In re Facebook, Inc., IPO Securities & Derivative Litigation
986 F. Supp. 2d 487
S.D.N.Y.2013Background
- The consolidated CAC challenges Facebook’s May 2012 IPO disclosures under Sections 11, 12(a)(2) and 15 of the Securities Act, alleging failures to disclose that rising mobile usage and product decisions had already and materially reduced revenues.
- Facebook’s registration statements warned that mobile usage “may” harm revenue and disclosed mobile as a critical growth area but did not quantify the extent to which mobile was substituting for desktop or the then-current revenue impact.
- In early May 2012 Facebook internally revised downward its Q2 and full‑year 2012 revenue projections; Treasurer Cipora Herman and others informed select syndicate analysts and institutional investors of the revisions in scripted calls (the “Herman Calls”).
- Facebook filed a May 9 amendment and free-writing prospectus stating the trend of DAUs rising faster than ad impressions continued and attributing it in part to mobile usage and product changes; syndicate analysts revised public estimates downward accordingly.
- After the IPO (May 18–22), media reports revealed that underwriters had cut estimates during the roadshow and that the company had privately limited distribution of the revised forecasts; Facebook’s stock dropped substantially, and plaintiffs allege corrective disclosures caused the losses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Item 303 required disclosure that mobile usage and product decisions had already materially and unfavorably affected revenues | Facebook knew the trend was occurring and was reasonably likely to materially affect revenues, so Item 303 required disclosure of whether and to what extent revenues were impacted | Registration warned of mobile risk; internal projections need not be disclosed and Facebook’s statements were sufficiently cautionary | Court: Plaintiffs plausibly allege Item 303 duty was triggered and that Facebook omitted material particulars about the trend and its impact — dismissal denied |
| Whether statements that the risk "may" affect revenue were materially misleading (half‑truths) | “May” warnings were misleading because the risk had already materialized and Facebook privately acted on that knowledge | The “may” language was truthful and did not imply the risk had not already affected results | Court: Reading documents and surrounding facts together, plaintiffs sufficiently plead that the statements were materially misleading — dismissal denied |
| Whether nondisclosure of internal revised projections (and selective disclosure to analysts) is actionable | Selective disclosure and prompt calls to analysts show defendants viewed the information as material and thus nondisclosure to the market violated the Act | Internal forecasts and intra‑quarter developments need not always be disclosed; industry practice justified communications with underwriters | Court: Industry practice does not excuse Item 303 duties; selective disclosures support inference of materiality — plausible claims survive dismissal |
| Whether loss causation or market truth-on-the-market defeats the claim at pleading stage | The post‑IPO price drops were caused by revelations of the withheld information and analysts’ reduced estimates | Media reports before IPO and analyst commentary meant the market already knew the facts; any stock decline was unrelated | Court: Loss causation and negative‑causation defenses are factual and not appropriate to resolve on Rule 12(b)(6); truth‑on‑the‑market not established at pleading stage |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (examining pleadings standard for securities claims)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standards and plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Rule 8 plausibility standard)
- Litwin v. Blackstone Group, L.P., 634 F.3d 706 (Item 303 requires disclosure of whether and to what extent known trends are reasonably expected to materially affect revenues)
- Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (Item 303 obligates disclosure of known uncertainties and their potential revenue impact)
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality test and total‑mix standard)
- Ganino v. Citizens Utilities Co., 228 F.3d 154 (materiality standard in securities context)