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15-_____IN THE
United States Court of AppealsFOR THE SECOND CIRCUIT
I N RE FACEBOOK , I NC., IPO SECURITIES
AND DERIVATIVE LITIGATION
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
MDL NO. 12-2389
PETITION BY DEFENDANTS FOR LEAVE TO APPEAL
CLASS CERTIFICATION ORDER PURSUANT TO FED. R. CIV. P. 23(f )
Counsel for Facebook, Inc. and Individual Facebook Defendants
(Counsel continued on inside cover )
d
TARIQ MUNDIYA
TODD G. COSENZA
SAMEER ADVANI
WILLKIE FARR & GALLAGHER LLP
787 Seventh Avenue
New York, New York 10019
(212) 728-8000
R ICHARD D. BERNSTEIN
ELIZABETH J. BOWER
WILLKIE FARR & GALLAGHER LLP
1875 K Street, NW
Washington, D.C. 20006
(202) 303-1000
A NDREW B. CLUBOK
BRANT W. BISHOP
NATHANIEL K RITZER
ADAM B. STERN
K IRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
(212) 446-4800
SUSAN E. E NGEL
K IRKLAND & ELLIS LLP
655 Fifteenth Street NW
Washington, D.C. 20005
(202) 879-5000
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JAMES P. R OUHANDEH
CHARLES S. DUGGAN
A NDRE W DITCHFIELD
DAVIS POLK & WARDWELL LLP
450 Lexington Avenue New York, New York 10017
(212) 450-4000
Counsel for the Underwriter
Defendants
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Fed. R. App. P. 26.1, I hereby certify that Facebook, Inc. has no
parent company, and no publicly held company owns more than ten percent of its
stock.
/s/ Andrew B. Clubok
Andrew B. ClubokKIRKLAND & ELLIS LLP601 Lexington Avenue
New York, NY 10022Telephone: (212) 446-4800
Facsimile: (212) 446-4900
Counsel for Facebook, Inc. and
Individual Facebook Defendants
Pursuant to Fed. R. App. P. 26.1, I hereby certify as follows:
Morgan Stanley & Co. LLC is a limited liability company whose sole
member is Morgan Stanley Domestic Holdings, Inc., a corporation wholly owned
by Morgan Stanley Capital Management, LLC, a limited liability company whose
sole member is Morgan Stanley. Morgan Stanley is a publicly held corporation
that has no parent corporation. Based on Securities and Exchange Commission
Rules regarding beneficial ownership, Mitsubishi UFJ Financial Group, Inc. 7-1
Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8330, beneficially owns greater
than 10% of Morgan Stanley’s outstanding common stock.
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J.P. Morgan Securities LLC is a wholly-owned subsidiary of J.P. Morgan
Broker-Dealer Holdings Inc., which, in turn, is a wholly-owned subsidiary of
JPMorgan Chase & Co., a publicly held company. JPMorgan Chase & Co. has no
parent company and no publicly held corporation owns 10% or more of its stock.
Goldman, Sachs & Co. is an indirect wholly owned subsidiary of The
Goldman Sachs Group, Inc. (“GS Group”), which is a corporation organized under
the laws of Delaware and whose shares are publicly traded on the New York Stock
Exchange. GS Group has no parent corporation and, to the best of GS Group’s
knowledge, no publicly held company owns 10% or more of the common stock of
GS Group.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned
subsidiary of BAC North America Holding Company. BAC North America
Holding Company is a wholly-owned subsidiary of NB Holdings Corporation. NB
Holdings Corporation is a direct subsidiary of Bank of America Corporation,
which owns all of the common stock of NB Holdings Corporation. Bank of
America Corporation is a publicly held company whose shares are traded on the
New York Stock Exchange. Bank of America Corporation has no parent company
and no publicly held corporation owns more than 10% of Bank of America
Corporation’s shares.
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Barclays Capital Inc. identifies the following as parent corporations or
publicly held corporations that own 10% or more of any class of its equity
interests: Barclays PLC, Barclays Bank PLC and Barclays Group US Inc.
Allen & Company LLC is a wholly owned subsidiary of Allen Operations
LLC, which is a privately held LLC. Allen Operations LLC is, in turn, owned by
employees of Allen & Company LLC and a minority position is also held by Allen
Holding Inc., a closely held company. No publicly held corporation owns 10% or
more of Allen & Company LLC’s stock.
Citigroup Global Markets Inc. (“CGMI”) is a wholly owned subsidiary of
Citigroup Financial Products, Inc., which, in turn, is a wholly owned subsidiary of
Citigroup Global Markets Holdings Inc., which, in turn, is a wholly owned
subsidiary of Citigroup Inc., a publicly held company. Citigroup Inc. has no parent
company and, to the best of CGMI’s knowledge, no publicly held corporation
owns 10% or more of Citigroup Inc.’s stock.
Credit Suisse Securities (USA) LLC is a wholly owned indirect subsidiary of
Credit Suisse Group AG. Credit Suisse Group AG has no parent company, and no
publicly held corporation owns 10 percent or more of its stock.
Deutsche Bank Securities Inc. is a wholly-owned subsidiary of DB U.S.
Financial Markets Holding Corporation, which in turn is a wholly-owned
subsidiary of DB USA Corporation, which in turn is a wholly-owned subsidiary of
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Deutsche Bank AG, which is a publicly held corporation. No other publicly held
corporation owns 10 percent or more of Deutsche Bank Securities Inc.’s stock.
RBC Capital Markets, LLC is an indirect wholly owned subsidiary of the
Royal Bank of Canada, a public company whose shares are traded on the New
York Stock Exchange and Toronto Stock Exchange. The Royal Bank of Canada
has no parent company and no publicly held corporation owns 10% or more of its
stock.
Wells Fargo Securities, LLC, a limited liability company organized under
the laws of Delaware, is a wholly-owned subsidiary of EVEREN Capital Corp.
EVEREN Capital Corp. is a wholly owned subsidiary of Wells Fargo & Company,
a publicly traded corporation organized under the laws of the State of Delaware.
There is no person or entity that owns more than 10 percent of the shares of Wells
Fargo & Company.
Blaylock Beal Van, LLC (formerly known as Blaylock Robert Van LLC) is
a privately held limited liability company that has no parent company, and no
publicly held corporation owns ten percent or more of Blaylock Robert Van, LLC.
BMO Capital Markets Corp. is an indirect wholly-owned subsidiary of Bank
of Montreal, a publicly held company. Bank of Montreal has no parent company
and no publicly held corporation owns 10% or more of its stock.
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C.L. King & Associates is a privately held company. No public company
owns 10 percent or more of C.L. King & Associates.
Cabrera Capital Markets, LLC is a privately held company that is owned by
Cabrera Capital Inc. and RCF-Cabrera Holdings, Inc. No public company owns 10
percent or more of Cabrera Capital Markets, LLC.
CastleOak Securities, L.P. is a limited partnership in which the partners are
CastleOak Management, LLC and CastleOak Management Holdings, LLC.
CastleOak Management Holdings, LLC is a wholly owned subsidiary of Cantor
Fitzgerald, L.P. No publicly held company owns 10 percent or more of the stock
of Cantor Fitzgerald, L.P.
Cowen and Company, LLC is owned by Cowen Group Inc., a publicly
traded company. No publicly held company owns 10% or more of the stock of
Cowen Group Inc.
E*TRADE Securities LLC states that its corporate parent is E*TRADE
Financial Corporation, a publicly traded company. E*TRADE Securities further
states that no publicly traded company owns more than 10% of E*TRADE
Financial Corporation’s stock.
Itau BBA USA Securities, Inc. is wholly owned by Itau USA Inc. Itau USA
Inc. is 99.9% owned by ITB Holding Brasil Participações S.A., which is 99.9%
owned by Itaú Unibanco S.A., which, in turn, is a wholly owned subsidiary of Itaú
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vi
Unibanco Holding S.A., a publicly held company. Itaú Unibanco Holding S.A. is
controlled by Itaú Unibanco Participações S.A., which is controlled, in part, by
Itaúsa - Investimentos Itau S.A., a publicly held company. Itaúsa - Investimentos
Itau S.A. has no parent company and no publicly held company owns 10% or more
of its stock.
FM Partners Holdings LLC (formerly known as Lazard Capital Markets
LLC) is a wholly owned subsidiary of LMDC Holdings LLC, a private limited
liability company. No publicly held company owns ten percent or more of FM
Partners Holdings LLC.
Lebenthal & Co., LLC, is an affiliate of Lebenthal Holdings, LLC. No
publicly held corporation owns ten percent or more of Lebenthal & Co., LLC or
Lebenthal Holdings, LLC.
Loop Capital Markets LLC is 69% owned by Loop Capital, LLC, a non-
operating limited liability company. No publicly owned company owns ten
percent or more of Loop Capital LLC.
M.R. Beal & Company is no longer a separate legal entity following the
formation of Blaylock Beal Van, LLC. M.R. Beal & Company has no parent
company, and no publicly held corporation owns ten percent or more of M.R. Beal
& Company.
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vii
Macquarie Capital (USA) Inc. (“Macquarie”) is a wholly owned indirect
subsidiary of Macquarie Group Limited, a publicly held corporation. No public
company owns more than ten percent of Macquarie Group Limited. No other
publicly held corporation owns more than ten percent of Macquarie.
Muriel Siebert & Co., Inc. is a wholly owned subsidiary of Siebert Financial
Corp., a publicly traded company. No publicly traded corporation owns ten
percent or more of Siebert Financial Corp.
Oppenheimer & Co. Inc. is a subsidiary of Oppenheimer Holdings Inc.,
which is a publicly traded company. No publicly held corporation owns 10
percent or more of Oppenheimer Holdings Inc.
KeyBanc Capital Markets Inc. (formerly known as Pacific Crest Securities
LLC) is a wholly-owned subsidiary of KeyCorp, a publicly traded company. No
publicly held company owns 10% or more of KeyCorp’s stock.
Piper Jaffray & Co. is a wholly-owned subsidiary of Piper Jaffray
Companies, which is a publicly held company. Piper Jaffray Companies does not
have a parent corporation and no publicly held corporation owns 10% or more of
Piper Jaffray Companies’ stock.
Raymond James & Associates, Inc. is a wholly owned subsidiary of
Raymond James Financial, Inc., a publicly held company. No publicly held
company owns 10% or more of the stock of Raymond James Financial, Inc.
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viii
Samuel A. Ramirez & Company, Inc. is a wholly owned subsidiary of SAR
Holdings, Inc., a closely held corporation. No public company owns ten percent or
more of Samuel A. Ramirez & Company, Inc.
Stifel, Nicolaus & Company, Incorporated is a wholly-owned subsidiary of
Stifel Financial Corp., a publicly traded corporation listed on the New York Stock
Exchange. There are no publicly held corporations that own 10% percent or more
of Stifel Financial Corp.’s common stock.
The Williams Capital Group, L.P. is a limited partnership of which the
general partner is The Williams Capital Group, Inc. No publicly held company
owns ten percent or more of The Williams Capital Group, L.P.
William Blair & Company, L.L.C. is wholly owned by WBC Holdings, L.P.
WBC Holdings, L.P. has no parent company, and no publicly held corporation
owns ten percent or more of WBC Holdings, L.P.
/s/ James P. Rouhandeh
James P. RouhandehDAVIS POLK & WARDWELL LLP450 Lexington Avenue
New York, NY 10001Telephone: (212) 450-4000Facsimile: (212) 701-5800
Counsel for Underwriter Defendants
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TABLE OF CONTENTS
Page
INTRODUCTION ..................................................................................................... 1
BACKGROUND ....................................................................................................... 3
QUESTIONS PRESENTED ...................................................................................... 8
REASONS FOR GRANTING THE PETITION ....................................................... 8
I. There Is A Compelling Need For Immediate Review Of TheDistrict Court’s Certification Of Classes “Widely” PopulatedBy Investors With Varying Degrees Of Knowledge OfAllegedly Omitted Information. ............................................................ 9
II. There Is A Compelling Need For Immediate Review Of TheDistrict Court’s Ruling That Knowledge And ConflictingArguments About Loss Causation And Damages Can BeManaged At A Later Stage. ................................................................. 17
CONCLUSION ........................................................................................................ 20
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TABLE OF AUTHORITIES
Page(s)
Cases
Akerman v. Oryx Commc’ns., Inc.,810 F.2d 336 (2d Cir. 1987) ............................................................................... 18
Brecher v. Republic of Argentina,806 F.3d 22 (2d Cir. 2015) ................................................................................. 17
Comcast Corp. v. Behrend ,133 S. Ct. 1426 (2013) ........................................................................................ 17
In re DJ Orthopedics, Inc.,2003 U.S. Dist. LEXIS 21534 (S.D. Cal. Nov. 16, 2003) .................................. 13
In re Facebook, Inc., Initial Pub. Offering Derivative Litig.,797 F.3d 148 (2d Cir. 2015) ......................................................................... 3, 4, 5
In re Facebook, Inc. IPO Sec. & Derivative Litig.,986 F. Supp. 2d 487 (S.D.N.Y. 2013) .................................................................. 6
Fort Wort h Emps.’ Ret. Fund v. J.P. Morgan Chase & Co.,301 F.R.D. 116 (S.D.N.Y. 2014) .................................................................. 18, 20
Hevesi v. Citigroup Inc.,366 F.3d 70 (2d Cir. 2004) ............................................................................... 8, 9
In re IPO Sec. Litig.,471 F.3d 24 (2d Cir. 2006), decision clarified on denial of reh’g ,483 F.3d 70 (2d Cir. 2007) .......................................................................... passim
In re Literary Works in Elec. Databases Copyright Litig.,654 F.3d 242 (2d Cir. 2011) ............................................................................... 19
Mazzei v. Money Store,288 F.R.D. 45 (S.D.N.Y. 2012) .......................................................................... 16
McLaughlin v. Am. Tobacco Co.,522 F.3d 215 (2d Cir. 2008) ................................................................... 11, 12, 20
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Moore v. PaineWebber, Inc.,306 F.3d 1247 (2d Cir. 2002) ......................................................................... 3, 13
Myers v. Hertz Corp.,624 F.3d 537 (2d Cir. 2010) ......................................................................... 11, 14
N.J. Carpenters Health Fund v. Rali Series 2006-QO1 Trust ,477 F. App’x 809 (2d Cir. 2012) ........................................................................ 16
N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC ,709 F.3d 109 (2d Cir. 2013) ............................................................................... 12
In re Omnicom Grp., Inc. Sec. Litig ,597 F.3d 501 (2d Cir. 2010) ............................................................................... 19
Police & Fire Ret. Sys. Of City of Detroit v. IndyMac MBS, Inc.,721 F.3d 95 (2d Cir. 2013) ................................................................................. 12
Schuler v. NIVS Intellimedia Tech. Grp., Inc.,2013 WL 944777 (S.D.N.Y. Mar. 12, 2013) ...................................................... 18
Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co.,559 U.S. 393 (2010) ............................................................................................ 12
Sicav v. James Jun Wang ,2015 WL 268855 (S.D.N.Y. Jan. 21, 2015) ....................................................... 20
In re Sumitomo Copper Litig.,262 F.3d 134 (2d Cir. 2001) ............................................................................. 8, 9
In re Vivendi Universal, S.A.,242 F.R.D. 76 (S.D.N.Y. 2007) .......................................................................... 12
In re Vivendi Universal, S.A. Sec. Litig.,284 F.R.D. 144 (S.D.N.Y. 2012) ........................................................................ 12
W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP ,549 F.3d 100 (2d Cir. 2008) ............................................................................... 17
Wal-Mart Stores, Inc. v. Dukes,564 U.S. 338, 131 S. Ct. 2541 (2011)....................................................... 2, 10, 14
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Statutes
15 U.S.C. § 77k(e) ................................................................................................... 18
15 U.S.C. § 77l(a)(2) ................................................................................................ 14
15 U.S.C. § 77l(b) .................................................................................................... 18
Rules
Fed. R. Civ. P. 23 .............................................................................................. passim
Fed. R. Civ. P. 23(f) ................................................................................................... 3
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INTRODUCTION
The district court certified two investor subclasses to litigate plaintiffs’
claims under the Securities Act of 1933 that Facebook’s Registration Statement
allegedly omitted information about revised revenue projections and the impact of
increased mobile device usage on Facebook’s revenues. As Defendants
demonstrated through extensive class certification discovery, however,
innumerable investors actually knew about the allegedly undisclosed information
prior to the IPO. The district court recognized that such knowledge precludes
liability for the Securities Act claims at issue, Op. 26, 1 and that determining the
knowledge of each investor in the plaintiff class “is a subjective inquiry for each
and every investor,” Op. 31, that would likely “overwhelm[] the common
adjudication” of other issues in this case if tried together. Op. 48. Accordingly,
class certification plainly is inappropriate given the well settled law of this Court.
But the district court ignored that law, erroneously proposing that “individual
actual knowledge can be adequately managed post-trial through an individualized
phase involving separate jury trials if necessary.” Id. And the court failed to
provide any class-wide or other efficient mechanism for resolving other central
issues, including conflicting arguments about loss causation. The district court’s
1 The district court’s order (“Op.”) is attached as Tab A. Defendants submitted inthe district court a paginated appendix (“A-#”). All emphases are added exceptas otherwise noted.
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approach cannot be squared with the cornerstone of the class action device, which
is appropriate only where litigating the lead plaintiffs’ claims would fairly resolve
defendants’ liability to other class member s.
The district court’s certification ruling so turns on its head well-settled class
action law that interlocutory review is warranted. The district court incorrectly
held that subjective knowledge is a common issue when it is so widespread that it
applies to “a very great number of potential claimants.” Op. 31. But an issue is
common only when common proof will resolve the issue for all plaintiffs in one
stroke. The district court’s acknowledgment that “a very large number of plaintiffs
and potential class members had varying degrees of knowledge” about t he
information at issue, O p. 31, means that class members’ subjective knowledge
cannot be resolved by common proof. The suggestion that class members’
knowledge might be inferred on a class-wide basis flouts due process — both the
rights of each absent class member to argue that it lacked actual knowledge and the
rights of Defendants to present evidence that absent class members had knowledge
that defeats their claims. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 131 S.
