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From Securities Regulation Daily, January 4, 2016

Two subclasses get thumbs up in Facebook IPO suit

By Rodney F. Tonkovic, J.D.

Two subclasses will be pursuing claims arising from Facebook's buggy May 2012 IPO. The federal district court sitting in Manhattan has certified subclasses of retail and institutional investors in the consolidated securities action. The sheer number of investors involved weighed both for and against class certification, but the court ultimately decided in favor, both for ease of administration and because the two subclasses would reduce the need for individualized determinations on the issue of knowledge (In re Facebook, Inc., IPO Securities and Derivative Litigation, December 29, 2015, Sweet, R.).

Facebook's IPO sold over 421 million shares, making it one of the largest in history. While the company's share price surged at first, it soon dipped and continued to tumble, failing to recover for more than a year.

At issue in this action are Facebook's statements in a free writing prospectus and amended registration statement concerning the growth in mobile device usage. These pre-IPO statements warned that the increased use of mobile devices could have negative implications for Facebook's revenue from ads. The investors allege that at the time these statements were made, Facebook knew with certainty, but failed to disclose, that these negative effects had already come to fruition, causing the company to internally revise its revenue forecast downward.

Subclasses given OK. The plaintiffs sought to certify a class of all purchasers of shares traceable to the IPO or, in the alternative, two subclasses—one for institutional investors and one for retail investors. The court found that the subclasses were necessary to avoid confusing the issues and to ease administration of the case. While common questions of liability existed, the court explained, Facebook "marshaled an impressive amount of evidence" showing that institutional investors had at least some knowledge of mobile's downward pressure on the company's revenue but that the less well-connected retail investors did not.

Predominance. In its predominance analysis, the court observed that this case presented a Catch-22: the sheer number of plaintiffs with the same claims against the same defendants threatened their ability to proceed as a class. Facebook argued that the individualized inquiries required to determine what each investor knew at the time of their purchases defeated predominance. The court rejected this argument, saying that the two subclasses would reduce the need for individualized determinations, and in fact add more weight to the predominance of common questions and answers, "practically negating the individualized questions raised," particularly with regard to the institutional investor subclass. For every individual question of knowledge, the court continued, there are scores of common facts and questions.

The court then addressed Facebook's arguments regarding the retail subclass in turn. First, those retail investors who purchased stock through accounts managed by investment advisers will be considered as part of the institutional investor class. Next, there were three individuals who had at least some knowledge, but the court held that this was a minuscule portion of the total class and not enough to defeat predominance for the entire retail subclass. The many common questions, answers, and facts predominated over the individualized issue of knowledge, the court said, and there was no allegation that any of the retail class members participated in the fraud.

Facebook also maintained that the damages inquiries were also individualized, citing a mismatch between the damages and the plaintiffs' surviving theory of liability. The court pointed to the Second Circuit's application of Comcast v. Behrend, stating that neither a class-wide damages model must be used to establish predominance nor that a class cannot be certified where damages cannot be measured on a class-wide basis. The court noted further that Securities Act Section 11(e) provides a damages formula.

The court also rejected an argument based on Morrison v. National Australia Bank Ltd. that the class could not be certified because millions of shares could not be traced to domestic transactions. The court observed that this argument applied to 295 investors out of, potentially, many thousands. The plaintiffs also sufficiently alleged that any foreign purchasers participated in a U.S. IPO to receive shares registered in the U.S. that would trade on an American exchange.

The court accordingly found that the investors met the burden of the predominance requirement. Any arguments on the issues of class-wide actual knowledge or individualized actual knowledge may be submitted on a motion for summary judgment or via separate jury trials, respectively, the court said.

The case is No. 12-md-02389.

Attorneys: Andrew J. Entwistle (Entwistle & Cappucci LLP) for Avatar Securities, LLC, First New York Securities LLC and T3 Trading Group, LLC. Darryl M. Bloodworth (Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, PA) for The Nasdaq Stock Market LLC. Andrew Brian Clubok (Kirkland & Ellis LLP) for Barclays Capital Inc. and Facebook, Inc.

Companies: Avatar Securities, LLC; First New York Securities LLC; T3 Trading Group, LLC; The Nasdaq Stock Market LLC; Barclays Capital Inc.; Facebook, Inc.

MainStory: TopStory IPOs SecuritiesOfferings NewYorkNews

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