The fact that Facebook shares continue languishing well below their $38-per-share launching pad price means shareholders are still smarting over the selective disclosure that preceded the social media giant's May 18 offering.
But that will not make it any easier for shareholders to exact their pound of flesh from Facebook founder Mark Zuckerberg -- not that he's impoverished enough to miss it.
University of Pittsburgh law professor Douglas M. Branson said there are plenty of reasons why Facebook shares failed to live up the hype, making it harder for shareholders to prove that selective disclosures from Wall Street firms about the company's outlook were the only thing that sent the shares southbound.
"Perversely, the defense to a shareholders' suit might be that underwriting mistakes rather than disclosure violations were the legal cause of investors' losses," said Mr. Branson, who has been an attorney or consultant in other litigation over stock offerings.
He said disclosure issues were only one of the missteps that prompted critics to conclude Facebook has become a textbook example of how not to take a company public. Other problems with the initial public offering include raising the price the shares were offered at; selling an additional 83 million shares; technical problems at the Nasdaq exchange that delayed trading; and conducting the IPO just as investor sentiment was swinging sharply from bullish to bearish.
Facebook shares finished Friday at $27.72, off $4.19 for the week and 27 percent below their offering price.
Based on a 2005 U.S. Supreme Court decision involving investors seeking damages for losses suffered in a pharmaceutical stock, investors must prove the lack of disclosure caused the losses, Mr. Branson said. The court overturned an appeals court decision in favor of investors, ruling they failed to provide a strong enough link between misleading information about the drug company's asthma treatment and the inflated price they paid for shares.
"It's much tougher for [investors] than it was back in the '60s, '70s or even the early '80s," Mr. Branson said.
A sore point with investors is that an analyst with Morgan Stanley, Facebook's lead investment banker, downgraded his outlook for the company and selectively shared the bad news with clients. As much as that sends a message to small investors that Wall Street is a rigged game, there's not necessarily anything illegal in the practice.
"That's why people pay for research," said Daniel Goldberg, an attorney in Reed Smith's New York office.
"I don't think they did anything different than anybody else. It's just that there's a brighter spotlight on them," he said.
A lawsuit filed in federal court in New York alleges Facebook told Morgan Stanley and other bankers underwriting the offering "to materially lower their revenue forecasts." The complaint alleges Facebook and the investment bankers failed to disclose that some firms had lowered their estimates during presentations to investors in advance of the offering. Instead, they selectively disclosed it to "preferred investors," the lawsuit states.
Following the tech stock bubble of the 1990s, the Securities and Exchange Commission required publicly traded companies to broadly share material information with all shareholders instead of arbitrarily disclosing it to select analysts or investors. Regulation Fair Disclosure, adopted in 2000, was supposed to level the information playing field.
The regulation does not prohibit companies from providing minor, inconsequential information that, in and of itself, is not significant enough to influence an investor's opinion. However, analysts can piece together these minor details with public information in a way that changes their view.
Mr. Goldberg said documents Facebook distributed to investors in advance of the stock sale provided plenty of information about risks ad revenue posed to its prospects. Moreover, investors could have drawn the same conclusion from General Motors' decision days before the offering to stop advertising on Facebook.
"If they had been paying attention, they could have seen the problems," said Malcolm Polley, chief investment officer of S&T Bancorp's Stewart Capital Advisors unit.
It could be years before courts determine whether Facebook and its bankers did anything wrong and whether the social media giant's unfriended investors have something coming to them.
In the meantime, the market has rendered its own verdict. Based on its two brief weeks as a public company, the law of supply and demand tells you -- at least for the time being -- Facebook sold too many shares at too high a price, said Daniel Henderson of Cookson Peirce & Co., a Downtown investment firm.
"The market took care of that," he said.
Len Boselovic: email@example.com or 412-263-1941. First Published June 3, 2012 12:00 AM