Ct. 2541, 2561 (2011) (“[T]he Rules Enabling Act forbids interpreting Rule 23 to
‘abridge, enlarge or modify any substantive right.’”).
The district court’s novel ruling is squarely at odds with this Court’s
precedent that predominance cannot be satisfied where, as here, knowledge and
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other central disputed issues would be left to a series of individual trials after a
class verdict. See, e.g., In re IPO Sec. Litig., 471 F.3d 24, 43-44 (2d Cir. 2006),
decision clarified on denial of reh’g , 483 F.3d 70 (2d Cir. 2007) (class certification
is improper where actual knowledge is widespread and thus a key individual
issue); Moore v. PaineWebber, Inc., 306 F.3d 1247, 1253 (2d Cir. 2002) (class
certification is improper where misrepresentation is not uniform and thus a key
individual issue). Here, the district court recognized the importance of individual
knowledge by excluding 20 investors (including one of the lead plaintiffs’
investment advisors) who were shown to have varying degrees of knowledge. Op.
48. Defendants are entitled to discovery and an opportunity to prove disabling
knowledge and other disputed individualized defenses as to each remaining class
member as well. This Court should grant review under Fed. R. Civ. P. 23(f).
BACKGROUND
This case arises out of Facebook’s IPO on May 18, 2012, which this Court
has recognized “was one of the largest in history.” In re Facebook, Inc., Initial
Pub. Offering Derivative Litig. (“ Derivative Decision”), 797 F.3d 148, 152 (2d Cir.
2015). On the first day of trading, a massive trading debacle on NASDAQ spurred
a wave of selling. Most of the press that followed focused on the NASDAQ
problems, but some press accounts also reported that several weeks into the second
quarter, Facebook and its underwriters had revised revenue projections. While still
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predicting revenue growth, Facebook forecast that for the second quarter it could
come in at the lower end of the 1.1 to 1.2 billion dollar range it had previously
given underwriters, and for the full year it could be 3 to 3.5 percent off its original
5 billion dollar projection.2 Some press accounts also reported that the
underwriters revised their estimates of Facebook’s projected revenue accordingly.
Facebook’s stock declined below the IPO price, and by the end of the third
trading day, the first of dozens of lawsuits were filed blaming the drop on different
parties. Derivative suits against Face book’s officers and directors were dismissed,
and this Court affirmed that dismissal on July 24, 2015. Id . Cases against
NASDAQ were settled for $26.5 million. Defendants in this action filed a notice
of appeal on December 9, 2015, challenging how the court failed to ensure the
offset arising from the settlement to which the non-NASDAQ defendants would be
entitled. These recent appeals are pending before this Court as docketed Nos. 15-
3983, -3986, -3989, and -3990.
This petition involves the claims against Facebook and the underwriters
brought under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. See
Complaint (attached at Tab B). The Complaint alleges that Facebook and the
2 The press had widely reported the revisions, albeit without the specificnumbers, prior to the IPO. A-1244-1301. Incidentally, the revised projections
proved too conservative: Facebook reported actual revenue of $1.184 billionfor the second quarter and over 5 billion dollars for 2012. Derivative Decision,797 F.3d at 152 n.3.
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underwriters did not disclose in the Registration Statement — but the underwriters
selectively disclosed to some institutional investors — that they had revised their
estimates of Facebook’s projected revenue. Compl. ¶¶ 178-80; Op. 9-10. Notably,
the Registration Statement did disclose that it is “difficult to forecast our future
results,” that Facebook did “not currently directly generate any meaningful
revenue” from mobile usage, and that its “revenue would be negatively affected” if
it remained “unable to successfully implement monetization strategies for []
mobile users.” A-1026, A-1030, A-1063 (Final S-1); see also Derivative Decision,
797 F.3d at 152-53. Facebook also filed a Free Writing Prospectus just nine days
before the IPO highlighting that “increased usage of Facebook on mobile devices”
had continued in the second quarter. A-1006; see also Oral Arg. Tr. 35-36, In re
Facebook, Inc., Initial Pub. Offering Derivative Litig., Nos. 14-1445, 14-1309, 14-
1784, 14-632, 14-1788 (2d Cir. Apr. 27, 2015) (“JUDGE JACOBS: Looking at the
disclosure … it basically says that something is happening … there is an increase
in the number of active daily users that’s increasing more rapidly than increasing
the number of ads. That’s not good…. Wouldn’t somebody assume that if you have
less advertising … you’re getting less revenue. This is not being written for
idiots.”) (excerpt attached as Tab C).
The court below denied a motion to dismiss, and plaintiffs moved to certify
a class of all investors or alternatively two subclasses of institutional and retail
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investors. Plaintiffs argued in class certification briefing that their liability theory
turned on the fact that Facebook failed to disclose that it had revised its
projections, and that because “[n]o class members” supposedly knew about
Facebook’s revised projections, individualized knowledge inquiries did not
preclude certification. Pls.’ Class Cert. Mem. at 5.3
In opposition, Defendants submitted what the district court admitted was “an
impressive amount” of individualized evidence (developed through thousands of
hours of discovery) showing that knowledge among individual class members,
including lead plaintiff s’ investment advisors, was rampant: many investors had
learned from a variety of sources that either Facebook or underwriters had revised
revenue projections and that increasing mobile usage was reportedly already
having an impact on second quarter revenues.4 Without explanation, plaintiffs then
3 In its opinion denying the motion to dismiss, the district court had agreed withthe consensus case law holding that a company has no duty to disclose internalforecasts or changes to internal forecasts, but held that plaintiffs could proceedwith a claim “that the loss of revenues caused by the increasing mobile usagewas a trend known by Facebook that the Company had a duty to disclose.” See
In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487, 507-08(S.D.N.Y. 2013). The district court’s class certification order, however,allowed plaintiffs to proceed with a class action based on a “post-motion todismiss position” (Op. 43) that flip flopped back to arguing that Facebookshould have disclosed that it “revise[d] its own revenue forecast.” Op. 10.
4 Dozens of declarations, multiple depositions, and hundreds of documentsshowed that before the IPO: Facebook disclosed the allegedly omittedinformation to at least 19 underwriter analysts; underwriters’ representativesshared information about revised revenue estimates with hundreds of
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conceded that, based on their review, 20 of the investors for whom Defendants had
submitted evidence of knowledge — who collectively purchased over 16% of the
IPO allocation — should be excluded from the class. Op. 5-6.
In an order dated December 11, 2015, the district court granted certification
under Rule 23(b)(3) of two “subclasses”— institutional investors and retail
investors — and excluded the 20 investors plaintiffs had identified. Op. 6, 20. The
court accepted that knowledge required “a subjective inquiry for each and every
investor,” Op. 31, and it found that knowledge was widespread among institutional
investors based on extensive individualized evidence presented by Defendants. Id.
However, the court then found that because this case “involve[s] a very great
number of potential claimants,” and because knowledge is “so widespread” among
institutional investors, knowledge can somehow be treated as a common question.
Op. 31-37. The court found the opposite for the retail class: because Defendants
presented “much less evidence of actual knowledge” for retail investors, “it was
not enough to defeat predominance for the retail subclass.” Op. 37, 40.
The court also rejected Defendants’ remaining arguments, including that
institutional investors; scores of those investors, including those who purchasedfor lead plaintiffs and individual investors, received the omitted information;individuals who worked for institutional investors passed the information tocolleagues, family, and friends; the media reported on the revisions and themobile revenue impact; and investors read the media reports. A-1-107, A-201-24, A-1529-70 (testimony); A-358-990, A-1685-1850 (documents); A-1244-1301 (media reports).
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lead plaintiffs were not typical because they were each subject to an individual
knowledge defense, and that loss causation and damages, exacerbated by intra-
class conflicts, cannot be resolved on a class-wide basis.
QUESTIONS PRESENTED
1. Did the District Court erroneously hold, in conflict with Rule 23 and
this Court’s precedents, including In re IPO Securities Litigation, 471 F.3d 24, 43-
44 (2d Cir. 2006), that a disputed individual issue such as varying, actual
subjective knowledge should be treated as a “common” issue that does not defeat
predominance when substantial individualized evidence indicates that it is likely to
be an issue for a great number of class members?
2. Did the District Court erroneously hold that questions of individual
knowledge, loss causation and damages, and intra-class conflicts can be managed
at some later stage, thereby requiring a series of additional jury trials on disputed
issues that are central to this action and that are not capable of class treatment?
REASONS FOR GRANTING THE PETITION
This Court has “‘unfettered discretion’ to grant or deny permission to appeal
based on ‘any consideration that [the Court] finds persuasive.’” Hevesi v.
Citigroup Inc., 366 F.3d 70, 76 (2d Cir. 2004) (quoting Rule 23 Comm. Note, 1998
Amend.). The Court has declined to adopt any hard-and-fast rules, In re Sumitomo
Copper Litig., 262 F.3d 134, 139 (2d Cir. 2001), but often looks to whether either
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“the certification order will effectively terminate the litigation and there has been a
substantial showing that the district court’s decision is questionable” or “the
certification order implicates a legal question about which there is a compelling
need for immediate resolution.” “[I]nterlocutory review is particularly appropriate
when it promises to spare the parties and the district court the expense and burden
of litigating the matter to final judgment only to have it inevitably reversed by this
Court on appeal after final judgment.” Id. (quotation omitted).
At the very least, the district court’s order implicates legal questions about
which there is a compelling need for immediate resolution. According to that
order, individual, varying subjective issues may be “inferred” and treated as a
“common” issue whenever they may aff ect a large number of class members, and
predominance is satisfied by leaving for “a later stage” numerous issues that will
require separate, individual trials after a class trial. These are issues “of
fundamental importance to the development of the law of class actions….”
Sumitomo, 262 F.3d at 140. Interlocutory review is especially appropriate because
the certification order rests on such doubtful footing and will inevitably alter
settlement incentives. See Hevesi, 366 F.3d at 80.
I. There Is A Compelling Need For Immediate Review Of The District
Court’s Certification Of Classes “Widely” Populated By Investors With
Varying Degrees Of Knowledge Of Allegedly Omitted Information.
The district court erred in certifying two subclasses of investors whose
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“varying degrees of knowledge” of the alleged omission admittedly requires
subjective inquiries for “each and every” investor. Op. 31. In re IPO reversed
certification of an investor class because “widespread knowledge” of the alleged
omissions and misrepresentations “would precipitate individual inquiries as to the
knowledge of each member of the class,” and defeated predominance. 471 F.3d at
43-44. Her e, the district court recognized that “varying” knowledge is also
“widespread” among these “plaintiffs and potential class members.” Op. 31, 35.
Yet the district court “decline[d] to follow” In re IPO, instead holding that
knowledge is “so widespread it presents yet another common question”— namely,
whether all investors should be “charged with actual knowledge”— even though
knowledge is admittedly a “subjective inquiry for each and every investor.” O p.
31, 35, 40.
The district court erred in holding that the prevalence of subjective
individual issues falling under one label — here, knowledge —creates “yet another
common question.” Op. 35. A question is not “common” because it must be asked
of each individual class member. The rule is the exact opposite. Under Wal-Mart
Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550-51 (2011), “[c]ommonality” requires a
question “of such a nature that it is capable of classwide resolution— which means
that determination of its truth or falsity will resolve an issue that is central to the
validity of each one of the claims in one stroke .” Where, as the district court
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acknowledged, “a large number of plaintiffs and potential class members had
varying degrees of knowledge,” Op. 31, actual subjective knowledge cannot be
determined “in one stroke.” The fact that one investor has knowledge would not
preclude another investor from arguing that i t lacks knowledge, just as the fact that
one investor lacked knowledge would not preclude a defendant from defending
against another plaintiff by arguing knowledge.
Instead of rejecting class certification because of the prevalence of
individual evidence, the district court converted the issue of actual knowledge to a
common one because the information, though varied, was disseminated widely.
That alone was error. Allowing lead plaintiffs to litigate claims on behalf of
thousands of class members whose varying claims and defenses will not stand or
fall with the lead plaintiffs’ is the antithesis of what R ule 23 allows. See Myers v.
Hertz Corp., 624 F.3d 537, 550 (2d Cir. 2010) (certification denied where evidence
showed “some variances” on central issues); McLaughlin v. Am. Tobacco Co., 522
F.3d 215, 226 (2d Cir. 2008) (reversing certification where there were “differences
in plaintiffs’ knowledge” and “varying degrees” of reliance on misrepresentations).
The district court then went on to adopt Plaintiffs’ suggestion that
Defendants could make a class-wide knowledge argument on summary judgment
that “a reasonable investor’s actual knowledge of the Facebook revenue cuts can
be inferred from the broad spread of this information.” Op. 20; see also id. at 35.
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But there is no such thing as a presumption of actual knowledge.5 As this Court
has made clear, the actual knowledge standard is not what a reasonable investor
“should have known,” but what each investor actually knew. N.J. Carpenters
Health Fund v. Royal Bank of Scotland Grp., PLC , 709 F.3d 109, 127 n.12 (2d Cir.
2013); see McLaughlin, 522 F.3d at 233-34 & n.10 (rejecting “presumption of
unawareness” and finding predominance not satisfied where issues, including
“actual notice,” “would require a more individualized inquiry”). And R ule 23
cannot be used to create or enlarge substantive rights, such as an element of a
claim or defense. See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co. ,
559 U.S. 393, 408 (2010) (plurality) (“A class action … merely enables a federal
court to adjudicate claims of multiple parties at once[; …] it leaves the parties’
legal rights and duties intact and the rules of decision unchanged.”); Police & Fire
Ret. Sys. Of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 109 (2d Cir. 2013)
(“the Rules Enabling Act forbids interpreting Rule 23 to abridge, enlarge or modify
5 Unlike knowledge, there is a presumption of reliance in the securities fraudcontext, and the district court therefore erred in relying on In re Vivendi
Universal, S.A. Sec. Litig., 284 F.R.D. 144, 155 (S.D.N.Y. 2012). That caseinvolved a securities fraud class action in which the class invoked the fraud-on-the-market reliance presumption, and the defendant did not dispute
predominance or that reliance may be “largely resolved by class-wide proof.” In re Vivendi Universal, S.A., 242 F.R.D. 76, 90 (S.D.N.Y. 2007). Thedefendant “waived its individual reliance challenges for approximately 98
percent of damages claimants but preserved its individual challenges as tocertain large claimants.” Final Principal Br. for Vivendi at 28, In re VivendiUniversal, S.A. Sec. Litig., No. 15-180 (2d Cir. Aug. 19, 2015), Dkt. No. 141.
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any substantive right[s]”) (quotation omitted).
Even the district court did not follow its new “class wide actual knowledge
defense.” It excluded some investors from the class because of their knowledge,
Op. 5-6, 39, created two subclasses because of knowledge differences, Op. 18-20,
and moved some class members from one subclass to the other without
explanation. Op. 52-53. Ultimately, the district court acknowledged that if its
newly-minted class-wide knowledge defense failed, knowledge would have to be
litigated in an “individualized phase involving separate jury trials if necessary.”
Op. 48. But this Court has made clear that class certification is not appropriate
where “the central disputed issues” must be litigated in “a series of mini -trials.”
Moore v. PaineWebber, Inc., 306 F.3d 1247, 1253 (2d. Cir. 2002); see also In re
IPO, 471 F.3d at 44.6
The district court erroneously refused to follow In re IPO on the ground that
6 The district court relied extensively on a California district court case, In re DJOrthopedics, Inc., 2003 U.S. Dist. LEXIS 21534 (S.D. Cal. Nov. 16, 2003), thatcertified two subclasses of stock purchasers, one for those who “received auniform disclosure of information,” id. at *24, and another for those who didnot, id. at *25. The case is inconsistent with In re IPO and in any eventinapposite because there admittedly was no uniform disclosure here; classmembers had “varying degrees of knowledge.” Op. 18, 31. In themisrepresentation context, such variations preclude class certification. See
Moore, 306 F.3d at 1253 (fraud actions “based on uniform misrepresentations”“are appropriate subjects for class certification,” but “[w]here there are materialvariations in the nature of the misrepresentations made to each member of the
proposed class, … class certification is improper”).
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actual knowledge arises as a defense under the Securities Act. Op. 40. This makes
no sense, given that In re IPO addressed both fraud claims and the Securities Act
disclosure claims plaintiffs raise here. 471 F.3d at 28. The district court also gets
the law wrong. Absence of actual knowledge is an element of Section 12. See 15
U.S.C. § 77l(a)(2). Most important, even for Section 11, where actual knowledge
is a defense, this Court issued a clarifying order in In re IPO reaffirming that
widespread knowledge defeats predominance for Section 11 claims. In re IPO
Sec. Litig., 483 F.3d 70, 73 & n.1 (2d Cir. 2006).7
In re IPO is fully consistent
with this Court’s ruling that district courts may not “give[] the ‘defense’ less
weight in determining whether overall class certification would serve the goals of
the predominance requirement.” Myers, 624 F.3d at 551. Indeed, Wal-Mart
prohibits class actions where a defendant “will not be entitled to litigate its
statutory defenses to individual claims.” 131 S. Ct. at 2561.
Nor do the district court’s exclusions and subclasses save its certification
order. Despite recognizing that Defendants put forth evidence that “investors at
numerous institutions,” including lead plaintiffs’ advisors, “gathered, inferred, or
were informed of some aspects of what was conveyed in the Herman Calls or
7 The district court relied on dicta in other district court cases mistakenlysuggesting In re IPO is limited to claims under the Securities Exchange Act of1934. Op. 41. This error provides yet another reason to grant review to correctthe development of class action law.
