OPINION & ORDER
Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”), entered on October 4, 2012, 41 actions stemming from the May 18, 2012 initial public offering (“IPO”) of Facebook, Inc. (“Face-book” or the “Company”) are presently before this Court.
The instant motion relates to Plaintiffs North Carolina Department of State Treasurer on behalf of the North Carolina Retirement Systems; Banyan Capital Master Fund Ltd.; Arkansas Teacher Retirement System; and the Fresno County Employees’ Retirement Association; and the Named Plaintiffs’ Jose G. Galvan and Mary Jane Lule Galvan (collectively, “Lead Plaintiffs” or “Plaintiffs”) consolidated class action complaint (the “Consolidated Class Action Complaint” or “CAC”) alleging federal securities claims (the “Securities Actions”) against the Defendants Facebook, certain Facebook directors and officers (the “Individual Defendants”),
1. Prior Proceedings
On September 20, 2012, the MDL Panel held a hearing to determine whether the pending 41 filed actions should be transferred to the Southern District of New York. On October 4, 2012, the MDL Panel issued a transfer order, finding that the “Southern District of New York is an appropriate transferee district for pretrial proceedings in this litigation,” reasoning that “[m]uch of the relevant discovery will be located in New York...." In re Face-book, IPO Secs. & Derivative Litig.,
Of the 41 actions presently before the Court due to the MDL Panel’s transfer order, 30 of these actions allege violations of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) against movants and various underwriter defendants. On December 6, 2012, this Court issued an opinion, In re Facebook, IPO Sec. & Derivative Litig.,
Lead Plaintiffs for the Securities Actions filed the Consolidated Class Action Complaint on February 28, 2013. The CAC alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act.
The Defendants filed the instant motion to dismiss the Securities Actions on April 30, 2013. Oral arguments were held, and the motion was marked fully submitted, on October 8, 2013.
II. Allegations of the Consolidated Class Action Complaint
Alleged facts and prior proceedings underlying this opinion are set out in the December 6, 2012 Opinion. Accordingly, only facts relevant to this motion will be provided below. Because this is a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the following facts, which this Court assumes to be true, are drawn from the CAC. See Tellabs, Inc. v. Makor Issues & Rights, Ltd,.,
The CAC refers to the events surrounding and arising out of Facebook’s May 18, 2012 IPO.
In 2011, Facebook began to explore engaging in an IPO to compete with other rival cash-rich technology companies. The Company’s shares were traded on private exchanges, but accessing the public markets through an IPO would provide the Company with large amounts of cash, create a highly liquid market for its stock and had the potential to significantly increase the Company’s value, among other benefits. (M.H8S.)
On February 1, 2012, Facebook publicly filed its initial registration statement with the SEC
Facebook ascribed its financial results to several factors. The first and principal factor was the growing usage of Facebook on mobile devices, as opposed to the use of Facebook through traditional, stationary desktop computers. (CAC ¶ 95.) A second factor was the Company’s “product decisions,” decisions Facebook made concerning the design and features of its website, the type of advertising it displayed and the price of the advertisements. (CAC ¶ 96.)
The usage of Facebook on mobile devices was critical to Facebook’s financial performance for several reasons. First, Faeebook’s mobile market was extremely large: approximately half of Faeebook’s monthly users accessed the website through their mobile devices, either as a supplement to their use of Facebook through desktop computers or as their only means of accessing Facebook. Second, the Company’s mobile users were growing more rapidly than the rest of the Company’s user base. Facebook anticipated the growth rate of its mobile users to exceed the growth rate of their overall member base for the foreseeable future. Third, while Facebook showed large volumes of advertising to users who accessed its website through desktop computers, it did not yet show advertising to its mobile users. Mobile users were, at that time, an unmonetized resource and an important factor for Facebook’s future growth. (CAC ¶ 94.) The Feb. 1 Registration Statement emphasized that the mobile market was a “critical” area of “growth” and a “significant opportunity” that the Company was actively developing products to capitalize on. Feb. 1 Registration Statement, at 4.
The Feb. 1 Registration Statement also included warnings of risk factors to poten
• “Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results.” Feb. 1 Registration Statement, at 5.
• “Our advertising revenue could be adversely affected by a number of other factors, including: ... 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.” Feb. 1 Registration Statement, at 12; accord Registration Statement, at 13.
• “We had more than 425 million MAUs [monthly active users] who used Facebook mobile products in December 2011. We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. Although the substantial majority of our mobile users also access and engage with Face-book on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. 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. Accordingly, if users continue to 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, our revenue and financial results may be negatively affected.” Feb. 1 Registration Statement, at 13; accord Registration Statement, at 14.
• ‘We believe that our ability to compete effectively depends upon ... our ability to successfully monetize mobile usage.” Feb. 1 Registration Statement, at 14; accord Registration Statement, at 15-16.
• We do not currently display ads to users who access Facebook via mobile apps or our mobile website. To the extent that increasing usage of Facebook through mobile apps or our mobile website substitutes for the use of Facebook through personal computers where we do show ads, the number of ads that we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website. We believe that people around the world will continue to increase their use of Facebook from mobile devices, and that some of this mobile usage has been and will continue to be a substitute for use of Facebook through personal computers.” Feb. 1 Registration Statement, at 46; accord Registration Statement, at 51.
• “We do not show ads or directly generate any meaningful revenue from users accessing Facebookthrough our mobile products.... ” Feb. 1 Registration Statement, at 79; accord Registration Statement, at 93.
• “We believe that mobile usage of Facebook is critical to maintaining user growth and engagement over the long term, and we are actively seeking to grow mobile usage, although such usage does not currently directly generate any meaningful revenue.” Feb. 1 Registration Statement, at 81; accord Registration Statement, at 94.
The Feb. 1 Registration Statement also noted that Facebook “prioritizes user engagement over short-term financial results,” and thus “frequently make[s] product decisions that may reduce our short term revenue.” Feb. 1 Registration Statement, at 17. It also explained its revenue trends:
Our revenue trends are also affected by ad inventory management changes affecting the number, size, or prominence of ads we display. For example, in the fourth quarter of 2010, we significantly increased the number of ads on many Facebook pages. As another example, in the fourth quarter of 2011, we increased the reserve price (i.e., the minimum price threshold) in our advertising auction system in order to reduce the frequency with which low quality ads are displayed to users. This change caused a reduction in the overall number of ads shown and increased the average price per ad as a result of factors including the removal of ads with bids that were below the reserve price and some advertisers raising their bids in response to this change. For this particular change, we estimate that the decrease in the number of ads displayed and the increase in average price per ad approximately offset each other such that the impact on total revenue was minimal.
Id. at 46-47; accord Registration Statement, at 53.
The market reacted positively to the disclosures in the Feb. 1 Registration Statement, including the Company’s position on capitalizing the mobile market. (CAC ¶ 97.) Bloomberg reported that Facebook expected its “next 1 billion users to come mainly from mobile devices,” and was therefore “increasing its focus on mobile technology to take advantage of the shift to smartphones and tablets.”
On February 28, 2012, the Securities and Exchange Commission (the “SEC”) sent Facebook a “comment letter” concerning certain of the Company’s disclosures in the Feb. 1 Registration Statement (the “SEC Letter”). (CAC ¶ 98.) In the SEC Letter, the SEC made note that the Feb. 1 Registration Statement stated “that users ‘could decide’ to increasingly access your products primarily through mobile devices____” Letter from SEC to Face-book, at 3 (Feb. 28, 2012). The SEC instructed Facebook to “ensure that your disclosure fully addresses the potential
On March 7, 2012, Facebook responded to the SEC’s comment letter. In its response, Facebook stated that it could not disclose the potential impact of mobile usage on its revenue because it was unable to determine that impact. (CAC ¶ 102.) Facebook asserted that because many of its mobile users also continued to access Facebook through their desktop computers, the Company “cannot specifically determine how mobile use is a substitute for, rather than incremental to, use on personal computers.” Thus, Facebook stated that it was unable to “specifically assess the impact of increasing mobile use on its revenue and financial results” at that time. (Id.)
