Judge Sweet Denies Facebook's Motion to Dismiss Federal Securities Claims

In an opinion filed last week but just posted to the ECF docket this morning, Judge Sweet denied the motion of Facebook and its underwriter banks to dismiss federal securities claims arising from the May 2012 Facebook IPO.  Noting specifically that the complaint does not allege securities fraud, Judge Sweet permitted the class action complaint of violations of other sections of the securities laws to go forward.

The Class Action Complaint alleges that Defendants violated Sections 11 and 12 of the Securities Act by, among other things, failing 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.  Defendants have challenged the materiality of this information and contend that the Company did disclose this information in the Registration Statement and [Free Writing Prospectus].

Judge Sweet recognized that Facebook had disclosed some information about the impact of increasing mobile usage of its site in the prospectus, but not enough to warrant dismissal.

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 Facebook' 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.

In addition, Judge Sweet ruled that the plaintiffs had alleged a material misrepresentation based on the statement in the prospectus that mobile use of Facebook "may" have a negative impact on revenues, when in fact such mobile use already had had such an impact. See our prior coverage of this case here.