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Syndicate Analyst Revisions,” Op. 18 n.6,8 the district court excluded only the 19
institutions, Op. 6, and one individual, id. at 38, that plaintiffs hand-selected. As
Tab D’s comparison between excluded and non-excluded investors confirms,
numerous non-excluded investors face individual knowledge issues at least as
serious as those facing excluded investors. It was error to certify a class that still
includes massive numbers of investors that face individual subjective knowledge
issues. See In re IPO, 471 F.3d at 43-44 (“exclusion[s]” do not save certification
where there still needs to be many “individual inquiries” for those that remain).
For example, with respect to lead plaintiffs’ investment advisors, the court
found that “the fact of actual knowledge defenses and the individualized inquiries
required to adjudicate them … more appropriately goes to predominance.” Op. 23-
24. But the district court then erroneously ruled those “individualized inquiries”
could be treated as a common issue and thus kept all but one of the lead plaintiffs’
advisors in the class. This has the law backwards. “The fact that each member of
8 In footnote 6 of its Order, the district court identified 26 institutional investorsthat Defendants highlighted at the class certification hearing. Those investorsare just the tip of the iceberg (although it required hundreds of hours ofintensive discovery to develop the record for even these investors). The recordincludes evidence that underwriters’ representatives told many other investors,including lead plaintiffs’ advisors, about the allegedly omitted information, A-1556, A-1565, A-667, as well as declarations and documents from otherinvestors that they knew varying degrees of information about the revisions andthe mobile impact on revenues, A-70-72, A-64, A-867, A-1782.7-1782.9, A-1810-14, A-1731-32. See also Tab D.
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the class is potentially subject to his or her own ‘unique defense’— far from
resolving all issues in favor of certification — only highlights the thousands of
individualized inquiries the class requires.” Mazzei v. Money Store, 288 F.R.D. 45,
58-59 (S.D.N.Y. 2012). This “demonstrates why the class must fail … the
predominance requirement.” Id. at 59.
The district court’s ruling is all the more arbitrary in that it certified a retail
subclass on the ground that Defendants “presented much less evidence of actual
knowledge” of retail investors. Op. 37. To begin with, the district court
erroneously discounted some evidence because it “hardly suffices to meet the high
bar of the actual knowledge” standard. Op. 39. It is black -letter law that
defendants need not prove actual knowledge for individual class members at the
class certification stage. See N.J. Carpenters Health Fund v. Rali Series 2006-
QO1 Trust , 477 F. App’x 809, 812 (2d Cir. 2012). Rather, certification must be
denied where, as here, there is a demonstrable need for “individual inquiries as to
the knowledge of each member of the class.” In re IPO, 471 F.3d at 44.
The district court also mischaracterized the evidence of retail class
members’ actual knowledge. The district court assumed the evidence was relevant
only to the institutional subclass because it determined that “institutional” included
those “individuals who purchased their shares through institutional investors” “if
the investor made the purchase decision.” O p. 38. But that was incorrect and also
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creates an additional layer of individual issues. First, an investment advisor has no
standing to bring suit on behalf of an individual purchaser and thus cannot be the
class member. See W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP , 549 F.3d
100, 111 (2d Cir. 2008). Second, the order gives no guidance for deciding the
critical question of whether “the investor made the purchase decision,” O p. 38,
absent individual inquiries. This failure alone warrants review, as it contradicts
Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), which held that it
must be “administratively feasible for the court to determine whether a particular
individual is a member.” Id. at 24 (quotation omitted).
II.
There Is A Compelling Need For Immediate Review Of The District
Court’s Ruling That Knowledge And Conflicting Arguments About
Loss Causation And Damages Can Be Managed At A Later Stage.
The district court compounded its error in crafting a novel “common” issue
out of “varying degrees of knowledge” when it held that other issues, including
conflicting arguments about loss causation and damages raised common issues or
could be left for separate trials at “a later stage.” Op. 46; see also id. at 26.
First , the court below refused to apply Comcast ’s requirements that, “at the
class certification stage”— not later —the proposed class “plaintiff’s damages case
must be consistent with its liability case” and “measure only those damages
consistent with [p]laintiff’s [liability] theory.” Comcast Corp. v. Behrend , 133 S.
Ct. 1426, 1433 (2013). The district court ruled Comcast did not apply because the
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Securities Act damages follow a “statutory formula” other than actual injury. Op.
44. This ruling conflicts with Fort Worth Emps.’ Ret. Fund v. J.P. Morgan
Chase & Co., 301 F.R.D. 116, 142 (S.D.N.Y. 2014), which applied Comcast to
deny class certification for Securities Act damages. Although the Securities Act
provides an initial statutory formula for damages, the Act also subtracts any
damages for which loss causation is lacking. 15 U.S.C. § 77k(e), § 77l(b). As a
result, Securities Act damages equal the “price decline [that] actually resulted
from the misstatement.” Akerman v. Oryx Commc’ns., Inc., 810 F.2d 336, 343 (2d
Cir. 1987); see also Schuler v. NIVS Intellimedia Tech. Grp., Inc., 2013 WL
944777, at *9-10 n.8 (S.D.N.Y. Mar. 12, 2013) (Securities Act damages are zero
when plaintiff’s “losses may not be attributed to the misrepresented facts”).
Comcast forbids certification in cases like this because there is an
inconsistency between plaintiffs’ liability and actual damages theories. Plaintiffs
limited their liability theory to the alleged failure to disclose that Facebook revised
its projections after they were forced to concede that all institutional investors
knew about underwriters’ revised projections. Pls.’ Class Reply at 4; Pls.’ Class
Certification Mem. at 13-14, 23. Plaintiff s’ liability theory thus excluded
disclosures relating to underwriters’ revisions. See id. at 7, 23, 28. In contrast,
their actual damages theory has included the $3.03 decline in Facebook’s price on
May 22, 2012 –over 40% of the class’s alleged damages– that plaintiffs have
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attributed to a May 22, 2012 media report of underwriters’ revised projections.
Compl. ¶ 184; Mot. to Dismiss Opp. at 18-21; Pls.’ Class Reply at 57-58.
Second , making that contradiction worse, both subclasses are represented by
the same counsel but have opposite positions on what caused the May 22 decline.
The institutional subclass must argue that the May 22 decline was not caused by
the May 22 media report of the underwriters’ revisions, as loss causation precludes
recovery when a plaintiff already knew information later reported in a
“journalistic” story. In re Omnicom Grp., Inc. Sec. Litig , 597 F.3d 501, 512 (2d
Cir. 2010). But the retail subclass, whom plaintiffs contend did not know of
underwriters’ revisions before May 22, will argue that the May 22 decline was
caused by the May 22 media report. In re Literary Works in Electronic Databases
Copyright Litigation, 654 F.3d 242 (2d Cir. 2011), held that a conflict requires
denial of certification where, as here, each subclass would be represented by the
same counsel, would seek compensation “in different ways,” but would be
“without independent counsel pressing [its own claims].” Id. at 251, 253.
Third , the district court also erred in concluding that the “common” question
concerning the damages offsets required by the $26.5 million settlement for
NASDAQ’s misconduct in the Facebook IPO outweighed individual issues. Op.
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45.9 NASDAQ injured many class members in individual ways that are not
captured by the extent to which NASDAQ also caused Facebook’s stock price to
decline. NASDAQ prevented some class members from selling on May 18. See
A-147-48, A-978 -978.1. In addition, NASDAQ’s May 18 delays in sending trade
confirmations caused some class members to submit repeat orders and therefore to
buy extra Facebook shares that they otherwise never wanted. Determining how
many shares NASDAQ forced some class members to own after May 18, and the
resulting settlement offsets for those shares, requires countless individual
proceedings. See McLaughlin, 522 F.3d at 227 (reversing class certification where
“determining the portion of plaintiffs’ injury attributable to defendants’
wrongdoing would require an individualized inquiry”). It is no answer to say
individual damages “can be administratively managed” after a class-wide trial.
Op. 45. Courts deny certification where, as here, lead plaintiffs do not provide any
model showing, “concretely, how [individual] damages would be calculated” after
a class-wide trial without separate trials. Sicav v. James Jun Wang , 2015 WL
268855 at *6 (S.D.N.Y. Jan. 21, 2015); accord Fort Worth, 301 F.R.D. at 141.
CONCLUSION
For the foregoing reasons, the Court should grant this petition.
9 As noted a bove, at page 3, the district court’s treatment of the NASDAQsettlement offsets is already before this Court in recently-filed appeals.
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December 28, 2015 Respectfully submitted,
/s/ Andrew B. Clubok
Susan E. EngelKIRKLAND & ELLIS LLP655 Fifteenth St. NWWashington, DC 20005Telephone: (202) 879-5000Facsimile: (202) 879-5200
Richard D. BernsteinElizabeth J. BowerWILLKIE FARR & GALLAGHER LLP1875 K Street, NWWashington, DC 20006Telephone: (202) 303-1000Facsimile: (202) 303-2000
Andrew B. Clubok
Brant W. Bishop, P.C. Nathaniel KritzerAdam B. SternKIRKLAND & ELLIS LLP601 Lexington Avenue
New York, NY 10022Telephone: (212) 446-4800Facsimile: (212) 446-4900
Tariq Mundiya
Todd G. CosenzaSameer AdvaniWILLKIE FARR & GALLAGHER LLP787 Seventh Avenue
New York, NY 10019-6099Telephone: (212) 728-8000Facsimile: (212) 728-8111
Counsel for Facebook, Inc., and Individual Facebook Defendants
James P. RouhandehCharles S. DugganAndrew DitchfieldDAVIS POLK & WARDWELL LLP450 Lexington Avenue
New York, NY 10001Telephone: (212) 450-4000Facsimile: (212) 701-5800
Counsel for Underwriter Defendants
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CERTIFICATE OF SERVICE & ELECTRONIC MAIL FILING
15-____ In re Facebook, Inc. IPO Securities And Derivative Litigation
I hereby certify that I caused the foregoing Petition By Defendants For
Leave To Appeal Class Certification Order Pursuant To Fed. R. Civ. P. 23(f) to beserved on counsel for Plaintiffs via Electronic Mail pursuant to Local AppellateRule 25.1 with one (1) courtesy copy via Federal Express Overnight Delivery:
Max W. BergerSalvatore J. GrazianoJohn J. Rizio-HamiltonBERNSTEIN LITOWITZ BERGER &GROSSMANN LLP1285 Avenue of the Americas
New York, NY 10019Tel: (212) 554-1400
Co-Lead Counsel For Lead Plaintiffs
and the Proposed Class
Thomas A. DubbsJames W. JohnsonThomas G. Hoffman, Jr.LABATON SUCHAROW LLP140 Broadway
New York, NY 10005Tel: (212) 907-0700
Co-Lead Counsel for Lead Plaintiffs,
Proposed Class Representatives Sharon
Morley, and the Proposed Class
Steven E. Fineman Nicholas Diamand
LIEFF CABRASER HEIMANN &BERNSTEIN LLP250 Hudston St., 8th Floor
New York, NY 10013Tel: (212) 355-9500
Additional Counsel for For Additional
Named Plaintiffs and Proposed Class Representatives Jose G. Galvan and
Mary Jane Lule Galvan
Frank R. Schirripa
HACH ROSE SCHIRRIPA &CHEVERIE LLP185 Madison Ave.
New York, NY 10016Tel: (212) 213-8311
Additional Counsel for Proposed Class
Representatives Eric Rand, and Pauland Lynn Melton
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I certify that an electronic copy was sent to the Court via Electronic Mail [email protected]. Four (4) hard copies of the foregoing Petition for Permission to Appeal Pursuant to Federal Rule of Civil Procedure 23(f) will bedelivered to the Clerk’s Office by hand delivery upon the Court’s re-opening at:
Clerk of CourtUnited States Court of Appeals, Second Circuit
United States Courthouse500 Pearl Street, 3rd floor
New York, New York 10007(212) 857-8500
on this 28th day of December 2015./s/ Alessandra Kane
Alessandra KaneRecord Press, Inc.
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A
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UNITED STATES DISTRICT
COURT
SOUTHERN
DISTRICT
OF NEW YORK
--------------------------- ------------x
IN RE
INC.
IPO
SECURITIES
AND
DERIVATIVE
LITIGATION
INION
MDL No. 12-2389
----------x
A P P E A R A N C E
S:
for
Lead Pl a i n t i f f s
and
ed Class
LABATON SUCHAROW
LLP
140 Broadway
New York NY 10005
By: Thomas A.
Dubbs
Esq.
James
W.
Johnson Esq.
Thomas
G.
Hoffman J r .
Esq.
UNDER SEAL
Attorneys fo r
Lead Pl a i n t i f f s Proposed
Class
Represen ta t ive
Morley and
the
Proposed
Class
BERNSTEIN LITOWITZ BERGER GROSSMAN LLP
1251 Avenue of the Americas 44th Floor
New York NY
10019
By: Max
W.
Berger Esq.
Salva to re J . Graziano
Esq.
John
Rizio-Hamil ton Esq.
Addi t ional
Named
Pl a i n t i f f
and
Proposed
Class
Represen ta t ives
Mr. Mrs. Galvan
LIEFF
CABRASER HEIMANN BERNSTEIN LLP
250 Hudson St ree t S t h
Floor
New York NY 10013
By: Steven E. Fineman
Esq.
Nicholas
Diamand Esq.
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At torneys fo r Proposed Class Represen ta t ives
Rand and
Mr.
Mrs. Melton
HACH ROSE SCHIRRIPA LLP
185
Madison
Ave.
New
York NY
10016
By: Frank R. Sch i r r i pa
At torneys fo r
Defendant Facebook
KIRKLAND ELLIS LLP
655 Fi f t een th St . W
Washington
DC
20005
By: Susan
E. Engel
Esq.
KIRKLAND ELLIS LLP
601
Lexington Avenue
New
York
NY 10022
By: Andrew
B.
Clubok Esq.
Brant
W
Bishop Esq.
Nathan ie l Kr i t ze r Esq.
Adam
B.
Ste rn Esq.
WILLKIE FARR GALLAGHER LLP
1875
K
S t r e e t W
Washington
DC 20006
Richard
D.
Berns t e in Esq.
El izabe th
J .
Bower Esq.
WILKIE FARR GALLAGHER LLP
787 Seventh Avenue
New York NY 10019-6099
By: Tar iq
Mundiya Esq.
Todd G.
Cosenza
Esq.
Sameer
Advani Esq.
2
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Sweet D. J
Cour t -appo in ted Lead
Pl a i n t i f f s
North Caro l ina Department
of Sta te
Treasurer
on behal f
o f
the North Caro l ina Ret i rement
Systems ( North Caro l ina
DST ), Arkansas Teacher Retirement
Systems ( Arkansas Teacher ) ,
Fresno
County
Employees'
Ret i rement Associat ion
( Fresno ) ,
Ind iv idua l Named P l a i n t i f
Jose G. Galvan and Mary Jane Lule
Galvan
( the Galvans ) , and
add i t iona l proposed
i nd iv idua l
c las s rep re sen ta t ive s c Rand
( Rand ), Paul
and Lynn Melton
( the
Meltons ) ,
and
Sharon
Morley ( Morley ) ( co l lec t ive ly ,
Pl a i n t i f f s ) , have moved
pursuan t
to
Federal
Rule
of
Civ i l
Procedure 23 (a) , (b) (3),
(c) (5), and (g) seeking c e r t i f i c a t i o n
of
a Class of
i nves to rs in
the
i n i t i a l publ ic of
r ing ( the IPO ) of Facebook, Inc .
or the
Company ),
fo r
appointment
as
Class
Represen ta t ives , and
appointment
of Berns te in
Li towi tz
Berger
Grossman
LLP and Labaton Sucharow LLP as Class Counsel . For the
reasons se t
fo r th
below,
the motions are granted .
I Prior Proceedings
The procedura l h i s to r y and
f ac tua l background of t h i s
l i t i g a t i o n has been d e t a i l ed
extens ive ly
various
opin ions
by
t h i s Court . See, ~
In
re
Facebook, Inc . , IPO Sec.
Deriv.
3
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~ ~ ' ' - ' 986 F.Supp.2d
487,
492-93 (S.D.N.Y.
2013)
motion to
c e r t i f y appeal
denied
sub nom. In re
Facebook, Inc . ,
IPO
Sec. &
Deriva t ive
Li t i g . ,
986
F. Supp.
2d 524
(S.D.N.Y. 2014) ( MTD
Opinionn) ;
see
a l so In
re Facebook,
Inc . , IPO
Sec.
&
D er iv a t iv e
t i g . , 288
F.R.D. 26,
31-34 (S.D.N.Y. 2012) ( Consol idat ion
Opin ion ) .
Fami l i a r i t y with the genera l
background
of t h i s case
as p rov ided
in the Cour t ' s previous opinions i s
assumed.
The
i n s t an t
ffiotion, f i l e d
December
23, 2014, concerns the
Consol idated S ecu r i t i e s Act ion. Inves to rs a l l ege
t h a t
and
c e r t a i n o f f i c e r s v io la ted
Sect ions 11,
12(a)
(2) , and
15 of
the
S ecu r i t i e s Act
in neg l igen t misstatements
o r
omissions
surrounding the Company's May
18, 2012
IPO. See MT
Opin ion§
I I . P l a i n t i f f s seek c e r t i f i c a t i o n to proceed as a c las s
pursuant
to
Federal
Ru
of
Civ i l
Procedure
23
def ined
as
fo l lows:
All persons and e n t i t i e s who purchased or o therwise
acqu i red the Class A common
s tock
o f
Facebook, Inc .
or the
Company )
in
o r
t r a ceab le
to
Facebook 's
i n i t i a l publ ic o f f e r i n g ( IPO ) , which occurred on
o r
about
May
17,
2012
and were damaged thereby .
Pl s . '
Mot. a t 5.