Facebook subsequently revised its Registration Statement to include more specific information about the trend of increasing mobile usage:
• “Increasing Mobile Usage. Increasing use of Facebook on mobile devices will also affect our performance, particularly if mobile use substitutes for use on personal computers. Historically, we have not shown ads to users accessing Face-book through mobile apps or our mobile website and we cannot be certain that our mobile monetization approaches will be successful in generating meaningful revenue. We cannot quantify the extent to which mobile usage of Facebook is substituting for, rather than incremental to, usage of Facebook through personal computers, but we generally expect mobile usage to increase at a faster rate than usage through personal computers for the foreseeable future.” See Registration Statement, Mar. 7, 2012, at 51 (“Mar. 7 Registration Statement”); accord Registration Statement, at 53.
• “We had 432 million MAUs who used Facebook mobile products in December 2011. 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.... [W]e do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. Accordingly, 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 incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.” Mar. 7 Registration Statement, at 14; accord Registration Statement, at 14.
• “We had 488 million MAUs who used Facebook mobile products in March2012. 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.... [W]e do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.” Registration Statement, April 23, 2012, at 14 (“April 23 Registration Statement”); see also Registration Statement, at 14 (adding additional disclosure based on information from the second quarter that “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”).
Facebook also included positive statements regarding mobile usage;
We experienced growth in DAUs [daily active users] across major markets including the United States, Brazil, and India. Increased mobile usage was a key contributor to this growth. DAUs as a percentage of MAUs [monthly active users] increased from 55% in March 2011 to 58% in March 2012, which we believe was driven entirely by increased mobile usage of Facebook. We believe that increases in DAUs and in DAUs as a percentage of MAUs generally positively affect our revenue because increases in user engagement may enable us to deliver more relevant commercial content to our users and may provide us with more opportunities for monetization.
Registration Statement, at 50.
In March and April 2012, Facebook began to prepare for its “roadshow,” (CAC ¶ 1C3.) Roadshows are a series of meetings around the country, primarily with groups of institutional investors, where a company makes presentations and answers investor questions regarding its upcoming IPO. The roadshow is an important part of the IPO process as it directly markets an IPO to institutional investors and generates interest in the IPO. (Id.) As part of this process, companies will typically provide its underwriters with the company’s projections, and underwriters will typically use these projections to create their own analysis and provide their own projections.
Defendant Ebersman and Facebook’s Treasurer, Cipora Herman (“Herman”), were the Facebook executives who had principal responsibility for managing the Company’s roadshow. (CAC ¶ 105.) The Lead Underwriters built the “book” of orders for the IPO during the roadshow, which contained the number of shares each institutional investor wanted to purchase, as well as the price that each investor was willing to pay for the stock. Facebook and the Lead Underwriters then used the orders in the book to determine how many shares to sell in the IPO and the price per share. (Id.)
In the time leading up to the roadshow, Facebook continued to make positive public statements emphasizing its growth. (CAC ¶ 110.) These comments included positive remarks on Facebook’s ability to monetize the mobile market. In the March 7, 2012 amendment to the Registration Statement, Facebook stated that it was beginning to display one of its principal advertising products to mobile users. See Mar. 7 Registration Statement, at 14 (“In February 2012, we announced plans to include sponsored stories in users’ mobile News Feeds.”). Facebook also noted that the number of users who accessed its website through mobile products had grown to 488 million as of March 31, 2012, an in
On April 16, 2012, the Company’s Chief Financial Officer (“CFO”), Defendant Ebersman, provided revenue guidance to the analysts from the investment banks that were underwriting the IPO (the “Syndicate Analysts”). (CAC ¶ 116.) This presentation included Facebook’s estimated revenues for the second quarter of 2012 and the full year. This information allowed the Syndicate Analysts to generate estimates of the Company’s revenues and financial results, which would then be incorporated into an “institutional selling memoranda” that the Underwriter Defendants would use to market the IPO to institutional investors. (Id.)
At the meeting, Ebersman informed the Syndicate Analysts that Facebook believed it would report revenues of as much as $1.2 billion for the second quarter of 2012 and $5 billion for the full 2012 year. These figures translated into year-over-year growth rates of as much as 34% for the second quarter and 35% for the year. (CAC ¶ 107.) The Syndicate Analysts incorporated the Company’s internal estimates into their financial models and virtually mirrored Facebook’s projections: The Syndicate Analysts’ predictions translated into expected year-over-year growth rates of up to 35% for the second quarter and 39% for the year. The Syndicate Analysts’ estimates were then incorporated into the institutional selling memoranda that the Underwriter Defendants used to market the IPO to investors. (Id. ¶¶ 108-09.)
On May 3, 2012, Facebook filed an amended Registration Statement (the “May 3 Registration Statement”) announcing that it was planning to sell more than 337 million shares in the IPO at a price between $28 and $35 per share. (CAC ¶ 113.) On the'same day, Facebook posted its roadshow video presentation on its website, which featured Defendant Chief Operating Officer Sandberg stating that the mobile market was “a key area of growth for Facebook” and that Facebook was not experiencing challenges in the mobile market: “For most companies, the mobile environment is a challenge, because it’s so small it requires new ad formats, but that’s not the case for Facebook.” Sandberg noted that Facebook had “just introduced [one of its principal advertising products] ... on mobile devices” and that these advertisements had “become a really natural part of the Facebook mobile experience.” (Id. ¶ 114.)
The market interest for Facebook shares during this time was extremely high. Investor demand to attend the roadshow was huge, and many projected the IPO to be one of the largest IPOs in history. The New York Times reported on May 3, 2012:
Facebook, which plans to make a market debut this month that could value it at $86 billion, is the stock that everyone seems to want.... The excitement over Facebook has come on the back of its rapid growth. For many, Facebook is the Internet. After a flurry of eye-popping market debuts by other Internet start-ups, ... Facebook’s will be the biggest yet.... Demand to attend the Facebook [roadshow] presentations has been extraordinarily high, with underwriters already drawing up waiting lists for the meetings[.]10
Facebook held its first live roadshow presentation on May 7, 2012. (CAC ¶ 118.) Based on the roadshow presentation and the Registration Statement, analysts widely recommended that investors buy Face-book stock. Analysts also widely reported that, for the second quarter and year-end 2012, Facebook would experience revenue growth rates of at least 35% year-over-year, based in part on the Company’s ability to make money from its mobile users. (Id. ¶¶ 120-21.) Analysts did not appear worried about the monetization issues associated with mobile usage. A Sterne Agee report recommended a “buy” of Facebook stock, noting that Facebook had a strong position in the mobile market “[w]ith 488 million MAUs [monthly active users] using Facebook mobile products in the month of March 2012, [Facebook] clearly has the reach on mobile platforms ____” (Id. ¶ 121.) Sterne Agee concluded that “mobile monetization [is] a significant long-terra growth opportunity for [Facebook].” (Id.)
However, on May 7, 2012, hours after its first roadshow presentation, Facebook’s management determined that the Company was facing difficulty in meeting its previous revenue projections for the second quarter of 2012 and the full year. (CAC ¶ 122.) Two developments were causing the change in analysis: First, during the second quarter of 2012, Facebook’s users increasingly migrated from desktop computers, where the Company displayed large amounts of ads, to mobile devices, where the Company displayed much less advertising. As such, Facebook was generating less advertising revenue than projected. Second, the Company had made certain product decisions in the second quarter of 2012 that reduced the average amount of advertisements displayed to users on some pages, which exacerbated the deterioration in its advertising revenues caused by increasing mobile usage. (Id.)
