This is not the first time investors in a hot tech company’s initial public offering have alleged that underwriters favored their regular clients at the expense of the little guys.
In the tech bubble of the late 1990s, IPO investors became suspicious of the steep run-up in prices that seemed inevitably to follow a stock’s debut. Eventually, some 309 IPO shareholder class actions were rolled into a giant multidistrict lawsuit called In re: Initial Public Offering Securities Litigation.
The plaintiffs said underwriters allocated IPO stakes to institutions on the condition that those investors would create demand by continuing to buy the stock after it started trading.
According to the class, the institutional investors would then bail out and give a portion of their profits to investment banks, leaving individual investors stuck with losses when the stock price returned to earth. Eight years of litigation resulted in a $586 million settlement, which was approved in 2009 by U.S. District Judge Shira Scheindlin in Manhattan.
A growing number of lawsuits are being filed against Facebook. Claims by four of Wall Street’s main market makers against Nasdaq over the botched IPO are likely to exceed $100 million, as they and other traders continue to deal with thousands of problems with customer orders.
Attorney Stanley Bernstein of Bernstein Liebhard, who served as the chair of the plaintiffs’ executive committee in the dot-com litigation, said the Facebook IPO is more of the same: “This is just another spin on the same game of unfair treatment of individual investors.”
His firm is gathering clients and preparing to file its own Facebook suit, he said.
Bernstein addressed the legal issues involved in Facebook’s IPO and the dot-com bust, in an interview with Reuters:
Q: What lessons do you think the banks and Facebook should have learned from the IPO securities litigation you headed?
A: We litigated 300 IPO cases from the dot.com era, where we uncovered and hopefully caused the correction of a number of evils. Regrettably, the banks and Wall Street have not learned their lesson and have devised and/or utilized loopholes to unfairly tilt the playing field against individual investors and in favor of a select group of institutional investors. It’s an unfair system that still needs to be corrected.
In the Facebook case, public reports strongly suggest that (underwriters) crossed the line of impropriety by telling the public that there might be a reduced earnings stream for mobile applications, while telling their favorite customers that there will be a reduced stream ....
And the entire process causes any rational-thinking person to reconsider a rule that allows bank analysts to give earnings estimates orally to their favorite customer but not publish them to the investing public.
Q: You said it’s a system that needs to be corrected and that banks and companies have devised rules that result in an unfair playing field. Regardless of whether the rules were fair, if (Facebook and the banks) were following them, doesn’t it mean that they can’t be held liable for not disclosing the information?
A: No, because published reports make it clear that ... select customers (received) information that was not in the prospectus. The prospectus said revenue “might” (decline), but published reports indicate that ... it was an actuality. That is a clear violation of disclosure rules.
Q: In this case, instead of hyping the stock, the analysts actually lowered their expectations so the stock price never really soared, in contrast to the situation in the IPOs in the 1990s that you addressed in the IPO litigation. Does that difference matter?
A: The evils that caused the 100- and 200-percent pops on IPOs in the days of the dot.com boom have basically been eliminated as a result of (our) litigation. Now people have “only” lost 10 percent of their investment in a matter of hours. That is a very significant loss and will not be ignored.
Q: Do you expect all potential plaintiffs in the Facebook IPO litigation to be part of the same class, or do you expect more casual investors and so-called “sophisticated investors” to seek to proceed in separate suits?
A: I think this one will be a much simpler class. Here it’s a very short time period, and the issues are much easier to define than in the complex dot.com litigation. That was 300 different cases and 55 investment banks and 1,000 individual employees. This is a few investment banks, one company and a class period of several days. It’s a classic case for resolution in a class action.
Reporting by Erin Geiger Smith; Editing by Richard Chang