1
In
the
a l t e rn a t i v e , P l a i n t i f reques t
1
This
p a r t i c u l a r motion has an
ex tens ive
record . In the
i n t e r e s t s of space and ease of re fe rence ,
fu l l
t a t ions
and
t he i r
corresponding
shor t form are
co l l e c t ed
here
and
wi l l
appear
h e r e in a f t e r . P l a i n t i f f ' s Memorandum of Law in Suppor t of
Motion fo r Class C e r t i fi c a t i o n ( P l s .' Mot. ) ;
Declara t ion
of
Salva to re J . Graziano in Support of
P l a i n t i f f ' s Motion fo r
Class
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c l a s s i
ca t ion of two subclasses , one for r e t a i l i nves to r s
and
one
for i n s t i t u t i o n a l i nves to r s ,
as fo l lows:
(1)
The
I n s t i t u t i ona l
Inves tor Subclass ,
cons i s t ing the
i n s t i t u t iona l
i nves to r s t ha t purchased or o therwise
acquired Facebook Class A common
s tock
in or t r aceab le
to the
Company's IPO
a l l o c a t i o n s
as
l i s t e d
in Exhibi t
42.
2
The proposed Class Representa t ives
for t h i s
Subclass
are
North
Carol ina DST Arkansas
Teacher ,
and
Fresno.
(2)
The Reta i l
Inves tor
Subclass , cons i s t ing of a l l
r e t a i l
i nves to r s who purchased
or o therwise
acqui red
Class
A common s tock in or t r aceab le
to
the Company's
IPO, and were damaged the reby. The
proposed
Class
Representa t ives
for
t h i s Subclass are the Galvans,
Rand,
the Meltons, and Morley.
Pls . '
Mot. a t
6.
Excluded from the
c lass / subc lasses
are Defendants , present
or former execut ive of f i ce r s of Facebook and i r immediate
fami ly
members. Pls . ' Mot. a t
5n.3 .
In rep ly
and ora l
argument,
P l a i n t i f f s
have
of fe red severa l exc lus ions from the
Class
on the
bas i s t ha t Defendants ' a f f i rma t ive defense of actua l knowledge
C e r t i f i c a t i on ( Graziano
Deel. 1 ) ;
Defendant 's
Memorandum of
Law in Opposi t ion to Pl a i n t i f f ' s
Motion
for
Class C e r t i f i c a t i on
( Def s . ' s Opp. }; Decla ra t ion of Adam B. Stern
in
Support of
Defendant 's Opposi t ion to Pl a i n t i f f ' s Motion ( Stern Deel . )
and
Appendix ( A- };
Pl a i n t i f f ' s Reply Memorandum
of
Law in Fur ther
Suppor t of Motion for Class C e r t i f i c a t i on
( P l s . '
Reply };
Decla ra t ion of Sa lva tore J . Graziano Fur ther Support
of
P l a i n t i f f ' s
Motion for
Class
C e r t i f i c a t i on
( Graziano Deel.
2 ) ;
Defendant 's
Sur-Reply Memorandum of Law
in
Opposi t ion to
Pl a i n t i f f ' s Motion
for
Class C e r t i f i c a t i on ( Defs . ' Sur-Reply ) ;
October 7,
2015
Class C e r t i f i c a t i on Hear ing
Transcr ip t ( Tr . ) ;
P l a i n t i f f ' s
October
7,
2015
Class C e r t i f i c a t i on Hear ing
Exhibi t
( P l s . ' Ex. } ;
Defendant 's
October 7, 2015
ass
C e r t i f i c a t i on
Hear ing Exhibi t ( Defs . ' Ex . ) .
2
Graziano
Deel.
1,
Ex.
42.
5
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i s
e i the r
es t ab l i shed o r
c lose
enough t ha t t i s not worth
rebu t t ing . Tr.
21:19-22:6 . Thei r f ina l comprehensive l st of
exclus ions
i s as fo l lows: American Century
Investment
Management,
ue
Ridge, Capi ta l Research
and
Management Company,
Chil ton Investment
Company, Clovis
Capi ta l
Management, Columbia
Management Investment
Advisors,
Fide l i ty Management
and Research
Company, Jennison
Associa tes ,
Kingdon
Capi ta l
Management,
Loews,
Maple Lane
Capi ta l , Schroder Investment Management North
America, Soros Fund Management, Surveyor
Capi ta l ,
T.
Rowe Pr ice
Dis t r ibu t ion Group, Teachers Insurance Annuity
Associa t ion
o f
America,
Turner
Inves tments , Weiss Mul t i -S t ra tegy
Advisers , and
Well ington Management Company ( co l lec t ive ly , the Exclus ions ) .
Discovery has
been ongoing during
submission of the motion
for
c l a s s
c e r t i f i c a t i o n .
Discovery
commenced
on
February
7,
2014. St ip . and P r e t r i a l
Scheduling Order
Feb.
5, 2014) , ECF
No. 209. Product ion
of
documents
re l evan t t o
c l a s s c e r t i f i c a t i o n
necess i t a ted extens ion of d i scovery dead l ines , and by
s t i p u l a t i o n and Order ,
the deadl ines
were
modif ied on
August 18,
2014. St ip . and
Pre t r i a l Scheduling Order
Aug.
18, 2014) , ECF
No.
249.
Deadlines
were again extended by Orders on October 28,
2014
and
September 10, 2015. St ip . and Modif ied
Pre t r i a l
Schedul ing Order
Oct. 28, 2014) ,
ECF
No. 253; St ip . and
Modif ied Pre t r i a l Schedul ing Order Sept .
10,
2015) ,
ECF
No.
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346. Pursuant to the l a t e s t
Modif ied P r e t r i a l
Schedul ing
Order ,
f ac t
discovery i s scheduled to c lose
December
4, 2015,
and
exper t d i scovery i s scheduled to c lose
on
Ju ly 3,
2016.
Oral argument was
he ld
and the
mot ion was
deemed
f u l l y
submi t t ed on October 7, 2015.
I .
The
Relevant acts
Given the
ex tens ive
fac tua l background
d e t a i l ed
in
t h i s
Cour t ' s o ther dec i s ions , the fol lowing
fac t s
prov ide only a
t r u n ca t ed
r e t e l l i n g
o f
undi spu ted even t s
fo r purposes
of
approaching the i n s t an t motion.3
On
February
1, 2012, Facebook
publ i c ly
f i l e d
i t s i n i t i a l
r e g i s t r a t i o n
s t a t ement with
the
SEC
( Reg i s t ra t ion
Statementu)
fo r ts upcoming i n i t i a l
publ ic of fe r ing .
The Reg i s t r a t i o n
Statement r e fe ren ced Facebook s h i s t o r i c a l performance data and
ts
pr imary revenue
source ,
adver t i sements . I t a l s o made mention
The fac t s t ha t fo l low are drawn from f i l i n g s in t h i s case and
a re not in d i spu te except as noted. For a d e t a i l ed and
c i t e d
r e c i t a t i o n of the fac t s in
the
se c u r i t i e s l i t i g a t i o n por t ion
of
t h i s
case ,
see
MT Opinion
a t 493-505; Consol ida t ion Opinion a t
31-33.
For an overview
of the
i s sues
with
Nasdaq s t echn ica l
sys tems
i s s u es
t r ad i n g
s tock dur ing t h e r e l ev an t t ime
per iod , see Conso l ida ted
Opinion
a t 33-34.
7
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of the o p p o r t u n i t i e s fo r growth in the mobi le
market ,
the
r i s k s
as s o c i a t ed with a t t empt ing to monet ize t h a t market
by
d i sp l ay in g
ads
on mobi
devices (which
had
not
yet done) , and the
produc t d ec i s io n s involved with ba lanc ing
the
revenue needs
fo r adver t i sement and
the
u se r exper ience .
On
March
7, 2012,
responded
to
an SEC comment l e t t e r by r ev i s i n g s
Reg i s t r a t i o n Sta tement to inc lude
more i n format ion c l a r i f y i n g
the t r en d of increas ing
mobi le
usage
and completed
irst
q u a r t e r
f i n an c i a l r e s u l t s .
Facebook prov ided
t h ese f i n an c i a l r e s u l t s and i n t e r n a l
p ro j ec t ed
revenue gu idance to
t h e inves tment
banks underwr i t ing
t h e IPO,
which
t h e u n d e rw r i t e r an a l y s t s
( the Syndica te
Ana lys t s ) used to genera te t h e i r
own es t ima tes
and p red i c t i o n s
of
Facebook s r evenues
and
f i n a n c i a l
performance
fo r
use
in
marke t ing
the
IPO. Facebook and
i t s
underwri te rs
s igned unique
Non-Disc losure Agreements c o n t ro l l i n g t h e f low of in format ion
Facebook provided.4
On May 7,
2012,
he l d its f i r s t
l i ve roadshow
See Graziano Deel . , Ex. (Morgan Stan ley
Non-Disc losure
Agreement ) ;
see a l s o P l s . ' Mot. 13
(co l l ec t ing
c i t a t i o n s ) . The
p a r t i e s d i sag ree
over
t h e e f f e c t
of
the
Non-Disclosure
Agreements . See
. , Pl s . ' Mot.
a t
5,
7, 13; Defs . '
Opp.
a t
14n .9 .
8
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pre sen ta t ion . Between t h i s f i r s t pre sen ta t ion
and
the
fol lowing
day, Facebook cu t
i t s
i n t e rna l
pro jec t ed
revenue
f igures
fo r the
second qua r t e r o f
2012.
On May 9,
f i l e d a Free
Wri t ing
Prospectus ( the FWP ) and an Amended
Regi s t ra t ion
Statement
warning fu r the r about the poss ib l e negat ive revenue impl ica t ions
fo r increased user t r a ns i t i on to
mobi le . Beginning
almost
immedia te ly t h e re a f t e r , Facebook 's Treasurer Cipora Herman
( Herman ) made
nineteen c a l l s to
Syndicate Analys ts ( the
Herman Cal ls
or the
Cal l s ) follo 'wing a
sc r i p t
descr ib ing
mobi le ' s downward p res s u re on revenue, and
not i fy ing
them tha t
Facebook had
rev i sed i t s
own Q
pro jec t ions downward.
The
Syndicate Analys t s rev i sed t h e i r own models and
es t imates
down.
At
l e a s t some Syndicate
Analys ts then
reached out to
others ,
and
a t
l e a s t some
of
the
pro jec t ion in fo rmat ion
f lowed beyond
the 19
Herman
ca l led .
Though
the
pa r t i e s
agree
on
the
fac t t h a t
leakage
occurred , they dispu te
nea r ly everything e l se , including
the
scope o f
what
was re layed ,
to
whom, and
to what e f fec t ( s ) .
managed
to hold on
to
ts
pre fe r red
pr ic ing a t $38
per share . The
IPO went
forward on May 17, 2012 se l l i n g
in
excess
o f 421
mil l ion shares , one of the l a rges t i n i t i a l publ ic
of fe r ings in
h i s to r y .
On May 18, 2012, the s tock
began
publ i c ly
t rad ing . Pr ices
i n i t i a l l y exceeded
pro jec t ions ,
opening
a t
$42.05,
but
the
surge
did
not l a s t . The
s tock dipped
and
c losed
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t ha t day a t
38.23.
On the fo l lowing two
t r ad ing days,
s tock
cont inued
to
tumble,
c los ing
a t
34.03 on May
21,
and 31
on May
22.
As
the s tock p r i ce f e l l , i n t e r e s t in the cause
increased ,
and the
in format ion
conveyed
in the
Herman
l s
l eaked fu r the r outward
from
the o r ig in a l 19 r ec ip i en t s .
Facebook 's s tock p r i ce
did
not recover u n t i l more than
a
year
l a t e r ,
on
Ju ly
31, 2013.
P l a i n t i f f s a l l ege
the
FWP
and Amended
Regi s t ra t ion
Statement
co n s t i t u t e
mat e r i a l misstatements o r omiss ions
by
f a i l i n g
t o d i sc lose what
knew
a t
the t ime
with
ce r t a in ty : the
prev ious ly
disc losed
p o s s i b i l i t y t h a t mobile
might
negat ive ly a f f e c t revenue
had
come
to f ru i t i o n caus ing
to i n t e rn a l l y
se i t s own
revenue fo recas t ,
and
t h i s
downward
t rend
was
not
of f
se t
by
produc t
Opinion
a t
506-522.
II Appl icable Standard
s ions .
See
MT
To obta in c e r t i f i c a t i o n , a proposed c l a s s must meet
Federa l
Rule of Civ i l Procedure
2 3 ( a ) s p r e r eq u i s i t e s
o f numerosi ty ,
c o m . ~ o n a l i t y
t y p i c a l i t y ,
and adequacy of rep re sen ta t ion . Fed. R.
Civ.
P.
23(a) ; Amgen Inc . v.
Connect icut
Ret. Plans Trus t
Funds, 133 S.
Ct.
1184, 1191, 185 L.
. 2d
308
(2013}.
10
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In
addi t
, the
proposed
c lass must
sa t i s fy
one
of
three
requirements l i s t e d in
Rule
23(b) . Fed. R. Civ. P. 23(b) ;
Amgen,
133
S. Ct. a t 1191. Pl a i n t i f f s have moved under
Rule
23{b)
(3) , which
requi res t ha t the
cour t f inds t ha t
the
quest ions of law or f ac t common to c las s
members predominate
over any
quest ions af fec t ing only
indiv idua l members,
and t ha t a
c lass ac t ion
i s
supe r io r to othe r ava i lab le
methods
for
i r l y
and e f f i c i e n t l y ad jud ica t ing
the
cont roversy .
. R.
Civ. P.
23(b)(3) .
The Second Circu i t
has descr ibed the s tandard
of
proof
governing
c lass
ce r t i f i ca t i on :
(1)
a d i s t r i c t judge may
c e r t i f y
a c lass only a f t e r making
erminat ions
t h a t
each
of
the
Rule
23
requirements
has
been met;
{2
such
determinat ions
can
be
made
only
i f
the
judge resolves fac tua l d i sputes re levant to each
Rule 23
requirement and
f inds t ha t whatever under lying
re levant to
a
pa r t i c u l a r
Rule
23 requirement have
es tab l i shed
and i s
persuaded to
ru le ,
ba on
the
re l evan t
s and the appl icable l ega l
standard,
t ha t the
requi rement i s met;
(3) the obl ion
to m such
dete na t ions i s not lessened by over lap
between
a
Rule
23
requi rement
and
a mer s i s sue , even a
meri t s
i s sue t ha t i s
i den t i ca l with a Rule 23 requirement ; (4) in making
such
dete rmina t ions ,
a d i s t r i c t
judge should not assess
any
c t
of
the
meri t s unrela t
Rule
23
requirement
~ ~ ~ - - - - - - - - - - ~ ~ ~ ~ ~ ~ ~ ~ _ , , , , _ ~ ~ ~ ~ ~ - -
471 F.3d
24, 41 {2d
r .
2006) ( In re IPO I ) s ion
c l
on
den
l of
reh '
sub nom.
In
re I n i t i a l
Pub.
Offer ing
Sec. Li t i g . , 483 F.3d
70
(2d
Cir . 2007) ( In re IPO
I I ) .
' [T]he s tandard o f proof
11
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appl icable
to evidence prof fe red to meet the requirements of
Rule 23
[ i s ] a preponderance of the evidence . ' In
re
Flag
Telecom Holdings, Ltd. Sec. L i t i g . , 574 F.3d 29, 35 (2d
Cir .
2009) (quot ing Teamsters
Local
445 Fre igh t
Div.
Pension Fund v.
Bombardier Inc . ,
546 F.3d
196, 202 (2d
Cir .
2008)) .
In determining whether c las s
ce r t i f i ca t i on
i s appropr ia te
in
a s e c u r i t i e s ac t ion , the Second Circu i t has d i rec ted d i s t r i c t
cour t s
to
apply Rule 23 according to a l i be r a l
r a th e r than
a
r e s t c t ive i n t e rp r e t a t i on . Bi l lhofe r v. Flamel Techs . , S.A. ,
281 F.R.D. 150,
155
(S.D.N.Y. 2012) ( c i t ing lt v. Parker
Par s le
Pet ro l
Co. ,
147
F.R.D.
51, 54
(S.D.N.Y. 1993) ; Green
v. Wolf
Corp. ,
406
F.2d
291, 298, 301 (2d Cir .1968) ,
ce r t .
den ied ,
395
U.S. 977, 89 S. Ct. 2131, 23 L.Ed.2d 766 {1969)}.
[ I ] f
t he re
i s
to
be
an
e r r o r
made,
l e t
t
be
in
favor
and
not
aga ins t
the maintenance of the c las s ac t ion , for t i s
always
subjec t to
modi f i ca t ion should l a t e r developments during
the
course
of the t r i a l so
r eq u i r e .
Green, 406 F.2d
a t 298 ( c i t ing
Espl in v.
Hirshi ,
402 F.2d 94 (10th Cir .
1968)) .
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III The Proposed Subc1asses Sat i s fy Ru1e 23 a)
a . Numerosity
For c l a s s c e r t i f i c a t i o n
to be appropr ia te , the
proposed
c l a s s
must
be
so numerous
t ha t
jo inder of a l l of i t s ind iv idual
members would be
imprac t i cab l e .
Bi l lho fe r , 281 F.R.D. a t 156;
See
a l so
Fed.R.Civ .P.
23(a) ( l ) ;
In re NYS
L i t ig . ,
260 F.R.D.
55, 69 70
(S.D.N.Y.2009).
Jo inder need not
be
imposs ib le , but only d i f f i c u l t
or
inconvenient enough to make
c lass
t r ea tment appropr i a t e .
Cent. St a t e s Se. Sw. Areas Heal th
Welfare Fund
v. Merck-Medco Managed Care, LLC, 504
F.3d
229,
244-45
(2d
Cir .
2007);
see a l so _ I _ n ~ r _ e ~ N _ A _ S ~ ~ _ M _ a ~ r _ k _ e _ t _ _ M _ a _ k _ e _ r _ s
A n t i t r u s t
L i t ig . , 169 F.R.D. 493,
508
(S.D.N.Y. 1996) . A c la ss
of more than 40 commands a presumption
of s u f f i c i en t numerosi ty .
Bi l lho fe r , 281 F.R.D. a t 156;
NYS
Spe c i a l i s t s , 260 F.R.D. a t
70
( c i t ing
Consol. Rail
Corp. v.
