Error Omissions
Error Omissions
Submit your information below so we can contact you with a FREE quote
[All fields are required.]
Actual Annual Revenue:
Verify:
=
I have read and agreed to theTerms & Conditions
Error Omissions
Error Omissions

Litigation: Face Off Over Social Media Giant’s IPO


Litigation: Face Off Over Social Media Giant’s IPOFacebook’s IPO hasn’t had that storybook ending many were counting on. In the wake of the company’s IPO and falling share prices, a lawsuit was filed on May 22nd in California against Facebook, CEO Mark Zuckerberg, CFO David Ebersman, seven outside directors, and 32 offering underwriters. The allegation: Offering documents “failed to disclose during the IPO road show that the lead underwriters, including defendants Morgan Stanley, J.P. Morgan, and Goldman Sachs, all cut their earnings forecasts and that news of the estimate cut was passed on only to a handful of large institutional clients, not to the public.”

The allegations also contend that the company’s registration statement “was negligently prepared, and as a result, contained untrue statements of material facts or omitted to state other facts necessary to make the statements not misleading.”

A securities class action lawsuit followed suit on May 23rd in New York alleging that the defendants failed to disclose that Facebook expressed caution about revenue growth due to a rapid shift by users to mobile devices. This had then lead underwriters to reduce their 2012 performance estimates while on the IPO road show. The defendants are the company; its CEO and CFO; seven outside directors: and six offering underwriters.

Another investor also filed a suit against NASDAQ for “failing to promptly and accurately execute” his order for Facebook shares. He has filed a purported class action lawsuit in the Southern District of New York on behalf of all individuals and entities whose purchase and cancellation orders during the Facebook IPO were delayed or otherwise improperly processed.

When Reuters had reported on May 22ndthat Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered the negative news of reduced revenue forecasts to major clients, some feel that this updated announcement contributed to the weak performance of Facebook shares. The shares ended more than 18 percent below the IPO price on the second and third days of trading. According to Reuters, the lower revenue estimate came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34 to $38, and before Facebook increased the number of shares being sold by 25 percent. “It’s very rare to cut forecasts in the middle of the IPO process,” said an official with a hedge fund firm who received a call from Morgan Stanley about the revision.

What does this all mean for IPOs and D&O coverage? Some insurance companies may begin to look more closely at Facebook-type IPOs and could become more cautious when it comes to coverage, especially for technology companies involved in social media where traditional revenues are not generated from products sold. Other insurers may consider adding exclusions, which would not indemnify investment brokers under a D&O policy. Under this scenario, the company making the IPO will have to bear the costs associated with any litigation. Or, investment bankers will need to rely on their own errors and omissions coverage or other liability coverage in the future.

Time will tell how this will all play out, and we will keep you updated on any new developments.

Axis Insurance Services, LLC offers Directors and Officers insurance to protect against the costs of legal defense and provide indemnity coverage for the business, directors and officers, and employees in suits alleging internal mismanagement.

Comments

comments

Blogged on: June 19, 2012 by Mike Smith
Error Omissions
Error Omissions
Submit your information below so we can contact you with a FREE quote
[All fields are required.]
Actual Annual Revenue:
Verify:
=
I have read and agreed to theTerms & Conditions
Error Omissions
Error Omissions