Facebook Class Action Lawsuits A Dead Weight Going Forward

on Jul 31, 2012

In the Facebook page on Reuters – you read that right, not the other way round – there is amongst other useful and interesting information a list of the lawsuits which have been filed against the social media behemoth in relation to its May IPO.

The basic reason for this embryonic litigation can be gleaned from the ticker at the top of the Reuters page. Right now, as I write this on the last day of July and two and a half months since Facebook (FB) went public, its stock is trading at $23.15. The listing price, paid just ahead of the float by the millions of initial public offerees, was $38. Meaning Facebook subscribers are currently down 39 percent on what they shelled out back on or just before 18 May.

Getting back to the litigation, the Reuters page identifies no less than eight law-firms which have advised the commencement of claims against Facebook and/or its founder-cum-CEO Mark Zuckerberg and/or financiers, brokers and others involved in the float.
!m[](/uploads/story/208/thumbs/pic1_inline.png)And seemingly this isn’t everyone. Market-watch website thestreet.com on 19 July gave space to a ‘press release’ by yet another law-firm, not listed by Reuters, reminding disgruntled investors that they had just ’96 hours’ to get themselves added to that firm’s suit against Facebook. And doubtless there are other law-firms the length and breadth of America which even now are looking at getting their own piece of the Facebook action.

The common theme is that Facebook and/or its advisers mislead the IPO subscribers by withholding until after the float information on worse than forecast earnings from mobile Facebook users. The Securities & Exchange Commission has launched an investigation which will run entirely independently of the lawsuits.
All of these suits comprise what are known as ‘class actions’ and, it seems, all are being filed in the US District Court in New York. A class action is when one or a group of plaintiffs file suit, against one or more defendants, as representative of a much larger group of people claiming to have been wronged in the same way. It’s a particularly American penchant and has a tendency to bring out the best and the worst in the US judicial system. In the latter category – ambulance-chasing lawyers working on contingency fees and spawning bloated lawsuits which drag through the courts for years. In the former, an effective voice being given to ‘the little man’ with the legitimate but uneconomic grievance against big business and who, but for class actions, might never have his day in court.

What the resolution of these claims – whether by verdict or out-of-court settlement – might mean for
Facebook’s finances is quite frankly anybody’s guess. And it could be years away. But for now the fact that its IPO clunked so badly continues to resonate across the wider equity markets. By the end of May, no less than 10 planned IPOs had been withdrawn from the US market. And the ripples ran wider. Ten days after Facebook’s listing debacle, hugely popular Russian social media company VKontakte pulled a last-minute plug on its IPO, with chief executive Pavel Durov telling his many followers on Twitter, “The IPO of FB (Facebook) destroyed the faith of many private investors in social networks”.

It seems hard to credit that Facebook, which hitherto could do no wrong, could have dug such a large hole for itself. And seemingly the way out is neither obvious nor is it going to be all beer and skittles. Just yesterday the UK’s Telegraph newspaper reported that following rumours of the company planning its own mobile phone – quickly denied by Zuckerberg – a British digital marketing agency conducted a poll amongst 500 people around the world, of whom – reportedly – half said they wouldn’t buy a Facebook phone.
The challenge for Facebook going forward – and a dilemma for its present and future shareholders – is just how to manage the litigation unleashed by its horrendous public launch. It’s a dead weight which the company is obliged to drag around even as it endeavours to persuade a now-highly sceptical market that it really is worth a punt.