Town of
Hyde
Park,
47
F.3d 473,
483
(2d Cir .
1995)) ; see a l so
In
re Sadia , S.A. Sec. L i t i g . , 269
F.R.D.
298, 304 (S.D.N.Y. 2010) .
In
s ecu r i t i e s f raud
c lass
ac t ions
r e l a t i ng
t o pub l i c ly
owned and na t iona l ly l i s t e d
corpora t ions ,
t he
numerosi ty
requi rement may be s a t i s f i e d
by
a showing t ha t a l a rge number of
shares
were
outs tanding
and t r aded dur ing
the re levant
per iod .
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In
re Vivendi Universa l , S.A. , 242
F.R.D.
76,
84
(S.D.N.Y. 2007)
( Vivendi I ) (quoting
Teachers '
Ret.
Sys.
o f La.
v.
CLN Ltd . ,
No. 01 Civ. 11814(LAP}, 2004
WL
2997957, a t
*3
(S.D.N.Y. Dec.
27,
2004)) ; see
a l so
In
re Globa ls ta r Sec. Li t i g . , No. 01 Civ.
1748(PKC), 2004
WL
2754674, a t *3*4 (S.D.N.Y. Dec.1, 2004); In
re Deutsche
Telekom
Ag Sec.
Li t i g . ,
229 F.Supp.2d 277 (S.D.N.Y.
2002}. 421,233,615 shares were so ld in
the
Facebook IPO.
Graziano Deel .
1,
Ex. 40. Whether in
one
c las s
or
two,
t h i s
case involves
a
grea t
deal
more
than
40
p l a i n t i f f s , making
jo inder impract icable
and es t ab l i s h in g
numerosi ty .
b ommonality
Rule 23(a) (2) demands
the
exis tence o f
common
quest ions
of
law or fac t between members of the
c l a s s .
Bi l lhofe r , 281 F.R.D.
a t 156. Common
quest ions
must
a l so genera te
common
nswers
ap t
to dr ive the re so lu t ion of the l i t i g a t i o n . Wal-Mart Stores ,
Inc. v. Dukes,
131
S. Ct. 2541,
2551,
180 L.
Ed.
2d
374
(2011)
(c i t a t ion omit ted} . However, commonali ty does
not
mandate
t ha t
a l l c l a s s members
make
i den t i ca l c la ims and arguments or t ha t
the
circumstances
of t he i r s e c u r i t i e s purchase be i de n t i c a l .
Id . ( c i t ing
Tr ie f
v. Dun
Brads t ree t
Corp. ,
144
F.R.D. 193,
198
(S.D.N.Y.1992) ( in te rna l
quota t ion marks omi t t ed ) ) ;
see
a l so
Port Auth.
Pol ice
Benevolent Ass 'n v. Port Auth . , 698 F.2d 150,
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153-54
(2d Cir .1983)) . The commonality requi rement has
been
app l ied
permiss ively
by
cour ts
in
the
con tex t of
s e c ur i t i e s
fraud
l i t i ga t i on ,
and
minor
var ia t ions
in the
c las s
members'
pos i t ions wil l not su f f i ce to
defea t
c e r t i f i c a t i o n . Die t r i v.
Bauer,
192 F.R.D. 119, 124 (S.D.N.Y.2000)
(c i t a t ions omit ted) ;
see
a l so
Vivendi I , 242 F.R.D.
a t
84 ( s ta t ing commonality i s
app l ied permiss ive ly in
s e c ur i t i e s
f raud l i t i ga t i on
11
) ( c i t ing
In
re Nortel Networks
Corp. Sec. Li t i g . ,
No. 01
Civ. 1855(RMB),
2003 W 22077464, a t
*3
(S.D.N.Y.
Sept .
8, 2003); In re Fron t i e r
Ins . Grp. , Inc . Sec. Li t ig . ,
172 F.R.D. 31,
40 (E.D.N.Y.
1997)) .
Common quest ions
of
law
and f ac t
are
presen t where
the
a l l eged
fraud invo lves mater ia l mis represen ta t ions and omissions
in documents c i r cu l a t ed
to the inv es t ing pub l ic ,
press
re l ea se s
and s ta tements
provided
to the
investment
community
and
the
media, and
i nves to r
conference c a l l s . Bi l lhofe r , 281 F.R.D.
a t
156; see
a l so e
Darquea v. Jarden Corp . , No. 06
Civ.
722,
2008 W 622811,
a t
*2 (S.D.N.Y. Mar.
6,
2008) ( The
a l leged
misrepresen ta t ion l ead ing to
a r t i f i c i a l l y i n f l a t e d
s tock pr ices
r e l a t e to
a l l
the i nves to rs
and the
exis tence and mater i a l i ty
of
such miss ta tements or
omissions present
important
common
i s sues . ) ; In re Fron t i e r ,
172 F.R.D.
a t 40 (E.D.N.Y. 1997)
(d i sseminat ing s ta tements t ha t omi t ted
o r
misrepresen ted
mate r i a l f ac t s deemed common ques t ions) .
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The
ex i s tence o f l a rge common quest ions with common
answers
in t h i s
mat te r
cannot be disputed .
P l a i n t i f f s '
pr imary c la im i s
t h a t the FWP
and Amended
Regi s t ra t ion Statement con ta in mater ia l
misrepresen ta t ions o r omiss ions .
Pl s . ' Mot.
a t
18.
Notwi thstanding
any
unique
f ac t s
as to
any
a i n t i f f ,
the
success
or f a i l u re
of any and
a l l i nves to r c la ims necessa r i ly
turns
on
severa l dete rmina t ive
l i a b i l i t y
quest ions the
Cour t has
sus ta ined
in
i t s Opinion on Defendants '
motion
to d ismiss :
(1)
Was
Defendants '
duty under I tem
303
t r iggered
before
the
Regi s t ra t ion Sta tement became e f fec t ive
because
was
aware
of
the
mater ia l negat ive
impact on
Facebook's
revenues
the
Company
had
su f fe red
as
a r e su l t o f
inc reas ing
mobile usage and
the
Company's
product
dec i s ions t en
days
before the IPO?
MT
Opinion a t
513. (2)
Did
the
r i s k
warnings in
the
IPO Prospectus
misleadingly
represent t h a t
Facebook 's
revenue
cu t
was
merely
poss ib l e
when
in fac t the
t rend
had a l ready
mater ia l ized?
Id . a t
516. (3)
Did
Rule 408 of
SEC
Regulat ion
C requi re Facebook to
d i sc lose
the known
f inanc ia l e f f e c t s r e l a t e d
to
increas ing
mobile
usage
and ce r t a in product dec i s ions? Id . a t 522. The
evidence necessary
to
answer these
ques t ions
wil l be the same as
to every
Pl a i n t i f f ,
and
the answer for any one
must
necessa r i ly
apply
to a l l othe rs . The necess i ty
of
answering these cen t ra l
quest ions for
p o t e n t i a l l y
thousands o f p l a i n t i f f s
s u f f i c e s
to
meet
the
low hurdleu and
permiss ib le app l i ca t ion o f
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commonality.
See
In re Marsh McLennan Cos., Inc . Sec. Li t i g . ,
No. 04 CIV.
8144
(CM),
2009 W
5178546,
a t *9
(S.D.N.Y.
Dec.
23,
2009) (c i t a t ions omi t t ed) ;
see
a l so Bi l lhofe r , 281 F.R.D.
a t
156
(expla ining
misrepresenta t ions
and omissions
a l leged in publ ic
f i l i ngs are of the
so r t
t ha t cour t s
rou t ine ly hold
to s a t i s f y
the common quest ion requirement (c i t a t ions and i n t e rna l
quota t ion marks omi t t ed ) ) ; Vivendi I , 242
F.R.D.
a t 84.
That Defendants in tend to b r ing subject ive , i nd iv idua l i zed
defenses by chal lenging
the ac tua l
knowledge of each
Pl a i n t i f f
5
may
defea t
commonality, but
t h i s i s
a weighty
quest ion
for the
predominance ana lys i s .
See
~ Korn v. Franchard Co 456
F.2d
1206,
1210
(2d
Cir . 1972) ( f inding commonality
p la in ly
s a t i s f i e d where the
a l leged misrepresenta t ions
re l a t ed to a l l
inves tors , rese rving the
more
d i f f i c u l t
problem
o f
whether
re l i ance posed a common i ssue for the
12(b)
(3) predominance
ana lys i s ) . Where
Pl a i n t i f f s
have i d e n t i f i e d a
unifying thread
among the members' cla ims t h a t warrants c las s t r ea tmen t , as
Pl a i n t i f f s
have
here ,
(n ]o t every
i s sue
must
be i den t i ca l as to
each
c lass
member. Vivendi I ,
242
F.R.D.
a t
84 (quoting
Cut le r
v.
Pera l e s , 128 F.R.D. 39, 44 (S.D.N.Y.1989) ( in te rna l quota t ion
5
S e e ~
Defs . '
Opp. a t 11 ( [F]or each p l a i n t i f f ' s Sect ion 11
cla im, Defendants are
en t i t l ed
to
prove
t ha t a t the t ime of
acqu is i t ion
the purchaser knew of
such
unt ru th or omiss ion.
(c i t a t ions
and i n t e rn a l quota t ion marks
omit ted)) .
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marks and
t a t i o n
o mi t t ed ) . The
ind iv idua l
ques t ions here do
not negate t h e
p l a i n ex i s t en ce
of
the
common l i a b i l i t y ques t ions
t h a t
must
genera te common answers
ap p l i cab l e
to every
s ing le
cla im in
t h i s mat te r .
However, commonal i ty
es t ab l i shed ,
t h e re remains an
ad mi n i s t r a t i v e ques t ion
of whether t h e
c l a s s c e r t i f i c a t i o n
an a l y s i s should
be ap p l i ed
to one c l a s s o r two
in l i g h t
Defendants ' i n d i v i d u a l i zed
arguments . Rule 23
gives
th e
d i s t r i c t
co u r t
f l e x i b i l i t y to c e r t i f y su b c la s ses as t h e case
p ro g res ses and as t h e n a tu re of the proof to be developed
a t
t r i a l becomes
c l e a r .
Mar iso l
A.
v. G i u l i an i , 126 F.3d 372,
379
(2d Ci r .
1997) ;
Vivendi
I ,
242 F.R.D.
a t
109
( The
Court has
the
a u t h o r i t y
under Ru
23
c) 4)
B
of t h e Federa l Rules of Civ i l
Procedure
to
div ide
a
c l a s s i n t o s u b c l a s s e s . ) .
Defendants have
marshaled an impress ive
amount of
ev idence
showing
t h a t
vary ing asp ec t s and amounts
of
t h e co n ten t
of
the
Herman
Cal l s
and the Syndica te Analys t s '
pro jec t ions
spread
to
other i n s t i t u t i o n a l i nves to rs . See
Defs . ' Opp.
a t
22-26 .
6
Emails
6 As a s ingu la r
example, Natasha Kuhlkin of Jenn i son
Associa tes
emai led 65 i n d i v i d u a l s
t o re l ay
some of the con ten t of the
Herman
Cal l s .
Defs . '
Ex.
A-547.
Defendants
have
put
fo r th
ev idence t h a t i n v es t o r s a t numerous
i n s t i t u t i o n s
gathered ,
i n fe r red ,
or
were
informed of some
aspec t s
of what was conveyed
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from
Morgan Stan ley and
JP
Morgan
show
teams
of
employees
execu t ing
an e f f o r t to
touch
base
wi th dozens of
investment
i n s t i t u t i o n s regard ing the changed
circumstances
a f t e r
the
Herman
Cal l s . A-867-891. This evidence appl ies widely to
i n s t i t u t i o n a l i nves to rs . Re ta i l i nves to rs
had
an a l toge ther
d i f f e r e n t
exper ience from i n s t i t u t i o n a l i nves to rs :
they
were not
neces sa r i ly wel l connected in the investment world , they were
not sub jec t s of
the
unde rwr i t e r s d i r e c t market ing e f fo r t s to
the same degree or in the same ways,
and
most s i g n i f i c a n t l y ,
the re was no corresponding sys temat ic e f f o r t to reach out
to
r e t a i l
i nves to rs a f t e r
the Herman
c a l l s .
7
P l s .
Reply a t
24-32.
in the Herman Cal l s
o r
Syndica te Analyst
Revis ions ,
inc luding:
American
Century
Inves tment Management A-14), Alyeska
Investment
Group A-1561), Capi ta l Research Global Inves to r s
A-
6-7) , Capi ta l
World
Inves to r s
A-17),
Chi l ton Investment Company
A-61),
Clovis
Capi ta l
Management
L.P.
A-1539), Columbia
Management Inves tment
Advisers
A-1552), Cr i te r ion
Capi ta l
Management, LLC A-50; A-59) , Federa ted Kaufmann A-46.2) ,
Fi d e l i t y
A-16), Gilder Gagnon Howe Co., LLC A-70; A-72),
Jennison Associa tes
A-204;
A-206), Lone Pine Capi ta l LLC A-
64}, Maple Lane Capi ta l
A-1568),
Oppenheimer
and
Nueberger
Berman A-1723),
Schroder
Inves tment Management A-98) ,
All iance
Berns te in
A-1685),
Teachers
Advisors , Inc.
A-79),
TPG-Axon
Management A-95), Polygon
Investments A-1772-3),
U S
Global
Asset
Management A-86), Waddell
Reed
Inves tment Management
A-91) ,
Weiss
Mul t i -S t r a tegy
Advisors
LLC A-1541),
Well ington
Management
Company
A-89),
Winslow Capi ta l Management,
LLC
A-
1556;
A-972).
7
Defendants do a l l ege i s o l a t ed ins tances of t h i s informat ion
reach ing
r e t a i l
i nves to rs . See Defs . Opp a t 49
53; see a l s o §
IV.a) . For
example,
one
ind iv idua l t h a t
lea rned
some of the
re levant
in fo rmat ion
through
h i s f a the r , and ano ther
through
her
research and ana lys i s as a consumer news
w r i t e r .
See Defs . Opp.
a t
-3 ; § IV.a) . Defendants a l l ege t h a t
the
most
widespread
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Spec i f i c
mer i t s determinat ion
as
to what exac t in fo rmat ion
spread, when, and to whom need not
be
reached to know t h a t the
answers to
these
ques t ions have s i g n i f i c a n t
admin i s t ra t ive
impact
on the case . The record has es t ab l i shed
t h a t
unique
world of f ac t s
app l i e s t o
i n s t i t u t i o n a l
i nves to rs
but not
r e t a i l
i nves to rs .
t
t he re fo re
r a i s e s
addi t iona l conunon quest ions with
conunon answers,
such
as whether reasonab le i n v e s t o r s ac tua l
knowledge
of the Facebook
revenue
cu t s can be
i n f e r red from
the
broad
spread o f t h i s in fo rmat ion . These
quest ions
and
t h e i r
answers
are
sub jec t
to genera l i zed
evidence ,
but
w i l l
a l so
r eq u i r e
di s t ingu i sh ing
between r e t a i l and i n s t i t u t i o n a l
i n v e s t o r s . To avoid
confus ing the
i s sues
and
t o admin i s t ra t ive ly
manage t h i s excep t iona l ly l a rge
case ,
i f
any c l a s s i s to
proceed,
two
subc lasses a re
necessary .
c
Typica l i ty
Rule
2 3 ( a ) s
t y p i c a l i t y requi rement
~ i s s a t i s f i e d
when
each
c l a s s member s
c
im a r i s e s
from
the same
course
of
events ,
d i f fus ion of t h i s in fo rmat ion to r e t a i l
i nves to rs
was
through
e i t h e r media
sources , o r by imputat ion to the indiv idua ls who
inves ted through i n s t i t u t i o n s . Defs .
Opp.
a t
49-54. Facts
regard ing
the
former
i s sue
apply to both subc lasses , and the
l a t t e r
i s sue
i s addressed i n f r a in sec t ion IV.a) . Defendants do
not
p o s i t
tha t r e t a i l i nves to rs were sys t ema t i ca l ly connected
to
o r
d i r e c t ly
informed by the d i f fu s i o n of
the
in fo rmat ion between
i n s t i t u t i o n a l i nves to rs .
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and each c las s member makes s imi la r
l ega l arguments to
prove the
defendant ' s l i a b i l i t y . ' Cent.
Sta tes , 504 F.3d
a t 245 (quoting
Robinson v.
Metro-N.
Commuter R.R. Co., 267 F.3d 147,
155
(2d
Cir .2001)) .
Typica l i t y
may be
found
to f a i l in cases where the
named p l a i n t i f f was not
harmed
by the conduct
a l leged to have
i n ju red the
c l a s s . Newman
v. R N Telecom Servs . ,
Inc . ,
238
F.R.D.
57, 64
(S.D.N.Y.2006).
As
discussed,
a l l P l a i n t i f f s put
fo r th the
same cla ims
based on
the same
miss ta tements
and
omissions in
the same
documents.
See
supra
§ I I I . b ) ;
see a l so P l s . ' Mot. a t 19. All
P l a i n t i f f s '
i n j u r i e s stem
from
those
mate r i a l
miss ta tements o r
omiss ions . Thus, the
c la ims
asse r ted by a l l
p l a i n t i f f s are
typ ica l
of one
another . The d iv i s ion
of
subc lasses cures any
concern ,
v a l id or no t ,
t h a t
a
r e t a i l
i n v e s t o r ' s
c la im
i s
con tex tua l ly
not t y p i ca l of a high ly experienced repea t -p l aye r
i n s t i t u t i o n a l i n v e s t o r ' s cla im.
Defendants
argue
t h a t
P l a i n t i f f s
have
of fe red
only
asse r t ions o f t yp i c a l i t y without poin t ing to any evidence
Defs . '
Opp a t 66-8. The
t yp i c a l i t y ana lys i s asks whether t he
cla ims and
defenses
of the rep re sen ta t ive p a r t i e s are typ ica l o f
the
cla ims
or defenses of
the c l a s s .
Fed. R.
Civ.
P.
23(a)
3 ) .