On the evening of May 7, 2012, Ebersman approached the lead Morgan Stanley banker on the IPO, Michael Grimes (“Grimes”), and informed him that, based on second quarter data received to date, Ebersman was no longer confident that Facebook would meet its internal revenue estimates. (Id. ¶ 123.) Ebersman informed Grimes that, “based upon their experience in Q2 to date, [Ebersman] was less confident in his financial projections— in reaching or exceeding his financial projections than previously [sic].” (Id.) Ebersman further informed Grimes that two developments had caused the deterioration in Facebook’s revenues: increasing mobile usage and the Company’s product decisions. (Id.)
By May 8, 2012, Facebook had cut its projected revenue figures for the second quarter of 2012 by $100 million, or more than 8.3%, and for the year by $175 million, or 3.5%. (CAC ¶ 124.) Facebook determined that its revenue for the second quarter would be as low as $1.1 billion, or 8.3% below the top of its prior range, and its revenue for 2012 would be between $4,825 billion and $4.85 billion, or as much as $175 million less than previously esti
On May 8, 2012, Facebook’s most senior executives determined that the change was so significant that it warranted disclosure to the Syndicate Analysts. (Id. ¶ 125.) Facebook’s Treasurer, Herman, sent an email to employees in the finance department with the subject line: “Q2 estimates from analysts IMPORTANT PLS THIS MORNING.” (Id. (emphasis in original)). Herman wrote that Facebook had “updated our forecast and we’re trying to gauge how far off our new forecast is from where the analysts are coming out.” (Id.) Herman stated that she and Morgan Stanley bankers immediately needed to see “the q2-q4 by quarter revenue estimates from the analysts for whom we have detailed models,” and that she was “[cjopying [a Morgan Stanley banker] on this so we can get some efficiency — I don’t want to be the bottleneck in getting the info to MS.” (Id.) After Morgan Stanley bankers had compared Facebook’s revenue figures with the Syndicate Analysts’ estimates, Grimes advised Ebersman that Facebook should immediately provide its new revenue figures to the Syndicate Analysts so that they could revise their models based on this new information and provide it to the Company’s largest potential investors. (Id. ¶ 126.)
The next day, May 9, 2012, Facebook filed a Free Writing Prospectus (the “FWP”) and an Amended Registration Statement (“May 9 Registration Statement”). (CAC ¶ 128.) The May 9 Registration Statement and FWP both stated:
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.
May 9 Registration Statement, at 57; FWP.
The FWP and May 9 Registration Statement led to some media reports on Face-book’s issues with mobile monetization.
On May 9, 10 and 15, after filing the FWP and the May 9 Registration Statement, Herman, Facebook’s Treasurer, made nineteen scripted calls with the Syndicate Analysts (the “Herman Calls”). (CAC ¶ 132.) During these calls, Herman told the Syndicate Analysts that Facebook had sharply reduced the revenue figures that the Company had provided to them three weeks earlier. The script for the Herman Calls stated as follows:
I wanted to make sure you saw the disclosure we made in our amended filing. The upshot of this is that we believe we are going to come in [on] the lower end of our $1.1 to $1.2 bn range for Q2 based upon the trends we described in the disclosure. A lot of investors have been focused on whether the trend of ad impressions per user declining (primarily as a result of mobile) was a one-time, or continuing, occurrence. As you can see from our disclosure, the trend is continuing. You can decide what you want to do with your estimates, our long term conviction is unchanged, but in the near term we see these trends continuing, hence our being at the low end of the $1,100 + $1,200 range.
{Id. ¶ 133.)
The Syndicate Analysts revised their financial models to reflect Facebook’s reduction in its revenue projections: estimates of the Company’s second quarter revenue were cut by as much at 7% and annual revenue as much as 6%. {Id. ¶¶ 135-36.) The Syndicate Analysts immediately provided this new information to some of Facebook’s most important potential investors.
Select Syndicate Analysts’ projections were revised for the second quarter as follows:
Goldman Sachs $1,207 billion $1,125 billion -6.79%
J.P. Morgan $1.182 billion $1,096 billion -7.27%
Morgan Stanley 1 $1,175 billion $1.111 billion -5.45%
Bank of America $1,166 billion $1.100 billion -5.66%
(CAC ¶¶ 108,136.)
Similarly, the projections for the year-end 2012 were revised as follows:
Syndicate Analyst Pre-May 9 Estimate Post-May 9 Revised Estimate Percent Change
Goldman Sachs 5.169 billion 1852 billion -6.13%
J.P. Morgan $5.044 billion $4.839 billion -4.06%
Morgan Stanley $4.854 billion -3.61%
Bank of America $5.040 billion 1815 billion -4.46%
(Id.)
Facebook’s reduction in its projections was reported by the media prior to the IPO.
The demand for Facebook stock remained high after Facebook released the FWP and May 9 Registration Statement. The high demand allowed Facebook to significantly increase both the size and price of the IPO in the week before the IPO. (CAC ¶ 143-44.) Raising both the price and size of an IPO is a rare occurrence: it has occurred in only 3.4% of all IPOs since 1995. (Id. ¶ 144.) On May 15, 2012, Face-book announced that it was increasing the price range for its stock from a range of $28 to $35 to a new range of $34 to $38. (Id. ¶ 145.) Bloomberg reported that Facebook was able to significantly raise the
Facebook completed the IPO as scheduled after the close of market on May 17, 2012. (CAC ¶¶ 16, 149.) Defendants sold more than 421 million Facebook IPO shares to the investing public at $38 per share, reaping more than $16 billion in proceeds, making the IPO one of the largest initial public offerings in history. (Id. ¶¶ 4,150.) Financial news analysts reported that the underwriters were releasing significantly more shares to retail investors than previously expected. (Id. ¶ 148.)
Facebook stock began publicly trading on May 18, 2012. In the days leading up to the IPO, numerous market commentators predicted that Facebook would experience a large increase in share price on the first day of trading due to large demand. (CAC ¶ 152.) Initially, Facebook’s price did surge as expected, with an opening share price at $42.05. (Id. ¶ 156.) However, soon after investors began to sell, which caused Facebook’s share price to drop close to its $38 IPO price within fifteen minutes of opening. (Id. ¶ 157.) The large drop in Facebook share price forced the Underwriter Defendants to step in and buy millions of shares at $38 a share to ensure that the stock never dipped below that line. (Id. ¶¶ 157-59.) Facebook’s stock closed at $38.23. (Id. ¶ 159.) Facebook’s stock prices fell even further on the next trading day, May 21, 2012. On extremely high trading volume, Facebook stock opened sharply down and closed at $34.03. (Id. ¶¶ 163-64.) Face-book’s stock price dropped again on May 22, closing at $31 per share. (Id. SI 20.) This represented a drop of 18% from Facebook’s initial IPO stock price. (Id.)
The slide in share price may have been caused by news reports on Facebook’s adjusted financial projections. On the night of May 18, 2012, Reuters reported that “Facebook [] altered its guidance for research earnings last week, during the road show, a rare and disruptive move.”
