Shares of Facebook (NASDAQ:FB) fell as much as 2 percent in afternoon trading on Thursday after news broke that a U.S. district judge will allow investors to pursue claims the company misled investors before its initial public offering in May 2012.
In Manhattan, Judge Robert Sweet ruled that Facebook erred when it stated in its S-1 prospectus that increased mobile use “may negatively affect our revenue and financial results.” At the time, Facebook was not displaying mobile ads, and whether or not the company would crack the mobile monetization code was a hotly debated subject.
“The company’s purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialized,” wrote Sweet in a decision seen by Reuters. “Plaintiffs have sufficiently pleaded material misrepresentation that could have and did mislead investors regarding the company’s future and current revenues.”
The lawsuit alleges that Facebook and as many as 40 defendants at the company such as CEO Mark Zuckerberg, COO Sheryl Sandberg, and the underwriters of the IPO were negligent in their handling of the event.
The investors, which include pension funds, are seeking compensation related to the financial damage incurred when Facebook stock fell below its IPO price and traded there for about a year. Shares, which hit the market at $38 in May, fell to $17.55 by September and did not climb back above $38 until the beginning of this August.
One of the primary reasons for the decline in stock price was Facebook’s trouble monetizing mobile. As soon as it became clear that mobile monetization was a make-it-or-break-it issue for the company — at least in the eyes of the market — many investors decided to walk away. Facebook has since pulled through, but the lawsuit alleges that the company was well aware of its relatively fragile status before it launched its IPO and that it should have made that status clear to investors.
For its part, Facebook has argued that the lawsuit lacks merit. The company did not include revenue projections, arguing that not only was it not required to disclose such information but that it still performed well as a business in the post-IPO period. In retrospect, it appears as if the stock action was more of a mood swing of the market than anything, something for which Facebook claims it shouldn’t be liable.