P l a i n t i f f s ' papers adequate ly p rov ide evidence o f t y p i c a l i t y by
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poin t ing to the
i den t i ca l
c la ims o f a l l P l a i n t i f f s in both
proposed subc lasses . Pl s . ' Mot. a t 19. This i s a l l the
Rule
requ i re s . See
NYS
S p e c i a l i s t s , 260
F.R.D.
a t
72
( As
long
as
p l a i n t i f f s
a s se r t ,
as
they
do here ,
t h a t defendants
committed
the same wrongful ac t s
in
the same
manner,
aga ins t
a l l members
of
the c lass ,
they
e s t a b l i sh
[ the) necessary t y p i c a l i t y .
( c i t ing
In
re
Towers
Fin . Corp. , Noteholders L i t i g . , 177 F.R.D.
167, 170
(S.D.N.Y. 1997)
( in te rna l
quota t ion marks
and
c i t a t i o n
omi t t ed) ; Robidoux v. Celan i , 987 F.2d 931, 936-37
(2d
Cir .1993)
( When t i s a l leged
t h a t
the same unlawful conduct was
d i rec ted
a t or af fec ted both
the
named p l a i n t i f f and
the
c las s
sought to
be represented , the t yp i c a l i t y requi rement i s usua l ly met
i r r e s p ec t i v e
of
minor v a r i a t i o n s
in the fac t
p a t t e r n s underly ing
indiv idua l c la im s . ) )
.
Defendants ' ·arguments
about
l ack
o f
c las s
s tand ing
are unava i l ing fo r the same
reason:
p l a i n t i f f s
here a l l a l lege they su f fe red the same in ju ry as
a
r e su l t of the
same
conduct ,
and
t ha t conduct impl ica tes the
same s e t of
concerns
as the
a l l eged ly i l l ega l
conduct t ha t
caused
in ju ry - the
misleading FWP
and
Amended Regi s t ra t ion Statement . See NECA-IBEW
Heal th Welfare
Fund
v. Goldman Sachs Co.,
693
F.3d 145, 162
(2d Cir . 2012) .
Defendants a l so
argue
t ha t ~ s ] o m e
p l a i n t i f f s ,
including
a l l o f the
Lead
P l a i n t i f f s ,
are subjec t to
a
knowledge defense
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based
on ind iv idua l communicat ions t ha t renders t h e i r cla ims
a typ ica l of othe r
c las s members. Defs .
Opp. a t
65
(c i t a t ions
and in te rna l
quota t ion
marks
omi t t ed) . For each
p l a i n t i f f
Defendants
provide evidence
to
prove
ac tua l
knowledge,
P l a i n t i f f s poin t to o ther evidence to rebut the c la ims . P l s
Reply a t 66-69.
Defendants,
of course , rebu t much o f th t
evidence
and
argument in t h e i r Sur-Reply. Defs . Sur-Reply 45
46.
This i s the
song
t ha t never
ends . What i s c l e a r i s t h a t
Defendants in tend to vigorously
pursue
an ac tua l knowledge
defense as
to
every
Pl a i n t i f f poss ib l e
(as i s t he i r
r i gh t ) ,
not
tha t the proposed P l a i n t i f f s are
any
more a typ ica l
in
r e l a t i o n
to the
c las s than any
othe r .
I t i s t he re fo re the p a r t i c u l a r
circumstances , not the
f ac t ,
of the
ac tua l
knowledge
defenses
t ha t sugges t s any a t y p i c a l i t y ,
an
obvious
t ru i sm
with any
sub jec t ive
defense
such
as
ac tua l
knowledge.
Typica l i t y
i s
quest ion
of the re l a t ion o f each cla im to the o ther s . To f ind
t ha t the i nd iv idua l i zed
c i rcumstances
of
an
ac tua l knowledge
defense prec lude
t yp i c a l i t y
here would
al low
Defendants to
unhinge the c lass
ce r t i f i ca t i on
ana lys i s
a t
th i s
point
not
because P l a i n t i f f s
cla ims
are
d i s s imi l a r
when
compared, but
s imply because the
defense may apply .
Because Defendants in tend
to argue ac tua l
knowledge widely , the
fac t
o f
ac tua l
knowledge
defenses and the
i nd iv idua l i zed
inqu i r i es requ i red
to adjudica te
them, whether aga ins t the cla ims o f the
proposed
rep re sen ta t ive s
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or other
po ten t i a l c l a s s members, more
appropr i a t e ly
goes
to
predominance r a the r than
t yp i c a l i t y .
See i n f r a § IV.a) .
Fur ther , as descr ibed below, subc lasses
and
admin i s t ra t ive
procedures
wil l
e f f e c t i v e l y
manage the
minor v a r i a t i o n s t h a t
may
be
appl icable
to the
proposed
r ep resen ta t ives . See id .
At
the
t yp i c a l i t y s tage ,
as se t
fo r th
above, P l a i n t i f f s have
s a t i s f i e d
Rule
2 3 ' s requirement . They need not demonst ra te they wi l l
succeed on
the
meri t s (by
disprov ing
Defendants a f f i rma t ive
defenses (s )
o r otherwise) .
d Adequacy
Rule
23(a)
(4)
requi res
t ha t
t he rep re sen ta t ive pa r t i e s
wil l
f a i r l y
and adequate ly pro tec t the
i n t e r e s t s
of the c l a s s .
Fed.R.Civ .P.
23(a)
(4) .
~ d e q u a c y
e n t a i l s
inqu i ry
as
to
whether :
1) p l a i n t i f f ' s
i n t e r e s t s
are
an tagon i s t i c to the i n t e r e s t
of
other
members of
the
c las s and 2) p l a i n t i f f ' s
a t torneys
are
qua l i f i ed , experienced and ab le
to
conduct the l i t i g a t i o n .
In
re
Flag Telecom, 574 F.3d
a t
35 ( c i t ing Ba
v.
Donaldson
222
F.3d
52, 6
(2d
Cir .2000)) ( in te rna l
quota t ion
marks
omi t t ed) .
The
f i r s t prong
o f
t h i s ana lys i s serves
to
uncover
c o n f l i c t s of
i n t e r e s t
between named p a r t i e s and
the
c las s
they seek to
represent
and ensure t h a t
the proposed c las s rep re sen ta t ive
possesses
the
same i n t e r e s t and suffe r[ed] the same in ju ry
as
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the
c l a s s members. Amchem
Prods . ,
Inc . v.
Windsor,
521 U.S.
591, 625-26, 117 S. Ct. 2231, 138 L.Ed.2d
689
(1997) . To
defea t
c e r t i f i c a t i o n , a
c o n f l i c t
between named p a r t i e s and
the
c las s
they seek
to represent
must be fundamenta l . In re
Visa
Check/MasterMoney A n t i t r u s t
Li t i g . ,
280 F.3d 124,
145 (2d
Cir .
2001,
abrogated
in p a r t on other grounds
by
In re IPO I , 471
F.3d 24).
North Caro l ina DST Arkansas Teacher , and Fresno would
represen t the i n s t i t u t i ona l i nves to r
c l a s s ,
while the Galvans,
Eric Rand, the
Meltons , and Sharon Morley
would represen t
the
r e t a i l
i nves to rs .
As
discussed
above, a l l
members
of
the
proposed c las s a l l ege c la ims
a r i s ing from the
same
wrongful
conduct t ha t
are
based on the same l ega l t heor i e s as
P l a i n t i f f ' s
cla ims
and
the re fo re
none
of
P l a i n t i f f ' s
i n t e r e s t s
are
an tagon is t i c to those o f the proposed c l a s s . Bi l lho
281
F.R.D. a t 157. Any c o n f l i c t
t h a t
may e x i s t i s
not fundamental .
Defendants submit t ha t P l a i n t i f f s ' i n t e r e s t s are
an tagon is t i c
because
some purchased
shares before
May
18
media
repor t s
about
Facebook's
rev i sed revenue pro jec t ions , and some
a f t e r . Defs . '
Opp
a t 66-67.
Much of
the di f fe rences are
a l l e v i a t e d by sepa ra t ing the
i n s t i t u t i o n a l
i nves to rs
and
the
r e t a i l inves to r s . Regardless ,
these
arguments
go to
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con t rad ic t ions regard ing l os s causa t ion and
knowledge.
Knowledge
i s
an a f f i rma t ive defense and as t h i s Court has a l ready s ta ted ,
los s
causa t ion i s
not an element o f
a
cla im under
e i the r
Sect ion
11 o r
12. MT Opinion a t 522-23 ( co l lec t ing c i t a t i ons ) .
Though t h i s does not make knowledge and loss causa t ion
i r re l evan t
to
the
e n t i r e
c l a s s
c e r t i f i c a t i o n
inqu i ry , see i n f r a
§ I V . a ) , t
does
mean
t h a t
the
purpor ted c o n f l i c t
i s specula t ive
as to adequacy a t t h i s s tage and thus not grounds to
defea t
rs
Heal th v. DLJ
Capi ta l ,
Inc . ,
No. 08
CIV.
5653 PAC,
2011
WL
3874821,
a t 4
S.D.N.Y. Aug.
16,
2011) amended in par t , No. 08 CIV. 5653 PAC,
2014 WL
1013835
S.D.N.Y. Mar. 17, 2014)
( f inding specula t ive
c o n f l i c t did not de fea t t yp i c a l i t y , and thus , c las s
c e r t i f i c a t i o n ) .
In the
event
an
ac tua l
c o n f l i c t a r i s e s ,
whether
a t
the
damages
phase
o f t h i s
case
o r
otherwise ,
the
p a r t i e s
are
f ree to a l e r t
the
Court
and the i s sue w i l l be reso lved
a t t ha t
t ime.
With regard
to
the second prong of the adequacy ana lys i s ,
Counsel
i s highly
q u a l i f i ed and
has
prosecu ted
t h i s ac t ion
vigorously ,
t he i r e f fo r t s r esu l t ing
in
surv iv ing
a
motion
to
dismiss aga ins t
some of the
f ines t f i rms in the na t ion .
See
Graziano Deel. 1, Exs. 43-44 f i rm
resumes); MT
Opinion.
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Counsel
are more than s u f f i c i e n t ly
q u a l i f i ed and
experienced to
conduct t h i s l i t i g a t i o n .
8
Defendants
argue
t h a t P l a i n t i f f s have not shown su f f i c i e n t
knowledge of involvement in the
case
to
meet
the requi rements of
adequacy and t ha t ce r t a in
proposed
rep re sen ta t ive s are
i n s u f f i c i e n t ly aware of the case . Defs . ' Opp. a t 68. [C] l a s s
repre sen ta t ive s t a t u s may proper ly 9e denied where the c l a s s
rep re sen ta t ive s
have
so
littl
knowledge of and involvement in
the c lass
ac t ion t ha t
they
would
be
unable
or unwi l l ing
to
p r o t ec t the
i n t e r e s t s of
the c l a s s
aga ins t the poss ib ly
competing i n t e r e s t s of the a t t o r n ey s . Baffa v.
Donaldson
222
F.3d a t 61. Defendants c i t e
an
exc i sed por t ion
of
t h i s quote to
j u s t i f y
indiv idua l ized
a t t acks
on
myopic aspec t s of proposed
r ep resen ta t ives '
unders tandings
of
t h i s
case. Defs . '
Opp
a t
8
(point ing to Melton ' s knowledge before she jo ined the case in
December
2014 Mr. Galvan 's unders tanding of the
knowledge
i s sue , Mr. Melton ' s unawareness of a
document search) .
s Defendants
have
a l so submit ted t h a t counsel i s conf l i c ted in
represent ing
P l a i n t i f f s of both
subc lasses ,
whose
i n t e r e s t s '
c o n f l i c t
due to
the t iming o f t h e i r
a l l eged ly cor rec t ive ac tua l
knowledge. P l ' s Opp. a t 63-4. Counsel
i s
only conf l i c ted i f the
subc lasses
t r u ly
c o n f l i c t ; in
other
words t h i s
is
the same
specula t ive
argument t h a t
the two proposed subc lasses conf l i c t
because t he i r l os s -causa t ion arguments which
are
not a
p a r t
of
t h e i r cla im are necessa r i ly opposed.
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Defendants l eave out
the
immediately preced ing sen tences in
Baffa: The Supreme Court in Surowitz
v.
Hil ton Hotel
383 U.S. 363
express ly
disapproved of a t tacks on the
adequacy of c las s r ep resen ta t ive
based
on
the
rep resen ta t ive ' s
ignorance .
Baffa ,
222 F.3d a t 61.
Even
i f
Defendants '
a t tacks were proper , [ c ] o u r t s r a r e ly
deny c las s c e r t i f i c a t i o n
on
the bas i s of
the
inadequacy of c l a s s
represen ta t ives , doing so only in f l ag ran t cases , where the
pu ta t ive c las s rep re sen ta t ive s
d i sp lay
an a larming unfami l ia r i ty
with
the
s u i t ,
display
an unwi l l ingness
to
l ea rn
about the
f ac t s
under ly ing t h e i r claims, o r are so lacking in
c r e d i b i l i t y
t ha t
they are l i k e l y to harm t h e i r case . In
re
Pf ize r Inc. Sec.
Li t i g . , 282
F.R.D. 38, 51 (S.D.N.Y. 2012) . Such circumstances
are
not
presen t here .
P l a i n t i f f s
pleaded
sp e c i f i c
reasons
and
ways
in
which
l ead
p l a i n t i f f s would remain involved
in
t h i s
l i t i g a t i o n . See
Pl s . '
Mot. a t 20-21. Resolving any doubt ,
depos i t ions
taken
in
mid-2015 and submit ted in Reply
demonst ra te
the adequacy
of
P l a i n t i f f s ' involvement in the case . See
Graziano Deel. 2, Ex. 92-7. P l a i n t i f f s need not demonst ra te a
deep unders tanding of t h i s l i t i g a t i o n to meet the adequacy
requirement .
See In re
Sadia ,
269
F.R.D.
a t 310.
The
awareness
and wil l ingness
the proposed
rep re sen ta t ive s have
demonst ra ted
are more
than
s u f f i c i e n t .
See
id .
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Defendants a l so argue
t h a t
Rand, the Meltons, and Morley
were not
named
in the
Complaint , and
t he re fo re have not a l leged
any claims and did
not
a t t a ch PSLR c e r t i f i c a t i o n s
to
the
Complaint .
Defs . '
Opp. a t 66.
Defendants do not a rgue
any
of
these
indiv idua ls
are not p a r t of the c las s o r subc lasses
proposed. Rule
23 gives the Cour t the power to des igna te
c l a s s
rep re sen ta t ive s who a re
not l ead
p l a i n t i f f s , and Defendants do
not p r o t e s t
t ha t to do
so
would
cause d is loca t ion
o r
delay . See
In re Oxford Heal th Plans , Inc . , 191 F.R.D. 369, 380-81
(S.D.N.Y. 2000)
( f ind ing [ t )h e
Cour t be l ieves on r e f l e c t i o n
tha t
it probab ly has the power to des igna te a Class
Represen ta t ive under Rule 23
who i s not a Lead
P l a i n t i f f , s imply
because t he re
i s nothing
in the s t a t u t e which preven t s
it. ).
Accordingly , the concern
does
not
d e fea t a
f ind ing of adequacy.
IV.The Proposed Subclasses
Sat i s fy Rule 23 b)
3)
a Predominance
Rule
23(b)
(3) r eq u i r e s a proposed c las s rep re sen ta t ive
to
es t ab l i s h t h a t
common ques t ions o f law or f ac t predominate over
any
ques t ions
af fec t ing
only i nd iv idua l
members, and t h a t
a
c las s
ac t ion
i s
supe r io r
to othe r
ava i l ab le
means of
ad jud ica t ion . B i l lhofe r , 281 F.R.D. a t 158; see
a l so
Fed.
R.
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Civ.
P. 23{b) (3) . The
predominance
inqu i ry
t e s t s
whether
proposed c las ses are s u f f i c i e n t ly
cohesive
to warrant
adjudica t ion
by r ep resen ta t ion . Amchem Prods . , 521 U.S. a t 623,
117 S. Ct.
2231.
However, [ i ) t
i s a more demanding
c r i t e r ion
than the commonality inqu i ry under
Rule
23(a)
.
Bi l lhofe r , 281
F.R.D. a t 158 ( c i t ing Amchem
Prods . ,
521 U.S.
a t 623-24). The
mat te rs p e r t i n en t to these f ind ings inc lude:
A) the c las s
members' i n t e r e s t s in i nd iv idua l ly
con t ro l l ing the prosecut ion or defense o f separa te ac t ions ;
B) the
extent
and natu re o f
any
l i t i ga t i on
concerning
the
con t roversy
a l ready
begun
by
o r
aga ins t
c l a s s members;
C) the
d e s i r a b i l i t y o r
u n d es i r ab i l i t y o f
concen t ra t ing the
l i t i g a t i o n of the cla ims in the
p a r t i c u l a r
forum;
and
D) the l i k e l y d i f f i c u l t i e s
in
managing a c l a s s
ac t ion .
Fed. R. Civ. P.
23(b)(3)(A)-{D).
Class-wide
i ssues predominate i re so lu t ion
o f some o f
the
l ega l
o r
fac tua l
quest ions
t h a t
qua l i fy
each
c l a s s
member's
case
as
a genuine con t roversy can
be
achieved
through genera l i zed
proof, and
i f these
p a r t i c u l a r
i ssues are
more s u b s t an t i a l than
the
i ssues subjec t
only
t o ind iv idua l i zed
proof . Moore v.
PaineWebber, Inc . , 306 F.3d
1247,
1252 (2d Cir.2002) {c i ta t ion
omi t t ed) .
Rule 23 (b) (3) does
ot requi re
a p l a i n t i f f seeking
c las s c e r t i f i c a t i o n
to
prove t h a t each
element
of
her
cla im i s
suscep t ib l e to
classwide
proof . What the
ru le
does requ i re i s
t h a t common quest ions predomin te over any quest ions
a f f ec t i n g
only ind iv idua l
c l a s s
members. Amgen, 133 S. Ct. a t
1196.
