Securities Act,

15 U.S.C. § 77k and is

not grounded on fraud.

The Registration Statement was materially false and misleading; contained untrue

statements of material fact; omitted to state material facts necessary to make the statements made
in the Registration Statement. under the circumstances in which they were made, not misleading:
and failed to disclose material facts, as described above.
38.

Facebook is the registrant for the IPO and filed the Registration Statement as the

issuer of the Class A common stock purchased by Plaintiff and the members of the Class, as

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defined in Section

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(a)(5) of the Securities Act. Facebook, the Individual Defendants and the

Underwriter Defendants were responsible for the contents of the Registration Statement and
caused

its filing

39.

with the SEC.

As issuer, Facebook is strictly liable to Plaintiff and the members of the Class

who purchased Facebook Class A common stock on the IPO pursuant to the Registration

Statement for the misstatements in, and the omissions from, the Registration Statement.
40.

Each Individual Defendant signed the Registration Statement.

41,

The Underwriter Defendants were underwriters and sellers with respect to the

common stock sold in the IPO within the meaning of the Securities Act. Those underwriters
purchased and sold the common stock issued in the IPO under a firm underwriting agreement.
42.

None of the Individual Defendants or Underwriter Defendants named herein made

a reasonable investigation or possessed reasonable grounds for the belief that the statements

described above, which were contained in the Registration Statement, were accurate and
complete in all material respects. The Underwriter Defendants and the Individual Defendants in
the exercise of reasonable care should have known of the material misstatements and omissions

contained in the Registration Statement as set forth herein.
43.

At the time Facebook Class A common stock was purchased, neither Plaintiff nor

any member of the Class knew, or by the reasonable exercise of care could have known, of the
fiicts concerning the inaccurate and misleading statements and omissions alleged herein.

44.

Plaintiff and the members of the Class purchased Facebook Class A common

stock on the IPO pursuant to the Registration Statement prior to the date Facebook has made
generally available to its securities holders an earnings statement covering a period of at least 12

months beginning after the effective date of the Registration Statement.
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in connection with the IPO and sale of Facebook Class A common stock.

45.

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce
and the United States Mails.
46.

This action was brought within one year after the discovery of the untrue

statements and omissions and within three years after Facebook Class A common stock was sold

to the public in the IPO.
By reason of the foregoing, the defendants named in this count have violated

47.

Section

11

of the Securities Act and are liable to Plaintiff' and the members of the Class, each of

whom has been damaged by reason of such violations.

COUNT

11

Violation of Section 12(a)(2) of
the Securities Act Against the Morgan Stanley

Plaintiff repeats and realleges each and every allegation contained above in

48.

paragraphs

1

49.

34, as

if fully set forth herein.

This Count is asserted against Morgan Stanley for violating Section l2(a)(

the Securities Act, 15 U.S.C.
50.

§

of

771(a)(2) and does not sound in fraud.

It is brought by Plaintiff on behalf of herself and the other members

of the Class,

who purchased Facebook Class A Common stock from Morgan Stanley on the IPO, pursuant to
the Prospectus.
51.

Morgan Stanley was a seller of the Class A common stock issued in connection

with the IPO having sold at least 162,174,942 shares pursuant to a firm commitment

underwriting agreement.
52.

The Prospectus, which was disseminated in connection with the IPO. contained

untrue statements of material facts and omitted to state other material facts necessary in order to
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make the statements, in light of the circumstances under which they were made, not misleading,
as set forth above.
53.

In connection with the IPO and sale of Facebook Class A common stock Morgan

Stanley directly or indirectly, used the means and instrumentalities of interstate commerce and
the United States mails.
54.

Less than one year has elapsed from the time that Plaintiff and the other members

of the Class discovered or reasonably could have discovered the facts upon which this Count is
based. Less than three years have elapsed from the time the Facebook Class A common

stock

were sold to the public in the IPO.
55.

