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Facebook Wins Case Against Shareholders Over Alleged Pre-IPO Pricing Misinformation

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In a ruling that is bound to bring much relief to the social networking giant, a federal appeals court on Friday threw out a case against Facebook, including CEO Mark Zuckerberg, filed by its shareholders alleging Facebook of conveying incomplete information before its IPO went live in 2012.

The verdict delivered was an upholding by the appeals court of a February 2013 dismissal of the derivative litigation by U.S. District Judge Robert Sweet.

The case, which was brought to the 2nd U.S. Circuit Court of Appeals by shareholders of the company, involved Facebook’s May 2012 initial public offering. According to the investors, who lost money on shares they bought after the IPO — valued at $16 Billion — the company witheld information associated with threats to its growth prospects, before the IPO took place.

According to the investors, the correct course of action that Facebook should have followed in such a situation, would have been to make public its internal projections on the effect of increased mobile usage on revenue prospects, claiming that Facebook instead choose to inform it’s underwriters, who cut down the earnings forecast, leading to a subsequent fall in the share prices.

The company officially entered the markets on May 18, 2012. The value of the shares however, dropped like a rock, going to a base level of $17.55 on Sept. 4, 2012 and staying well below it’s IPO price of $38 per share. The company has more than recovered since then, and shares are valued at around $99 apiece at the moment.

Circuit Judge Dennis Jacobs, in his decision, ruled that considering the fact that the plaintiffs could not have obtained shares before the IPO took place and as such could not exhibit “contemporaneous” ownership,

A proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired.

Further adding that the investors lacked standing to sue the directors and underwriters of the web giant, the latter of whom is lead by Morgan Stanley.

While lawyers representing the shareholders were unavailable for comment, a Facebook spokeswoman said that the company is happy with the decision (Predictably!).

The case is available under re: Facebook Inc Initial Public Offering Derivative Litigation, 2nd U.S. Circuit Court of Appeals, Nos. 14-632, 14-1309, 14-1445, 14-1784 and 14-1788.


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