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With these pr inc ip les
in
mind, before proceeding to analyze
the
i nd iv idua l i zed
ques t ions
in t h i s mat te r , t must
aga in
be
noted
t h a t t h i s
case
i s of
s tagger ing
s i ze , invo lv ing very
grea t
number
of p o ten t i a l
c la imants . See
supra §
I I I . a ) . The
presence o f common
quest ions
and answers
i s t he re fo re
an
ext remely
heavy
counterweight to
any
i nd iv idua l i zed ques t ions .
Defendants argue s t renuous ly
t h a t predominance
i s defea ted
because
i nd iv idua l i zed
inqu i r i es w i l l be
requ i red to
determine
whether
each
i nves to r knew
the t r u t h
of the a l leged
misstatements or omissions a t the t ime
of
t he i r
purchases .
Defs . '
Opp. a t 11-54.
I t
i s undeniable t h a t
Defendants have
shown t ha t l a rge number
of
p l a i n t i f f s
and p o ten t i a l
c las s
members
had
vary ing
degrees
o f
knowledge
about
mobi le ' s
n eg a t iv e
impact on Facebook s revenue,
Facebook s rev i sed pro jec t ions
given
t h a t impact ,
the
Syndica te
Ana lys t ' s Revised
Pro j ec t i o n s
given Facebook s r ep o r t o f
t h a t
impact , o r
some
combinat ion
t he reof . See supra n.
6-7.
Of
course ,
Defendants a re c o r r e c t
t h a t
for each
ind iv idua l with any
degree
of knowledge-whether
or
not
t h a t
knowledge i s found
on
the mer i t s
to
prec lude
t h a t
p a r t i c u l a r p l a i n t i f f ' s
c la im- i s sub jec t ive
inqu i ry
for
each
and every i nves to r . At the same t ime, t has been noted in
t h i s
D i s t r i c t t h a t
i nd iv idua l i s sues
wil l
l i ke ly
a r i s e
in
t h i s
case
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as in a l l
c las s
ac t ion cases ,
and
to a l low
var ious
secondary
i ssues
of
p l a i n t i f f s '
c la im[s ) to prec lude c e r t i f i c a t i o n of
a
c las s
would render the ru le an impotent t oo l fo r
p r iv a t e
enforcement of the se c u r i t i e s l aws . Pub. Emps. ' Ret.
Sys.
o f
Miss i s s ipp i v. Merr i l l Lynch Co., 277
F.R.D.
97, 111
(S.D.N.Y.
2011) (c i t a t ions
and
i n t e rna l quota t ion marks omit ted)
( Pub.
Emps . ' ) . Moreover,
[a ] l though
a defense
may a r i s e
and
may
a f f e c t d i f f e r e n t
c l a s s
members d i f f e r e n t l y , t h i s does not compel
a
f inding t ha t indiv idua l i ssues predominate over
common
ones.
As
long
as
a
su f f i c i e n t
co n s t e l l a t i o n
of
common
i s sues binds
c las s members
toge ther ,
v a r i a t i o n s
in the sources
and
app l i ca t ion o f a defense w i l l not au tomat ica l ly fo rec lose c l a s s
c e r t i f i c a t i o n
under
Rule 23(b) (3) . B ro w n v. Kel ly , 609 F.3d
467, 483 (2d Cir . 2010) (c i t a t ions
and
i n t e rna l quota t ion marks
omit ted)
.
Given the
ex t raord ina ry s i ze of t h i s case,
t
i s
a
perplexing
problem t h a t the
sheer
number of
p o ten t i a l
p l a i n t i f f s
of
a l l
s t r i pe s
and
co lo rs with the
same
c la ims aga ins t the
same
defendants
i s
what
t h rea t ens
t h e i r
a b i l i t y to proceed
as a
c l a s s .
Though the
case i s not binding on
t h i s Court , the
approach of In re DJ Orthopedics , Inc . i s i n s t ru c t i v e in
reso lv ing the i s sue . 2003 U.S. Dis t .
LEXIS
21534 (S.D. Cal .
Nov.
16, 2003) ( DJ Orthoped ics ) .
DJ
Orthopedics i s s t a r t l i n g l y
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comparable to
t h i s one f ac tua l ly : the defendant
company
had been
prepar ing to
go
publ i c
when they
l ea rned
of
dec l in ing
sa les
for
the
cur ren t qua r t e r ,
the
equ iva len t o f Facebook's r e a l i z a t i o n
of
mobi le ' s impact on ad
revenue.
See id . a t *4. The day before the
IPO,
underwr i t e r
s a l e s teams
con tac ted a l imi t ed
number of
i nves to rs t o
n o t i f y
them
o f
the new lowered pro jec t ions
fo r the
qua r t e r , the equ iva len t of the
Herman
Cal l s . See id . The IPO
went ahead, and
i nves to rs
subsequen t ly
brought
s u i t
aga ins t
the
company cla iming
the Regi s t ra t ion Sta tement
and Prospectus
i s sued in
connect ion
with
the
IPO-which had
not
been updated
a f t e r the r e a l i z a t i o n of dec l in ing
sa l e s -con ta ined ma te r i a l
misstatements and
omissions
in v io l a t i o n
of sec t ions
11,
12,
and
15 of
the S ecu r i t i e s
Exchange Act
o f 1934.
Id. a t *4-5.
P l a i n t i f f s sought
ce r t i f i ca t i on
of
two subc lasses : a
knowledge
c l a s s ,
composed
of the
i nves to rs
the
underwr i t e rs
had
con tac ted , and
a
no-knowledge c las s
composed
of the
i nves to rs
the
underwr i t e rs d id not contac t . Id. a t
*8.
Jus t as in
t h i s
case , the
DJ
Orthopedics defendants argued t ha t
i nd iv idua l i zed
determinat ions
of
knowledge would predominate .
See
Id. a t
*25.
The Honorable Jud i th N Keep
of
the Southern D i s t r i c t o f
Cal i fo rn ia
agreed the
knowledge i ssues would
be s i g n i f i c a n t
for
the i nves to rs i n DJ Orthopedics
t h a t were
not con tac ted
by
underwr i t e rs , but
nonethe less
c e r t i f i e d
the
subclass
on four
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pr inc ip les
appl icable
here :
f i r s t , the d iv i s ion
of
subc la sse s
reduc[ed]
the
need for
i nd iv idua l i zed dete rmina t ions on
the
i s sue o f
knowledge. Id .
a t *26-7.
Second,
p l a i n t i f f s
had
presented
mul t ip le common
ques t ions with
common
answers
appl icable to every
c las s member,
whereas defendan ts
i nd ica t e [d ]
only one
ques t ion t ha t
i s individual ized -knowledge.
Id .
a t
*27. Third ,
the
proof
regarding
the i nd iv idua l i zed i s sue
would
r e ly
as much on in fo rmat ion
common
to a l l subc lass members
(e .g. how widespread was the pub l i c dissemina t ion
o f
the
informat ion) as it would on
i nd iv idua l
in fo rmat ion (e .g. to what
sources of in fo rmat ion was each
subc la ss member
exposed) . Id .
Four th ,
the
t r i a l cour t has broad d i s c r e t i o n in determining
whether a
c l a s s
should
be
c e r t i f i e d .
Id .
(c i t a t ions omit ted) ;
see a l so Hamilton v. Accu-tek, 935
F.
Supp. 1307,
1331-32
(E.D.N.Y.
1996)
( I t
i s
un iver sa l ly
recognized
t ha t
a
d i s t r i c t
cour t
i s af forded broad d i sc re t ion
in determining
whether an ac t ion should be c e r t i f i e d under
Rule
23.
( c i t ing
City of
New
York v. Int l Pipe Ceramics Corp . ,
410
F.2d 295,
298 (2d Cir .1969) ; In re Jo in t E. S. Dis t . Asbestos Li t i g . ,
129
B.R.
710,
816 (E.D.N.Y.
1991} vaca ted , 982 F.2d 721 (2d
Cir .
1992) opinion modif ied on reh 'g , 993
F.2d 7
(2d
Cir .
1993);
In
l i ne Cases , 107 F.R.D. 719, 735 (W.D.Mo.1985) ( c i t i n g
cases
and
t r e a t i s e s ) ; 7A C. Wright ,
A.
Mil le r , M Kane,
Federal
Prac t i ce
and
Procedure§
1759,
a t 111
(2d ed.
1986)) ) .
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Defendants
a t tempt to d is t ingu ish
DJ Orthopedics
on
the
grounds t ha t the
knowledge c l a s s
in tha t case
was
subjec t
to a
uniform di sc losure ,
and
no uniform di sc losure
i s presen t
here .
Defs . ' Opp. a t
37-8.
However, the case ' s
reasoning
c e r t i f i e d
the
c las s
desp i t e the indiv idua l ized
knowledge inqu i r i es
appl icable
to the
no-knowledge
s ubc l a s s - i . e . , the c las s not
subjec t
to
any formal
di sc losure ,
not
the
knowledge
subc lass
sub jec t to
uniform
di sc losure . 2003 U.S. Dis t .
LEXIS
21534, a t
*24-5
( f inding under the heading Putat ive-Knowledge
Subclass t h a t
no
indiv idua l ized
determinat ions [we] re necessary , while
gran t ing
under
the heading No-Knowledge
Subclass
t ha t
i nd iv idua l i zed quest ions , l i ke ly to be a s ign i f i can t
i ssue
nonetheless
did
not predominate)
DJ Orthopedics '
l og ic
and fac tua l s i m i l a r i t y i s persuas ive
in t h i s mat te r . With respec t to the i n s t i t u t i o n a l inves tor
c las s ,
Defendants '
evidence i s so
widespread
t
presents
yet
ano ther
common quest ion
and
answer:
whether
the
in fo rmat ion was
so d i f fuse
th a t
a l l i n s t i t u t i o n a l i nves to rs can be charged with
ac tua l knowledge of the t r u th of the mate r i a l
miss ta temen ts
and
omissions al leged.9
Indeed,
Defendants ' have re t a ined
an
exper t
9 Defendants at tempt
to
rebut t h i s add i t iona l common i s sue by
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to
t e s t i f y
to
widespread d i f fus ion of informat ion.10 The d iv i s ion
of
subc lasses t he re fo re reduces the
need
fo r i nd iv idua l i zed
determinat ions on the
i ssue
of knowledge,
and
in f ac t adds more
weight to the predominance o f common quest ions
and
answers,
pra c t i c a l l y
negat ing the
i nd iv idua l i zed ques t ions
ra i sed .
Mult ip le common quest ions
and
answers to the i n s t i t u t i o n a l
i nves to r subc lass t he re fo re outweigh
any
i nd iv idua l i zed
ques t ions . Defendants
at tempt
to place a thumb on the sca l e
aga ins t
predominance by arguing a t
t imes in terms of shares
(which were
of t en
purchased
in
s i g n i f i c a n t numbers by
i n s t i t u t i o n a l inves to r s ) .
S e e ~ Defs . '
Sur-Reply
a t 6,
p r o t e s t i n g t h a t they
do not
in tend
to
put
fo r th a cons t ruc t ive
knowledge defense. See Defs . ' Sur-Reply a t 3. Regardless of the
meri t
o f such an argument , whether an in fe rence o f
ac tua l
knowledge
stemming from widespread
d i f fus ion of the in format ion
in ques t ion
can be
made
i s
s imi l a r to
but
d i s t i n c t
from
a
cons t ruc t ive
knowledge defense .
10
P l a i n t i f f s have
moved
to s t r i k e the repor t
of
Dr.
Aninyda
Ghose. Pls . ' Mot.
to
St r ike ,
E F
No. 292. The Court has
cons idered the Ghose Report in
determining
whether
uinformat ion
discuss ing the negat ive impact o f mobile usage
on Facebook s
revenue
was broad ly d i f fused .
Defs . ' Opp. to Pl s . ' Mot. to
St r ike the Report of Aninyda Ghose a t 5. In l i gh t of the
mul t i tudinous
examples of in fo rmat ion presen ted by Defendants
showing some
aspec t
o f
the Herman Cal ls
leaked
( to i n s t i t u t i ons ,
i nves to rs , and media) , t h i s conclusion appears warranted .
Never the less ,
fo r
a l l
the reasons
se t fo r th here in ,
the
common
ques t ions ,
f ac t s , and answers
presen ted predominate over the
i nd iv idua l i zed
ques t ions of knowledge t ha t
wil l
be re levan t in
reso lv ing Defendants a f f i rma t ive
defense . The motion
to s t r i k e
i s t he re fo re denied wi thout
pre jud ice ,
and
the
i ssue
of whether
the
Ghose Report s a t i s f i e s
Daubert i s moot.
In the event
Defendants o f fe r
Ghose
or
the
Ghose Report fo r
other
purposes ,
Pl a i n t i f f s are f ree to renew
t h e i r Daubert
objec t ion .
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D efs . Ex.
a t 11.
However, how many i n d i v i d u a l i zed knowledge
i n q u i r i e s
a re
presen t and whether
t hey predominate
i s a mat t e r
o f
i nves to rs ,
not shares . Defendants need not ask a
s i n g l e
i n v es t o r
who
purchased 40,000 sh a res whether she knew
about
mo b i l e s negat ive
impact on
Facebook s revenue (or anything
e l se )
40,000
t imes .
Once
s
enough.11
Likewise , whether
any
i n v es t o r ,
i n s t i t u t i o n a l
o r r e t a i l ,
ga ined re levan t ac tua l knowledge from media r ep o r t s prec lud ing
t h e i r cla im p res en t s ano ther common ques t ion as to whether the
r e l ev an t
media
r ep o r t s conveyed
a l l
of
the
t r u t h
P l a i n t i f f s
a l l ege
was
mi s s t a t ed
o r omi t t ed .
See
D e f s . s
Opp a t . 26-28;
46-
49. For every
i n d i v i d u a l
ques t ion
of
whether
each i n v es t o r
had
ac t u a l knowledge stemming from t h ese
repor t s ,
t h e re a re s co res
of
common
fac t s
and
ques t ions
about
the con ten t of
each
and
every media repor t .
As to the r e t a i l
subc lass ,
Defendants have p resen ted much
l e s s ev idence
of ac t u a l
knowledge, and each a l l eg a t i o n i s
worth
address ing in
t u rn .
F i r s t , Defendants
a l l ege
t h a t r e t a i l
11 A maxim as ap p l i cab l e t o f ac t discovery as to l i f e and broken
hea r t s . See W i l l i e
Nelson, Steven
Tyler , One Time Too Many, on
The
E s s en t i a l W i l l i e
Nelson
(Columbia/Legacy 2003); Lyle
Love t t ,
Once
i s
Enough, on Lyle Lovet t and His Large Band
(MCA/Curb
Records 1989) ; Elv i s Pres ley , Once
i s
Enough, on K iss in Cousins
RCA V ic to r 1964) .
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i nves to rs who purchased s tock
in
the IPO through accounts
managed
by investment adv isors can be imputed with the knowledge
o f
i n s t i t u t i ona l
adv isors . Defs . '
Opp a t
50.
This argument loops
back
to a t l e a s t one
common
quest ion
o f
whether i n s t i t u t i ona l
i nves to rs
can
a l l be charged with ac tua l
knowledge.
See supra
t ex t accompanying
n.9-10.
Regardless , P l a i n t i f f s have
c l a r i f i e d
t h a t
these i nd iv idua l s
who
purchased t h e i r shares through
i n s t i t u t i o n a l i nves to rs
a re
cons idered a
p a r t of
the
i n s t i t u t i o n a l i nves to r c l a s s both by the indus t ry and fo r
purposes of t h i s
c las s
ac t ion
i f
the i nves to r made
the
purchase
dec i s ion .
Pl s . '
Reply
a t
33,
Tr. 77:4-7 ( The quest ion i s what
i s the s t a t u s of the person making the investment
dec is ion .
I f
t ha t person i s an investment advisor , they are under FINRA a
quote-unquote i n s t i t u t i on .
And they
are t rea ted tha t way. ) .
Fur thermore ,
19 i n s t i t u t i o n s wi l l
be
excluded
from
the
c las s
(see Exclus ions ,
s u p r a § I ) ,
s i g n i f i c a n t l y reducing
the weight
of the i s sue with regard to the i n s t i t u t i ona l i nves to r subc lass .
Next, Defendants a l l ege Ian DelBalso l ea rned a t l e a s t
some
of the
re levant
f ac t s
from
h is fa the r , an employee a t Jennison ,
one of the i n s t i t u t i o n a l i nves to rs . Defs . ' Opp. a t 52. This
i nc red ib ly unique s e t
of f ac t s
app l i e s
s o l e ly
to
Mr.
DelBalso,
hardly
p res en t i n g an
i s sue
of predominance o r even p laus ib le
specula t ion
t h a t the same circumstances of
knowledge might apply
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on any widespread b as i s . Regardless , he
i s
excluded from the
r e t a i l c l a s s
as
se t fo r t h
above.
P l s . '
Reply
a t 39.
Defendants
a l l e g e Larry Kim had ac t u a l
knowledge
ev idenced
by
h i s blog pos t s voic ing
concerns about Facebook 's
a b i l i t y
to
monet ize i t s
mobi le
pla t fo rm. Defs . ' Opp. a t 52. Mr. Kim's
i n s ig h t f u l an a l y s i s of read i ly apparen t
p u b l i c i n format ion
( s p ec i f i c a l l y , t h a t Facebook did not o f f e r mobi le ads, and t h a t
mobi le use was growing
fas t ) alone hard ly s u f f i c e s to meet the
high bar of the ac t u a l knowledge of the s p ec i f i c miss ta t ement s
and omiss ions a l l eg ed i n t h i s case . Simi la r ly ,
Defendants
a l l ege
Connie
Pra te r , consumer
news
wri t e r ,
had
ac t u a l
knowledge
due
to having r e f e r r e d readers to a r t i c l e s
about
Facebook 's
dece le ra t ing
revenue growth
and rev i sed pro jec t ions ,
and
t e s t i fy i n g t h a t she i n v es t ed
knowing
the r i s k s . Id . a t 52-3.