By reason of the conduct alleged herein, Morgan Stanley violated Section

12(a)(2) of the Securities Act. Accordingly, Plaintiff and the other members of the Class who

hold Facebook Class A common stock, purchased from Morgan Stanley in the [P0, have the right

to rescind and recover the consideration that they paid for these Facebook Class A common

shares, and hereby elect to rescind and tender their Facebook Class A common stock to Morgan
Stanley. Class members who have sold the F'acebook Class A common stock that they purchased
from Morgan Stanley in connection with the IPO are entitled to rescissionarv damages.

COUNT Ill

Violation of Section 15 of
Act Against Zuckerberg

the Securities

56.

Plaintiff repeats and realleges each and every allegation contained above, as if

fully set forth herein.
57.

This Count is asserted against Zuckerberg for violating Section 15 of the

Securities Act, 15 US.C.

§

77o and does not sound in fraud.

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Zuckerberg is a control person of the Company by virtue of his position as

58,

Chairman of the board, CEO and by virtue of his owning or controlling a majority of Facebook's
stock givin.g him voting control over the Company.
59.

Zuckerberg did not make a reasonable investigation or possess reasonable

grounds for the belief that the statements contained in the Registration Statement and Prospectus
for the IPO were true and devoid of any omissions of material fact, Therefore, by reason of his

position of control over the Company, as alleged herein, pursuant to Section

15

of the Securities

Act, Zuckerberg is liable jointly and severally with and to the same extent that Facebook is liable
to Plaintiff and the members of the Class as a result of the wrongful conduci alleged herein.

As a result of the foregoing, Plaintiff and the members of the Class have suff'red

60.

damages.

WHEREFORE. Plaintiff prays for relief and judgment, as follows:

Determining that this action is a proper class action, certifying Plaintiff as a class

A.

representative under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs counsel as
Lead Counsel:
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

l)efendants
C.

Tongdoing, in an amount to he proven at trial, including interest thereon:

Awarding Plaintiff and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and
D.

Such other and further relief as the Court may deem just and proper.

I-,

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JURY TRIAL DEMANDED
Plaintiff hereby demands a trial bvjury.
DATED: May

2012

KLAFTER OLSEN & I.ESSER LLP

Jeffrey A. Kiafier
Seth RLesser
Two International Drive, Suite 350
Rye Brook, New York 10573
Tel: [phone]
Fax: [phone]

Kurt B. Olsen (pro hoc vice to be filed)
1250 Connecticut Ave,
Suite 200
Washington, DC 20036
Tel: [phone]
Fax: [phone]

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FACEBOOK, INC.
CERTIF1CTIO' PLRSUA"NT FO THE FEDERAl SECLRITIES
Kathy Reichenbaum ('Plaintiff") duly swears and says,

as

L4\S

to the claims asserted

under the federal securities laws, that:
1.

1

have retained

Klafer Olsen & Lesser LLP

as

my counsel, reviewed the

complaint, and authorized the filing of a substantially similar complaint on my behalf. I
understand that Klafter Olsen

& Lesser LLP may join with or refer me to other qualified counsel

to prosecute this case.
2.

The security that is the subject of this action was not purchased at the

direction of plaintiffs counsel or in order to participate in this private action.
3.

Plaintiff is willing to serve as a representative party on behalf of the class,

including providing testimony at deposition and trial,
4.

if necessary.

The transactions in the security that is the subject

Class Period are as follows:

Number of Shares

May 18, 2012

Date

May23,2012

Price Per

Purchased

Share

2900

838,00

Number of Shares

Price Per

Sold

Date

Share

1000

832.061

of this action during the

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Plaintiff has not sought to serve as a class representative in more than five

class actions filed under the securities laws in the last three (3)

years,

Other than

this

action,

Plaintiff has sought to be appointed a lead plaintiff in no other action:
6.

Plaintiff will not accept any payment for serving as a representative party

on behalf of the class beyond the Plaintiffs pro rata share of any recovery, except as ordered or

approved by the Court for reasonable costs and expenses (including lost wages) directly relating
to the representation of the class.

I

declare under penalty of peijury under the laws of United States that the

foregoing is true and correct. Executed this 25th day of May 2012, at Armonk, NY.

U fl

/

Plaintiff's signature