[S]uch a late change in guidance would mean that Facebook’s business was deteriorating rapidly between the start of the roadshow and the middle of the roadshow. Any time a business outlook deteriorates that rapidly, alarm bells start going off on Wall Street, and stocks plunge.18
On May 22, 2012, Reuters further reported that the lead underwriters, Morgan Stanley, J.P. Morgan and Goldman Sachs, all had significantly cut their revenue fig
The CAC alleges that Facebook failed to disclose material information in Facebook’s Registration Statement and other disclosures and the Registration Statement made materially untrue and misleading statements and omissions. Lead Plaintiffs offer two primary theories of liability: (i) Facebook’s failure to disclose whether increasing mobile usage and Facebook’s product decisions had or were reasonably expected to have a material unfavorable impact on revenues and to what extent these trends had or were reasonably expected to impact Facebook’s revenues were omissions or falsities of information required for disclosure by Item 303 of Regulation S-K; and (ii) the Company’s “may” and “if’ statements regarding the impact of the increasing mobile usage and the Company’s product decisions on Face-book’s revenues represented affirmative material misrepresentations.
III. Discussion
Standard of Review
On a motion to dismiss pursuant to Fed. R.CivJP. 12(b)(6), all factual allegations in the complaint are accepted as true, and all inferences are drawn in favor of the pleader. Mills v. Polar Molecular Corp.,
To survive a motion to dismiss pursuant to Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
Plaintiffs allege that Defendants violated Sections 11, 12 and 15 of the Securities Act. Section 11 impopes strict liability on issuers and signatories, and negligence liability on underwriters, where “any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Section 12(a)(2) imposes liability under similar circumstances for misstatements or omissions in a prospectus, on “[a]ny person who ... offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order
The CAC does not allege fraud; Lead Plaintiffs instead allege that Facebook acted negligently in preparing its Registration Statement. Neither scienter, reliance nor loss causation is an element of Section 11 or Section 12(a)(2) claims. Id. Section 11 requires only “ordinary notice pleading ... subject only to the ‘short and plain statement’ requirements of Federal Rule of Civil Procedure 8(a).” Litwin v. Blackstone Group, L.P.,
“Collectively, the language of [S]ections 11 and 12(a)(2) creates three potential bases for liability ... (1) a misrepresentation; (2) an omission in contravention of an affirmative legal disclosure obligation; and (3) an omission of information that is necessary to prevent existing disclosures from being misleading.” In re Morgan Stanley,
The Registration Statement Omitted Material Information
The Class Action Complaint alleges that Defendants violated Sections 11 and 12 of the Securities Act by, among other things, failing to disclose the information required by Item 303 of Regulation S-K. (CAC ¶¶ 188(c), 197-201.) Plaintiffs allege that Defendants were required to disclose: (i) whether increasing mobile usage and the Company’s product decisions had or were reasonably expected to have a material unfavorable impact on revenues; and (ii) to what extent those trends had impacted or were reasonably expected to impact Facebook’s revenue. (Id. ¶ 201.) Defendants have challenged the materiality of this information and contend that the Company did disclose this information in the Registration Statement and FWP.
Item 303 requires the disclosure of all “known trends ... that have had or that the registrant reasonably expects will have a material ... unfavorable impact on ... revenues.” Regulation S-K, Item 303, 11 C.F.R. § 229.303(a)(3)(ii). According to the SEC’s interpretive release regarding Item 303, “A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial condition or results of operation.” Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 6835, 54 Fed.Reg. 22427, 22429 (May 18, 1989) (“1989 SEC Release”). “Several specific provisions in Item 303 require disclosure of forward-looking information,” including “where a trend, demand, commitment, event or uncertainty is both [1] presently known to management and [2] reasonably likely to have material effects on the registrant’s financial condition or results of operations.” Id. at 22429; see also Panther
Internal forecasts are generally considered “not material facts that are require[d] to be disclosed’ in a registration statement.” In re Facebook, Inc., IPO Secs, and Derivative Litig.,
Item 303 similarly does not obligate companies to disclose their internal forecasts. See, e.g., In re Authentidate Holding Corp. Secs. Litig.,
The SEC requires “material forward-looking information regarding known material trends and uncertainties ... to be disclosed as part of the required discussion of those matters and the analysis of their effects.” Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No. 33-8350, 68 Fed.Reg. 75,056, 75,062 (Dec. 29, 2003). “Materiality is an ‘inherently fact-specific finding,’ ... that is satisfied when a plaintiff alleges ‘a statement or omission that a reasonable investor would have considered significant in making investment decisions’ ...” Litwin,
The Second Circuit recently decided two cases, Litwin and Panther Partners, that provide further illumination on the disclosure obligations under Item 303. Plaintiffs in Litwin alleged that defendant Blackstone violated Sections 11 and 12 of the Securities Act because the registration statement and prospectus for its IPO failed to disclose that (and the extent to which) its future revenues were expected to be impacted by certain developments concerning its business, including: (i) downward trends in the real estate market; (ii) a shift towards a more risky strategy by a subsidiary company, FGIC, which
The Second Circuit upheld the plaintiffs’ claims and held that Item 303 required more than the mere identification of trends that were occurring in the defendant’s business. The court noted that “the relevant question under Item 303 is whether [the company] reasonably expects the impact to be material.” Litwin,
[T]he key information that plaintiffs assert should have been disclosed is whether, and to what extent, the particular known trend, event, or uncertainty might have been reasonably expected to materially affect Blackstone’s investments. And this potential future impact was certainly not public knowledge ... and thus cannot be considered part of the “total mix” of information already available to investors. Again, the focus of plaintiffs’ claims is the required disclosures under Item 303 — plaintiffs are not seeking the disclosure of the mere fact of Blackstone’s investment in FGIC, of the downward trend in the real estate market, or of Freescale’s loss of its exclusive contract with Motorola. Rather, plaintiffs claim that Blackstone was required to disclose the manner in which those then-known trends, events, or uncertainties might reasonably be expected to materially impact Blackstone’s future revenues.
Id. at 718-19.
In holding for the plaintiff, the court emphasized that Blackstone’s real estate segment played a “significant role” in Blackstone’s business and that the alleged misstatements and omissions regarding Blackstone’s real estate “were qualitatively material because they masked a potential change in earnings or other trends.” Id. at 722. “[A]ll Item 303 requires in order to trigger a disclosure obligation [is] a known trend that [defendant] reasonably expected would materially affect its investments and revenues.” Litwin,
Approximately one year later, the Second Circuit upheld the Litwin panel’s decision in Panther Partners. In Panther Partners, the plaintiffs alleged that the defendants failed to disclose the extent of the impact of known product defects on the company’s financial results in advance of a secondary offering. See
In holding that the plaintiffs did adequately plead a violation of Item 303’s disclosure obligations, the Second Circuit looked not just at the omission alleged by plaintiffs but also at the circumstances surrounding the omission:
We believe that, viewed in the context of Item 303’s disclosure obligations, the defect rate [the alleged omission], in a vacuum, is not what is at issue. Rather, it is the manner in which uncertainty surrounding that defect rate, generated by an increasing flow of highly negative information from key customers, might reasonably be expected to have a material impact on future revenues.
Id. at 120.
In its analysis, the Court noted that “the Registration [s]tatement’s generic cautionary language ... was incomplete and, consequently, did not fulfill [the issuer’s]
In deciding for plaintiffs in Litwin and Panther Partners, the Second Circuit emphasized the issuer’s knowledge of both the trend and uncertainties surrounding the issue disclosed in its registration statement. The operative failure by the issuer in Panther Partners was not its omission of the possibility of the defects and bugs in its products but the omission of the company’s knowledge regarding the uncertainty of the issue. See id. at 121-22 (noting that the issuer “was aware of the ‘uncertainty’ ” of possible returns related to its product’s defects and that such “ ‘known uncertainties’ could materially impact revenues”).
