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July 26, 2012 / Alison Wilson

Class Action Lawsuit Alleges that Facebook Misled Investors, Causing $2.5 Billion in Losses

After its much awaited initial public offering (“IPO”), Facebook is now being sued by several investors who claim they were misled.  A class action lawsuit has  been filed against Facebook, CEO Mark Zuckerberg, along with Facebook’s underwriters, including Morgan Stanley, JPMorgan Chase, Goldman Sachs, Barclays Capital, and Merrill Lynch.

According to the complaint, Facebook filed documents with the Securities and Exchange Commission (“SEC”) that contained “untrue statements of material facts,” specifically relating to its revenue forecasts. The plaintiffs allege that Facebook’s SEC Registration Statement cautioned that Facebook “could be negatively affected by the growth in mobile users of its site or app.”  Plaintiffs claim that in reality, Facebook was already suffering a “pronounced reduction in revenue growth due to an increase of users of its Facebook app or users through mobile devices….” Apparently, shortly before the IPO, Facebook’s lead underwriters cut their earnings forecasts for the company, but only a handful of preferred investors were informed of the decreased earnings projections.  The lawsuit claims that this and other information misled investors and caused them to lose more than $2.5 billion.   CNN Money reports that the price of Facebook shares has continued to fall and is down 32% from its May 18 initial public offering.

A substantial majority of Facebook’s revenue is generated from advertising.  Until recently, Facebook did not show ads to users who accessed the site through mobile apps or the mobile website.  In March 2012, Facebook began to include “sponsored stories” in mobile users’ News Feeds but as of May 16, 2012, Facebook apparently had not generated any meaningful revenue through the use of Facebook mobile products.

If you have been the victim of securities fraud, contact Khorrami, LLP for a confidential evaluation of your rights. Video:


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