Taking Litwin and Panther Partners together, an issuer has a duty to disclose any trend, event or uncertainty that is “known and existing at the time of the IPO” that “was reasonably likely to have a material impact” on the issuer’s financial condition. Panther Partners,
The SEC’s commentary on Item 303 further supports this reading of Litwin and Panther Partners. In its 1989 SEC Release, the SEC stated that if “[m]anagement is unable to determine that a material effect ... is not reasonably likely to occur,” then “MD & A disclosure of the effects of [the known trend, development or uncertainty], quantified to the extent reasonably practicable, would be required.” 54 Fed.Reg. at 22,430; see also 2003 SEC Release, 68 Fed.Reg. at 75,062 (“Quantitative disclosure ... may be required to the extent material if quantitative information is reasonably available.”). The “required disclosure regarding the future impact of presently known trends, events or uncertainties [under Item 303] may involve some prediction or projection.” 1989 SEC Release, 54 Fed.Reg. at 22,429; see also 2003 SEC Release, 68 Fed.Reg. at 75,059 (“In addressing prospective financial condition and operating performance, there are circumstances, particularly regarding known material trends and uncertainties, where forward-looking information is required to be disclosed.”). Thus, the mere identification of a trend is, in some cases, not sufficient disclosure.
Facebook’s Registration Statement did note the Company’s potential issues with mobile users and advertisements. The FWP noted that daily active users were increasing more rapidly than the increase in number of ads delivered, that this trend was likely caused by increased usage of Facebook on mobile devices and that growth in use of Facebook through mobile products “may” negatively affect the Company’s revenues. See FWP; see also Registration Statement, at 5. Faeebook’s disclosures denoted a trend, the increase of mobile users, and the uncertainty surrounding the trend, that the increase of mobile users may affect the Company’s revenues. However, two issues arise with the Company’s disclosures in the Registration Statement.
Second, Facebook’s warnings also noted that the increase in mobile users was not the sole variable that could have affected Facebook’s revenues at the time of the IPO. The Registration Statement noted that Facebook’s “revenue trends are also affected by ad inventory management changes affecting the number, size, or prominence of ads we display,” Registration Statement, at 52, and decreasing the number of ads displayed to users did not necessarily lead to a decrease in revenue. The Company, for example, was able to increase the reserve price (or the minimum price threshold) in Facebook’s advertising auction system which reduced the frequency of low quality ads displayed. This caused a reduction in the overall number of ads shown but increased the average price per ad in a way that “the impact on total revenue was minimal.” Registration Statement, at 53. The Registration Statement portrayed Facebook’s product decisions as having an impact on revenue, and an investor could reasonably conclude that an increase in mobile users will not necessarily negatively affect Face-book’s revenues since the Company’s product decisions could offset any lost revenue. Thus, the Registration Statement did not provide the extent increasing mobile users would affect the Company’s overall revenues at a time this trend was already affecting the Company’s revenues as a result of the Company’s product decisions. Facebook should have disclosed more of this relationship to investors.
Thus, while Facebook made significant disclosures, including that it “[does] not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven .... [and] if users continue to 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, our revenue and financial results may be negatively affected,” Registration Statement, at 14, these disclosures satisfy only part of Defendants’ Item 303 obligations.
Identification of a past trend does not satisfy a company’s disclosure obligations under Item 303; Item 303 require specifics disclosure of whether, and to what extent a material trend has impacted or is expected to impact future revenues. See Litwin,
Changes in the number of Daily Active Users who were using Facebook’s desktop website, how much time, on average, each user was spending on the desktop website and Facebook’s pricing for each of its ads at that time and Facebook’s own product decisions all could have affected Face-book’s revenues and an investor’s reading of the disclosures. However, Facebook knew that increasing mobile usage and the Company’s product decisions were impacting the Company’s revenues for the second quarter and the year, as evidenced by the Company’s second quarter internal projections, but did not disclose these trends or the impact on the Company’s revenue. Because of these variables, investors reading Facebook’s disclosures had no way of knowing what effect on revenue, if any, the Company was currently experiencing as a result of the mobile usage trend.
The Defendants did not violate Item 303 when it decided not to disclose its updated second quarter and yearly internal projections. However, the Company’s changes in its internal projections and subsequent calls to the Syndicate Analysts establish that the Company had identified a trend leading up to its IPO alleged to be material. Item 303 does require the disclosure of a company’s analysis of the future impact of a material trend or the impact such trend currently has on an issuer. See 2003 SEC Release, 68 Fed.Reg. at 75,059 (“In addressing prospective financial condition and operating performance, there are circumstances, particularly regarding known material trends and uncertainties, where forward-looking information is required to be disclosed.”).
Similarly, a company has no general “obligation to disclose the results of a quarter in progress.” Arfa v. Mecox Lane Ltd., No. 10 Civ. 9053,
Facebook’s choice to make the Herman Calls to a select group of investors just a few days before its IPO does not, by itself, trigger a disclosure obligation. Although sharing projections with underwriters and institutional investors might be “industry practice” in an IPO, a fact-intensive issue that the Court declines to resolve at this current stage of the litigation, Shah v. Wilco Sys., Inc.,
Defendants cite to Sheppard,
Given the reasoning above, Plaintiffs have sufficiently pleaded that Facebook omitted material information in violation of Item 303 of Regulation S-K in the Company’s Registration Statement.
The Registration Statement Did Contain Material Misrepresentations
Plaintiffs also allege that Defendants violated Sections 11 and 12 of the Securities Act by making material misrepresentations in the Registration Statement concerning the impact of increasing mobile usage and the Company’s product decisions on Facebook’s revenues. (CAC ¶¶ 188-96.) Plaintiffs contend that Face-book misled investors because the statements warned that increased mobile usage and product decisions “may negatively affect [Facebook’s] revenue” when, in fact, these factors allegedly already “had negatively impacted [the Company’s] revenue.” (Id. ¶ 11 (emphasis in CAC).) Plaintiffs contend that the Company’s purported risk warnings misleadingly represented that this negative impact was merely possible, when in fact, it had already material
“Whether or not a statement is materially misleading is a ‘fact-specific’ inquiry.” In re Noah Educ. Holdings, Ltd. Sec. Litig., No. 08 Civ. 9203(RJS),
Cautionary language may protect an issuer from liability; however, “[c]autionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired.” Wilson v. Merrill Lynch & Co., Inc.,
At the same time, “[disclosure is not a rite of confession or exercise of common law pleading.” Wilson,
Courts in this Circuit have held that a company’s purported risk disclosures are misleading where the company warns only that a risk may impact its business when that risk has already materialized. “[E]ven apparently specific risk disclosures like those in [a defendant company’s] prospectus are misleading if the risks are professionally stamped in internal undisclosed analyses ... as significantly greater or more certain than those portrayed in the prospectus.” In re Prudential Secs. Inc. Ltd. P’ship Litig.,
As noted above, Facebook’s Registration Statement did not disclose that increased mobile usage and the Company’s product decisions had already had a negative impact on the Company’s revenues and revenue growth. The Company’s purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialized. The warnings only warned what might occur if certain contingencies were met; the disclosures did not make clear that such contingencies had, in fact, already occurred.
Indeed, the Registration Statement included language that created ambiguity as to whether the Company’s risk warnings regarding mobile use would have an impact on the Company’s revenues. Face-book specifically informed investors that “the substantial majority of our mobile users also access and engage with Face-book on personal computers where we display advertising.” February 1 Registration Statement, at 13. Facebook also told investors that it could not determine the degree to which mobile use was substituting for desktop use. Registration Statement, at 53 (“We cannot quantify the extent to which mobile usage of Facebook is substituting for, rather than incremental to, usage of Facebook through personal computers.... ”). Although the Registration Statement disclosed that the Company did not “directly generate any meaningful revenue from the use of Facebook mobile products,” Registration Statement, at 14, this disclosure is not adequate to disclose that mobile usage and product decisions were harming Facebook’s revenues. Facebook did not discuss whether revenue from use of Facebook on personal computers or other Company product decisions could offset the loss caused by the increase in mobile usage. Investors had no way of knowing if this was occurring or not from the information provided by the Company.
The Registration Statement even contained positive statements concerning the impact of mobile usage on Facebook’s fi
The Plaintiffs’ allegations regarding the events after the Company filed the May 9 Registration Statement support a finding that Facebook did not disclose the fact that mobile usage was already affecting revenue growth. Plaintiffs allege that Facebook’s Treasurer Herman made nineteen phone calls to the Syndicate Analysts beginning only minutes after filing the May 9 amendment to the Registration Statement to tell them of the Company’s revenue cuts. (CAC ¶ 132.) The Syndicate Analysts then privately contacted certain preferred investors to inform them of their reduced estimates.
Further, market commentators specifically reported that Facebook had not previously disclosed its projected revenue cuts prior to the alleged May 21 and 22 disclosures that revealed the cuts. (CAC ¶¶ 173-74.) Plaintiffs contend that investors reacted with “shock” and “anger” to the post-IPO revelation of the Company’s cuts, and that the Company’s stock price collapsed after this reveal. (PL Op., at 40.) These allegations, along with the language in the Registration Statement, constitute adequate allegations that the Company did materially misrepresent to investors the impact increasing mobile usage was having on the Company’s revenues.
While Facebook used “may” statements in its Registration Statement, construing its warnings as mere “opinions” about the future does not preclude a Securities Act violation. “[M]isstatements of belief and opinion” can give rise to liability only “to the extent that the [belief or opinion] was both objectively false and disbelieved by the defendant at the time it was expressed.” Freidus v. Barclays Bank PLC,
Moreover, Facebook’s risk warnings are alleged to be more than mere opinions, they were misstatements of present fact, warning that something “may” occur when that event “had” already occurred, and not mere opinions of future possibilities.
While In re Noah and In re FBR found defendants not liable for its cautionary statements in its security disclosures, the facts in those cases are distinct from those in the instant action. Unlike in In re Noah,
Similarly, the regulatory filings and risk factor warnings at issue in In re FBR Inc. Sec. Litig.,
Reading the Registration Statement as a whole and taking the events alleged by Plaintiffs surrounding Facebook’s IPO into context, Plaintiffs have sufficiently pleaded material misrepresentation by Defendants in violation of Sections 11 and 12 of the Securities Act by making misrepresentations in its Registration Statement that could have and did mislead investors regarding the Company’s future and current revenues.
Materiality is sufficiently pled “by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.” Ganino,
“Where the principal issue is materiality, an inherently fact-specific finding, the burden on plaintiffs to state a claim is even lower” than the “relatively minimal burden” applicable to other elements of their claims under Rule 8 of the Federal Rules of Civil Procedure.” Litwin,
Facebook reduced its revenue figures for the second quarter of 2012 in its internal projections from $1.1-$1.2 billion range to $1.1 billion. This was a more than 8.3% downward shift from its initial estimate; the Company also cut its revenue figures for the year by as much as $175 million, or 3.5%. The Syndicate Analysts also made significant cuts to its own projections for the second quarter by as much at 7% and annual revenue as much as 6%. Such reductions have been found to be sufficiently material in this Circuit. See Litwin,
Further, the Registration Statement repeatedly highlighted that Face-book’s revenue and advertising revenue was Facebook’s most significant financial metric. (CAC ¶¶ 88-97, 185.) “[0]ne factor affecting ... materiality is whether the misstatement or omission relates to a segment that plays a ‘significant role’ in the registrant’s business.” Litwin,
The Defendants’ actions once Facebook revised its second quarter projections establish the significance of the cuts and the connection between mobile usage and revenues. Immediately after determining that its revenues for the quarter and the year
The market reaction to the revenue projections also supports the adequacy of the materiality allegations. In the week before the IPO, investor demand for Face-book shares was reported to be at high levels. The financial press reported that the revenue cuts were a “big shock” to the investors who learned of them, raised “a significant red flag” about Facebook’s financial condition and that the “declaration” in Facebook’s revenues “freaked a lot of people out.” (CAC ¶¶ 138-39, 180); see also SEC v. Mayhew,
This Court in the Derivative Opinion has previously stated:
[Facebook] repeatedly made express and extensive warnings in the Company’s Registration Statement, drafts of the Registration Statement and in its final Offering Documents about the trend of increased use of mobile applications. Thus, even if internal projections could be consider material to the IPO, [ ] Plaintiffs have not demonstrated that the Facebook projections would have significantly altered the total mix of information in the marketplace, considering that these disclosures were publicly disseminated.
Derivative Op.,
The Derivative Opinion’s dicta does not change the analysis here. In the Derivative Opinion, the Court applied a different standard that does not govern Securities Act claims. Id. Securities Act claims need only satisfy a burden that is “even lower” than the “relatively minimal burden” imposed by Fed.R.Civ.P. 8 to plead materiality. Litwin,
Furthermore, the facts alleged in the CAC are different from the facts alleged in the Derivative Actions: the Derivative Plaintiffs did not assert any particularized facts establishing materiality. Derivative Op.,
Defendants contends that the financial media widely reported that the impact of mobile usage and product decisions were continuing to harm Facebook’s revenue growth when the Facebook issued the FWP, and any subsequent disclosures after the IPO were immaterial. (See Def. Mem., at 43.) Under the “truth on the market” defense, a corollary to the “fraud on the market” doctrine, “a misrepresentation is immaterial if the information is already known to the market because the misrepresentation cannot then defraud the market.” Canino,
In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our shares.... We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers, or employees.
Registration Statement, at 31. A reasonable investor will not be charged to regard press reports as a reliable source of information after having read such advice. See SEC v. Bank of Am. Corp.,
Defendants Did Fail To Disclose Under Rule 108
Plaintiffs have alleged that the Registration Statement failed to disclose material information required to be disclosed by Rule 408 of SEC Regulation C because known financial effects related to increasing mobile usage and certain product decisions were not disclosed. (CAC ¶¶ 188, 197-202; Def. Op., at 61.)
Rule 408(a) reflects the principle that an issuer’s disclosures must be complete and accurate. See Nanopierce Techs., Inc. v. Southridge Capital Mgmt., No. 02 Civ, 0767,
The Allegations With Respect To Loss Causation Do Not Require Dismissal
Defendants assert that Plaintiffs fail to state a claim because the absence of loss causation is apparent on the face of the complaint. Defendants contend that Plaintiffs’ allegations of loss causation are inadequate because none of the alleged corrective disclosures mentions Facebook’s “product decisions” and the fact that Face-book had lowered its projections was publicized in at least 16 media reports prior to the IPO. (Def. Mem., at 46-47.) Defendants contend that Plaintiffs own allegations show the absence of any tie between the May 21 and 22 stock drops and the revelation of any new information about such decisions. (Id., at 46.)
Generally, loss causation is not an element of a claim under either Section 11 or 12. See, e.g., In re Giant Interactive Grp., Inc. Sec. Litig.,
While “a plaintiff pursuing a Securities Act claim is not required to affirmatively plead causation, a negative causation defense may be considered on a dismissal motion where the absence of loss causation is apparent on the face of the complaint.” Blackmoss Inv. Inc. v. ACA Capital Holdings, Inc., No. 07 Civ. 10528,
Defendants have not sufficiently shown the lack of loss causation or the existence of negative causation. Whether the May 19 and May 22 Reuters reports constituted corrective disclosures that revealed Face-book’s alleged omissions or misrepresentations and whether such disclosures actually caused the drop in Facebook stock prices are issues of fact and are not appropriate for resolution in the motion to dismiss stage. See Giant,
The alleged corrective disclosures do not specifically mention the Company’s product decisions, but this is not fatal to Plaintiffs claim. See, e.g., Freudenberg, 712 F.Supp.2d at 202 (noting that loss causation may exist when “ ‘truth’ about the company’s underlying condition, when revealed, causes the ‘economic loss’ ”).
Conclusion
Based on the conclusions determined above, Defendants’ motion to dismiss is denied.
The parties will meet and confer upon the schedule for further proceedings which will be the subject of a pretrial conference at 10 a.m. February 4, 2014, or at such
It is so ordered.
Notes
. The Individual Defendants include Mark Zuckerberg ("Zuckerberg”); Sheryl K. Sand-berg ("Sandberg”); David A. Ebersman ("Ebersman”); David M. Spillane ("Spil
. The Underwriter Defendants include Morgan Stanley & Co. LLC ("Morgan Stanley”); J.P. Morgan Securities LLC ("J.P. Morgan”); Goldman, Sachs & Co. ("Goldman Sachs”); Allen & Company LLC; Barclays Capital Inc.; Blaylock Robert Van LLC; BMO Capital Markets Corp.; 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.; E*TRADE Securities LLC; Itaú BBA USA Securities, Inc.; 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; Muriel Siebert & Co., Inc.; Oppenheimer & Co. Inc.; Pacific Crest Securities LLC; Piper Jaffray & Co.; Raymond James & Associates, Inc.; RBC Capital Markets, LLC; Samuel A. Ramirez & Company, Inc.; Stifel, Nicolaus & Company, Incorporated; Wells Fargo Securities, LLC; The Williams Capital Group, L.P.; and William Blair & Company, L.L.C.
. The Securities Actions include: Brian Roffe Profit Sharing Plan v. Facebook, Inc., No. 12-cv-4081 (filed 5/23/12); Twining v. Facebook, Inc., No. 12-cv-4099 (filed 5/23/12); Goldrich Cousins P.C. 401(k) Profit Sharing Plan & Trust v. Facebook, Inc., No. 12-cv-04131 (filed 5/23/12); Braun v. Facebook, Inc., No. 12-cv-4150 (filed 5/24/12); Alexander v. Face-book, Inc., No. 12-cv-4157 (filed 5/24/12); Lightman v. Facebook, Inc., No. 12-cv-4184 (filed 5/25/12); Reichenbaum v. Facebook, Inc., No. 12-cv-4194 (filed 5/25/12); Lazard v. Facebook, Inc., No. 12-cv-4252 (filed 5/30/12); Gregorczyk v. Facebook, Inc., No. 12-cv-4291 (filed 5/31/12); Brinckerhoff v. Facebook, Inc., No. 12-cv-4312 (filed 6/1/12); Goldberg v. Facebook, Inc., No. 12-cv-4332 (filed 6/1/12); Eannarino v. Facebook, Inc., No. 12-cv-4360 (filed 6/4/12); Mamula v. Facebook, Inc., No. 12-cv-4362 (filed 6/4/12); Leitner v. Facebook, Inc., No. 12-cv-4551 (filed 6/11/12); Savitt v. Facebook, Inc., No. 12-CV-4648 (filed 6/13/12); Sexton v. Face-book, No. 12-cv-4777 (filed 6/19/12); and Loomis v. Facebook, Inc., No. 12-cv-5511 (filed 7/17/12), which were filed in this District. The Securities Actions also include: Spatz v. Facebook, Inc., No. 12-cv-2662; Chang v. Facebook, Inc., No. 12-cv-2680; Gregory v. Facebook, Inc., No. 12-cv-2815;
. Information from Securities and Exchange Commission ("SEC”) filings by Facebook, in particular its Form S-l Registration Statement and amended Form S-l/A Registration Statements are noted where relevant.
. All of Facebook’s Form S-l Disclosures, including amendments, and the SEC’s declaration of effectiveness are searchable on the SEC's EDGAR search platform at http://www. sec.gov/edgar/searchedgar/webusers.htm.
. Facebook subsequently amended its registration statement several times before filing their final Form S-l/A on May 16, 2012 (the "Registration Statement”).
. Brian Womack & Ari Levy, Facebook Seeks to Raise Up to $5 Billion in Biggest Internet IPO oil Record, Bloomberg, Feb. 2, 2012, http://www.bloomberg.com/news/2012-02-01/ facebook-files-to-raise-up-to-5-billion-in-ipoof-social-networking-site.html.
. Evelyn Rusli, Facebook Files for an I.P.O., N.Y. Times, Feb. 1, 2012, http://dealbook. n3ftimes.com/2Oi2/O2/Ol/facebook-files-for-ani-p-o/?_r=0.
. According to the Lead Plaintiffs, the SEC makes comment letters public "no earlier than 20 business days after it has ... declared a registration statement effective." (PI. Op., at 9 n. 3.) The SEC Letter was made public by the SEC on or around June 15, 2012, after the date of Facebook's IPO. (Id.)
. Susanne Craig & Evelyn Rusli, Small Investors May Get to Own a Bit of Facebook, N.Y. Times, May 3, 2012, http://dealbook. nytimes. com/2012/05/03/small-investors-may-get-to-own-a-bit-of-facebook/.
. Alistair Barr & Alexei Oreskovic, Face-book’s IPO show to hit the road May 7: source, Reuters, May 2, 2012, http://www. reuters.com/article/2012/05/02/us-facebookipo-idUSBRE8401PD20120502.
. See, e.g., April Dembosky, Facebook Admits To Mobile Weakness, Fin. Times, May 9, 2012, http://blogs.ft.com/tech-blog/2012/05/ facebook-admits-to-mobile-weakness/ ("Face-book said the migration of its users to mobile platforms is compromising its ability to make money from them.”); Henry Blodget, Face-book Is "Muppet Bait,” Bus. Insider, May 10, 2012, i http://www.businessinsider.com/ faceboqk-muppet-bait-2012-5 (writing that the disclosures revealed that the company "is unlikely to be able to generate as much revenue per user from mobile as it does from the web,” and that this concern, combined with the fact that "Facebook’s growth is decelerating,” make the offering "muppet bait”); Face-book Admits Mobile Shift Damaging Business Faster Than Expected In New SEC Filing; Will Miss Q2 Projections, PRIVCO, May 9, 2012, http ://www.privco. com/breaking-newsfacebooks-admits-mobile-shift-damagingbusiness-faster-than-expected (writing that the FWP "reveals fast erosion in [its] core advertising business,” offers "a stunning preview of a lower than expected Q2 as a result of the shift to mobile devices,” and "Effectively Warns Investors That Facebook Will Miss Its Second-Quarter Projections”); Jennifer Van Grove, Facebook’s Mobile Risk by the big, Bad Numbers, Venturebeat, May 13, 2012, http:// venturebeat.com/2012/05/13/facebook-mobilenumbers/ ("Mobile is Facebook’s advertising
. Facebook Admits Mobile Shift Damaging Business Faster Than Expected In New SEC Filing; Will Miss Q2 Projections, PRIVCO, May 9, 2012, http://www.privco.com/ breaking-news-facebooks-admits-mobile-shiftdamaging-business-faster-than-expected.
. Reuters would later report that certain institutions described the Syndicate Analysts’ decision to reduce their revenue estimates during the time period when the roadshow was occurring as "a big shock,” "very, very unusual,” a "bombshell,” and something that they had "never before seen ... in 10 years.” Alistair Barr, Insight: Morgan Stanley cut Facebook estimates just before IPO, Reuters, May 22, 2012, http://www.reuters.com/article/ 2012/05/22/us-facebook-forecasts-idUSBRE84 L06920120522; (CAC ¶¶ 14, 138, 166.) Business Insider similarly wrote that the reduction in revenue estimates during the roadshow was "highly unusual” and something that they never saw "during 20 years in and around the tech IPO business.” Henry Blodget, BOMBSHELL: Facebook Bankers Secretly Cut Forecasts For Company In Middle Of IPO Roadshow, Bus. Insider, May 22, 2012, http://www.businessinsider.com/
. See, e.g., Serena Saitto et al., Facebook IPO Said to Get Weaker-Than Forecast Demand, Bloomberg, May 11, 2012, http://www. bloomberg. com/news/2012-05-10/facebookipo-said-to-meet-weaker-than-expectedinvestor-demand.html (reporting that Face-book was "telling analysts that sales may not meet their most optimistic projections”); Henry Blodget, UH OH: Facebook IPO Seeing 'Weak Demand’, Bus. Insider, May 10, 2012, http://www.businessinsider.com/facebookipo-weak-demand-2012-5 (Facebook is "said to have told investors that it won’t meet their most optimistic projections”); Facebook IPO: Expectations on Facebook are way too high, Wash. Post, May 11, 2012, http://articles, washingtonpost.com/2012-05-1 1/busi-ness/3545471 l_l_facebook-ipo-social-network-facebook-common-stock (same); Kim Peterson, Is Facebook IPO Hot or Not?, MSN Money, May 11, 2012, http://money.msn.com/ technologyinvestment/article.aspx?post=769 ce83c-2bef-423l-b384-957272alaa25 (same); Cory Willard, Is the I. P. Morgan bombshell a one-day event ?, Wall St. J. MarketWatch, May 11, 2012 (linking to the Serena Saitto Bloom-berg article as one that "every investor should be thinking about into this weekend”).
. Douglas MacMillan, et al., Facebook CEO Focuses on Mobile Strategy as IPO Nears, Bloomberg, May 14, 2012, http://www. bloomberg.com/news/2012-Q5-14/facebookceo-focuses-investors-on-mobile-strategy-asipo-nears.html.
. Nadia Damouni & Olivia Oran, Morgan Stanley made big bet on Facebook, Reuters, May 18, 2012, http://www.reuters.com/article/ 2012/05/19/facebook-morgan-stanley-idUSLlE 8GIERQ2Q120519.
. Henry Blodget, If This Really Happened During The Facebook IPO, Buyers Should Be Mad As Hell ..., Bus. Insider, May 19, 2012, http://www.busmessinsider.com/facebookearnings-guidance-2012-5.
. Felix Salmon, The Facebook eamings-forecast scandal, Reuters, May 22, 2012, http: //blogs.reuters.corn/felix-salmon/2012/05/22/the-facebook-earnings-forecastscandal/ ("[H]ere's a material nonpublic fact about Facebook, which retail investors and everybody else in the deal deserved to know: all three underwriters cut their estimates simultaneously, in response to some very minor changes in the revised IPO prospectus.”).
. Item 303 establishes a safe harbor for "forward-looking information” made by issuers "pursuant to paragraphs (a)(4) and (5) of this Item” but not subsection (a)(3). 17 C.F.R. § 229.303(c).
. Defendants argue that the SEC has even discouraged issuers from disclosing projections in advance of an IPO by not applying a safe harbor provision to IPOs. (See Def. Mem., at 30.) The SEC concluded that the safe harbor should not apply because companies engaging in IPOs are "generally untested” and thus especially likely to produce uncertain projections. Sec. Offering Reform, Securities Act Release No. 8591, 70 Fed.Reg. 44722, 44739 (Aug. 3, 2005) (the "2005 SEC Release”); accord Letter of Mary L. Schapiro, SEC Chair to Comm. On Oversight and Gov’t Reform, U.S. House of Rep., at 23 (August 23, 2012).
. Plaintiffs contend that Facebook knew of the issues relating to mobile usage, the Company’s product decisions and the potential impact the two could and did have on the Company's revenues. Facebook's statements in its Registration Statements, FWP and the Herman Calls support this allegation.
. Although Facebook made numerous disclosures and identified many risk factors to potential investors, such disclosures do not shelter Defendants from liability under the "bespeaks caution” doctrine. See Iowa Pub. Emps. Ret. Sys. v. MF Global, Ltd.,
. While this Court previously ruled that Facebook "repeatedly made express and extensive warnings in the Company’s Registration Statement, drafts of the Registration Statement and in its final Offering Documents about the trend of increased use of mobile applications” in the Derivative Actions, Derivative Op.,
. As noted by the SEC, ”[u]ntil the early 1970s, the [SEC] prohibited disclosure of forward-looking information ... based primarily on [its] perception that such information was inherently unreliable, and that unsophisticated investors would place undue emphasis on the information in making investment decisions.” Safe Harbor For Forward-Looking Statements, 59 Fed.Reg. 52723, 52723-24 (Oct. 19, 1994). When the SEC modified its rules in 1978, it stated only that companies may "voluntarily ... disclose management projections in their filings with the [SEC].” Guides for Disclosure of Projections of Future Economic Performance, 43 Fed.Reg. 53246, 53247 (Nov. 15, 1978). In 2005, the SEC expressly rejected a rule that would have "required] projections or other forward-looking information to be included in [IPO] registration statements.” 2005 SEC Release, Fed. Reg. at 44739. However, ”[s]ince the 1980’s, [the SEC has] encouraged issuers to disclose forward-looking information and, in some situations ... required them to do so.” Id. at 44736.
. While the SEC does not require disclosure of revenue data from a quarter that is completed up to a month and a half before an IPO, see Regulation S-X, 17 C.F.R. § 210.3-12(a) (mandating that registration statements contain financial statements that are no more than 135 days old), Regulation S-X is not the only operative SEC regulation setting forth Defendants' disclosure duties. See DeMaria v. Andersen,
. Facebook’s eventual post-IPO result from its completed second quarter showed a revenue increase of almost 12% over the first quarter of 2012 and 32% from the second quarter in the previous year. As noted above, Facebook’s Item 303 disclosure duties were triggered before the completion of the second quarter, when Defendants determined that the Company was facing a material negative impact on Facebook's projected revenues. See Litwin,
. That Facebook ultimately reported revenues in line with its original estimates does not change the Court’s analysis. "The truth of a statement made in the registration statement is judged by the facts as they existed when the registration statement became effective.” In re IPO Sec. Litig.,
. Defendants note that in Glassman and In re Turkcell, the courts treated comparable variances in actual results as immaterial as a matter of law. See Glassman,
. Defendants contend that it followed industry custom in providing its original and revised projections to the Syndicate Analysts. (See Def. Mem., at 43). However, when the revised projections were disclosed, highly experienced industry participants stated that what Facebook did was "very, very unusual,” "rare,” and something they had "never seen [ ] during 20 years in and around the tech IPO business. (CAC ¶¶ 161, 166-67.) As discussed above, industry custom, whatever it may be established to be, does not justify dismissal on the grounds of materiality at the motion to dismiss stage.
. At the motion to dismiss stage, allegation of sharply negative market reaction can be used to support other allegations of materiality. See Rules and Regulations, Securities Exchange Commission, 64 Fed.Reg. 45, 150, 45,152 (Aug. 19, 1999) ("Considerations of potential market reaction to disclosure of a misstatement is by itself too blunt an instrument to be depended on in considering whether a fact is material.”); see also New Orleans Emps. Ret. Sys. v. Celestica, Inc.,