As with Mr. Kim,
t h i s
evidence
does
not r i s e to the l eve l of the
ac tua l
knowledge s tandard .
Regardless , even assuming
t h a t
Defendants had s u f f i c i e n t l y
proven each
of these
i n d i v i d u a l s had ac t u a l knowledge su f f i c i e n t
t o d e fea t t h e i r p a r t i c u l a r
c la ims ,
and even
assuming
none
were
exc luded from the r e t a i l c la s s as the
s ig n i f i c an t
p o r t i o n o f
i n d i v i d u a l s
who
inves ted through i n s t i t u t i o n a l inves to rs
wi l l
be, t h i s i s
r e l a t i v e l y
miniscu le p o r t i o n of the t o t a l
proposed
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c las s
of r e t a i l i nves to rs
when compared to
the
whole. Grant ing
a l l of
the
above
arguendo,
the s ing le i nd iv idua l i zed
issue
of
knowledge as
to
a smal l handful of
r e t a i l
i nves to rs s not
enough to
defea t
predominance fo r
the
r e t a i l
subc lass .
Both
qua l i t a t i ve ly
and
quan t i t a t ive ly , the
many
common
ques t ions ,
answers, and f ac t s a r t i c u l a t e d above predominate
over the
indiv idua l ized i ssue of
knowledge.
To
defea t
predominance, Defendants a l so r e ly
heavi ly
on In
re PO where
the
Second
Circu i t found predominance of
indiv idua l quest ions of knowledge
defea ted
common quest ions in a
lO(b)
ac t ion . 471
F.3d a t 27. The Second Circu i t subsequent ly
c l a r i f i ed In
re
PO
by d is t ingu ish ing
the
d i f f e r e n t
circumstances
of Sect ion 11
and
12
c la ims . In re
IPO I I , 483
F.3d
70,
73n. l
(2d
Cir .
2007);
see
a l so
Pub.
Emps. ' ,
277
F.R.D.
a t 117 ( The Second C i r c u i t ' s
c l a r i f i ca t i on
is not t r i v i a l
in
t h i s
con tex t ,
as cour ts genera l ly
focus on
the l i a b i l i t y
i ssue
in deciding whether
the predominance
requirement
i s
met,
and i f
the l i a b i l i t y i ssue i s common to the c lass , common quest ions are
held
to
predominate over i nd iv idua l ques t ions .
( c i t ing Dura-
B i l t Corp. v. Chase Manhattan Corp. , 89
F.R.D.
87, 93
(S.D.N.Y.1981) ( in te rna l
quotat ion
marks
omi t t ed ) ) .
Moreover,
cour ts dec l ine to fol low PO in ins tances where, as
here ,
the
proposed
c las s does
not
include
i nves to rs who
are
a l leged to
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have p a r t i c i p a t e d in
the fraud
in quest ion .
See
In
re Moody's
Corp. Sec. L i t i g . , 274 F.R.D. 480, 491 (S.D.N.Y. 2011)
(decl in ing
to
fol low IPO in
lO(b) (5)
ac t ion
where Defendant could not
poin t to
anyth ing
t h a t r i se s to the
same
l eve l of ac tua l
knowledge or , even a reasonable in fe rence o f
such
knowledge,
t ha t the market
had
in IPO ); Pub. Emps. ' , 277
F.R.D.
a t
117
(decl in ing to fol low In
re IPO given [ t ]h e re
i s
no a l l eg a t i o n
in t h i s case t ha t
any
c las s
member ac tu a l l y
par t i c ipa ted in the
conduct
descr ibed in
the Amended Compla in t . ) ; see
a l so
In re
Lehman Bros. Sec.
ERISA
Li t ig . , No. 08
CIV.
5523 LAK 2013 WL
440622, a t
*4
(S.D.N.Y. Jan.
23,
2013) .
Defendants
argue
t ha t the same knowledge
i ssues
undermine
c e r t i f i c a t i o n
because
P l a i n t i f f s
have not
ca r r i ed t h e i r
burden
to
prove
t ha t
causa t ion
and damages
are c lass -wide
i s sues
. . .
and t ha t ma te r i a l i ty w i l l be a common
ques t ion .
Defs . ' Opp. a t
54.
Regarding mater i a l i ty , the law i s
c l ea r : Because
m a t e r i a l i t y i s
judged
according to an objec t ive s tandard , the
m a t e r i a l i t y
o f (Defendant 's ]
a l l eged misrepresen ta t ions and
omissions i s a
ques t ion
common to
a l l members
o f
the
c l a s s .
.
As to mater i a l i ty , t he re fo re , the
c l a s s i s e n t i r e l y cohesive:
I t wil l preva i l o r
f a l l in
unison.
In
no event wil l the
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ind iv idua l ci rcumstances of p a r t i c u l a r c las s members bear on
the
inqu i ry . Amgen, 133 S. Ct.
a t 1191. This
Court having
found
m a t e r i a l i t y
on c lass -wide
bas i s
su f f i c i e n t
to
uphold
P l a i n t i f f s ' c la ims on the
motion
to dismiss de fea t s Defendants '
argument . MT Opinion a t 519
522.
Never the less ,
to whatever
ex t en t Defendants
are
concerned t ha t huge swaths
of
the
c las s
had
' add i t iona l in fo rmat ion ' c rea t ing
uncommon
mater i a l i ty
i s su e s , t
i s
p ra c t i c a l l y reso lved
by
c e r t i f i c a t i o n of
the
subc lasses .
With respec t
to
l os s causa t ion , t h i s i s not an element of
any
o f
P l a i n t i f f s
claims.
See
MT
Opinion a t
522-3.
The causes
o f
the
Facebook s tock dec l ines a re fac tua l ques t ions s u i t ab l e
fo r r e s o l u t i o n on class-wide
bas i s .
Defendants
have
yet to
prov ide
su f f i c i e n t
evidence
a t
t h i s
s tage
to
e s t a b l i sh
negat ive
causa t ion .
Whether
subsequent re so lu t ion
w i l l be
in favor
of
Defendants such
t h a t
i nves to rs who
made t h e i r purchases on
c e r t a i n dates wil l
be
precluded from recovery
does
not
cons t i tu t e
an
i nd iv idua l i zed
ques t ion , nor does t
t i p the
sca l e s
of predominance
in Defendants ' favor.
Tangen t ia l ly to t he i r l os s causa t ion
argument ,
Defendants
next
submit
t h a t the damages i n q u i r i e s here
are indiv idua l ized ,
r e s u l t i n g both predominant
uncommon
ques t ions , and mismatch
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between damages and P l a i n t i f f s '
t h eo ry
o f l i a b i l i t y bar red by
Comcast v.
Behrend.
Defs . ' Opp. a t 54-60; Defs . ' Sur-Reply a t
34-40;
see
g en e ra l l y ,
133 S. Ct. 1426,
185
L. Ed. 2d 515
(2013).
Defendants
a l l ege a mismatch due
to incongru i ty
between the
a l l eg a t i o n s
in
the
Complaint
( s p ec i f i c a l l y , t h a t
the May
22
Facebook s tock pr ice dec l ine
was
a r e su l t
o f repor t s
o f the
underwr i t e rs ' r ev i s ions ) , and P l a i n t i f f s '
pos t -mot ion
to dismiss
p o s i t i o n
( tha t
the mat e r i a l miss ta t ement or
omission
a t
i ssue i s
t ha t Facebook
had
determined mobile was reducing
revenues and
cut
i t s own revenue pro jec t ions as a r e s u l t ) . Defs . ' Opp. a t 55-
( c i t ing Compl. 184;
Pl s . ' Mot.
a t 7, 23, 28}. Comcast was
an
a n t i t r u s t
case where the r eg re s s i o n
model
used
to
ca l cu l a t e
damages did
not
measure damages a t t r i b u t a b l e to the su rv iv ing
theory
of l i a b i l i t y .
133 S. Ct. a t 1433 ( There i s no ques t ion
t h a t
the
model
fa i l ed
to
measure
damages
r e s u l t i n g
from
the
p a r t i c u l a r
a n t i t r u s t i n j u ry on
which
pe t i t i one r s ' l i a b i l i t y in
t h i s
ac t ion
i s premised . ) .
The case
r eq u i r e s t h a t a t the
c l a s s - c e r t i f i c a t i o n s tage
(as a t t r i a l } , any
model suppor t ing a
p l a i n t i f f ' s
damages case
must be
cons i s t en t with i t s l i a b i l i t y
case . Id .
F i r s t , Comcast does
not
mandate
t h a t
c e r t i f i c a t i o n
pursuan t to
Rule 23(b) (3)
requ i re s
a
f ind ing
t ha t damages are
capable of
measurement
on a c lasswide
b a s i s .
Roach v. T.L.
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Cannon Corp. , 778 F.3d 401,
402
(2d Cir . 2015) .
The
Second
Circu i t
did
not read
Comcast
as over ru l ing
the law
of t h i s
Circu i t holding
the
f ac t t ha t damages may have to be
asce r t a ined on an
i nd iv idua l
bas i s i s not su f f i c i e n t to
defea t
c las s
c e r t i f i c a t i on under
Rule
23(b)
(3)
. Id . a t 405.
Second,
Comcast
does not
bar ce r t i f i ca t i on
here,
where
Sect ion
11(e)
of
the
S ecu r i t i e s Act prov ides
a
s t a tu to ry formula fo r damages.
N.J . Carpen ters Heal th
Fund
v.
Resident ia l Capi ta l , LLC
No. 08
V
5093
HB 2013
WL
6839093,
a t
*5
(S.D.N.Y.
Dec.
27,
2013)
( r e jec t ing Comcast ' s
app l i ca t ion to
cla ims
under
Sect ions 11,
12 (a) (2), and
15
of the Secur i t i e s Act where Sect ion
11 (e)
provided
a
damages formula}
.
Defendants a t tempt
to
r e fu te t h i s
conclus ion by
charac te r iz ing t as an argument
t h a t
Comcast
appl ies
only
to a n t i - t r u s t
a c t i o n s , an
e a s i e r point to
disprove .
Defs . '
Sur-Reply
a t
45.
Quite
to
the
con t ra ry ,
Comcast
appl ies
beyond
an t i t ru s t ,
but t does
not bar c e r t i f i c a t i o n for
the
cla ims P l a i n t i f f s have
presen ted . New Jersey
Carpen ters ,
2013 WL 6839093, a t
*5 ( While
[Comcast 's] ana lys i s i s
not
l imi t ed to the a n t i - t r u s t con tex t ,
see
v. Hears t Co
. ,
293
F.R.D.
489,
497 (S.D.N.Y. 2013},
t i s inappos i t e
here,
where
damages
r e f l e c t l i a b i l i t y by s t a tu to ry formula .u}. Because the
s t a t u t o ry
formula
app l i e s , the ind iv idua l damages quest ions are
s u f f i c i e n t ly reduced
t h a t
predominance of the common quest ions ,
answers, and fac t s
remains. Likewise, the
o f f se t o f the Nasdaq
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se t t l ement pre sen t s ano ther
weighty common
ques t ion (and perhaps
severa l )
t ha t
outweighs the
i nd iv idua l i zed
mat te r of
how
it wi l l
apply to ind iv idua l i nves to rs , mat te rs t ha t
can
be
admin i s t ra t ive ly managed
as se t
fo r th
below.
Ci t ing Morrison v. National Aus t ra l i a
Bank,
561 U.S. 247
(2010),
Defendants
p o s i t
t ha t the
c las s
cannot be c e r t i f i e d
because
U.S. se c u r i t i e s laws do not apply e x t r a t e r r i t o r i a l l y ,
but
only
where titl
to the
s ecu r i t y
t r a n s fe r s within
the
u . s . n Defs. Opp.
a t
74. Defendants
submit
t h e i r proof of
i n t e r n a t i o n a l
inves tors stems from P l a i n t i f f s ' evidence showing
t h a t
over
53
mil l ion shares
(out o f the 421
mil l ion
IPO
s ize)
were
a l loca ted
to a t l eas t 295 i nves to rs
i d e n t i f i e d
in myriad
foreign
loca t ions .n Id . Coupling
t h i s fac t
with the purchase of
many
of
the shares impl ica ted
in
t h i s
ac t ion
on
secondary
market , Defendants argue
t h a t
P l a i n t l f f s a re unable to t r a ce
vas t number o f
shares to domest ic
t r ansac t ions , and
t he re fo re
f a i l Morisson. Defs , ' Opp. a t 74-5.
Fi r s t , Defendants ' argument admit tedly goes to
295
inves tors
in
po ten t i a l
c l a s s o f many thousands.
See id . a t
74. For
t h i s
reason
alone,
it does not d e fea t predominance.
Second, the i d e n t i f i e d
in
myriad foreign l oca t ions language i s
notab ly imprecise in l i gh t of doc t r ine t ha t asks exac t ly where
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i r r ev o cab
l i a b i l i t y
was incur red .
That
any buyers were
i d en t i f i ed
outs ide
the Uni ted
S t a t e s i s
not d e te rmin a t iv e of
where t h e i r t r ansac t ions
occur red .
[ I ) n order to
adequa te ly
a l l ege
t h e
ex i s t en ce o f
a domest ic
t r ansac t ion ,
it
i s su f f i c i e n t
fo r
a p l a i n t i f f to a l l ege fac t s l ead in g to the p l a u s i b l e
i n fe ren ce t h a t the
p a r t i e s incur red i r revocab le
l i a b i l i t y with in
the United S t a t e s . Absolu te A ct iv i s t Value Master Fund Ltd. v .
Fice to ,
677 F.3d 60,
68
{2d Ci r . 2012) . Af te rmarke t
notwi ths tand ing , t h a t P l a i n t i f f s have a l l eg ed t h a t any
fo re ig n
a l locan t s
p a r t i c ip a t ed in a s t r i c t l y
U.S. IPO
of a
U.S. company
in order to
r ece iv e
shares r e g i s t e r e d in the United Sta t e s with
the SE t h a t would t r ad e ex c l u s i v e l y on an American exchange
i s
su f f i c i e n t
to es t ab l i s h t h a t
p l a u s i b i l i t y . P l s . '
Reply
a t 83
(emphasis o mi t t ed ) . Defendants ' o t h e r arguments on
t h i s
i s su e
a re
not
p ersu as iv e ,
and
to
the
ex t en t
t r a c e a b i l i t y
i s sues
e x i s t
to over tu rn the p l a u s i b l e in fe rence ,
Defendants
a re f r ee to
presen t
t h ese i s sues a t a l a t e r s t ag e .
F i n a l l y ,
Defendant ' s
put fo r t h a
Sur-Reply
p ray e r to defer
ru l i n g on
(or ,
more
p re c i s e l y , d e fe r gran t ing)
c l a s s
c e r t i f i c a t i o n
pending the
Supreme
Co u r t ' s
re so lu t ion o f
Tyson
Foods,
Inc .
v. Bouaphakeo.
See
Defs . ' Sur Reply a t
43;
see a l s o
2015 W 1285369 (U .S . ) . Decis ion in t h a t case may touch upon the
23(b)
(3)
predominance
inqu i ry , but it may a l s o
r e s t on
s o l e l y
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independent
grounds r e l a t i ng to
a
1974 wage-and-hour
rul ing.12
The Cour t decl ines to
wait and
see
for
a poss ib ly r e l evan t
ru l ing
t ha t
may never a r r ive .
For
the reasons s e t for th above, the i nd iv idua l i zed
i nqui r i e s Defendants present are
not
more subs t an t i a l than the
many
common
ques t ions ,
answers,
and f ac t s
subjec t
to
genera l ized
proof ,
and
thus the P l a i n t i f f s
have
met t he i r
burden
of
12(b) (3)
predominance. See Moore, 306 F.3d
a t
1252.
C e r t i f i c a t i on does
not bar Defendants from exerc i s ing t h e i r due process r igh t to
r a i s e
i nd iv idua l i zed knowledge defenses, as
they
have r epea t ed ly
suggested . e e ~ Tr.
31:16-18,
35:9-13. I t
i s
admin i s t r a t ive ly
feas ib le
(and indeed
f a r
more
f eas ib le
than the
prospec t of thousands
of
ful l -blown i nd iv idua l i zed
t r i a l s
for
each
and
every c la imant
necessa r i ly
involving the
same
f ac t s
and
quest ions) to manage Defendants ' ac tua l knowledge ques t ions as
r e l i ance was managed in In re Vivendi . See genera l l y 284 F.R.D.
144 (2012) ( Vivendi I I ) . Defendants may submit t h e i r c la ss
wide ac tua l
knowledge defense arguments
on
a
motion for
summary
judgment
and/or a t t r i a l ,
and
i nd iv idua l i zed ac tua l knowledge
12
In fac t , o ra l argument seems
to
suggest the opinion in
Tyson
Foods
wi l l say[] nothing about Rule 23. See Lyle
Denniston,
Argument Analysis :
Big t e s t of c l a s s
act ion
maybe not so big ,
Scotusblog.com
(Nov. 10,
2015, 1:48pm),
h t tp :/ /www .sco tusb log .com/2015 /11 /a rgument -ana lys is -b ig t e s t - o f
c l as s -ac t i on -maybe-no t - so -b ig / .
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can be adequa te ly managed
p o s t - t r i a l th rough
an i n d i v i d u a l i zed
phase
invo lv ing s ep a ra t e j u ry
t r i a l s i f
necessary . This i s the
most
e f f i c i e n t way to manage both the predominant
common
ques t ions and the i n d i v i d u a l i zed ques t ions in t h i s
case
wi thout
overwhelming
the
common
ad j u d i ca t i o n
with
i n d i v i d u a l i zed
i s sues
and v ice versa . The s p ec i f i c procedures
fo r
management through
adequate
n o t i ce
and
the cla im process can be r e so lv ed
when
t hose
ma t t e r s a re p ro p e r ly
before the
Court .
b Superiori ty
The s u p e r io r i t y r equ i r ement a sks cour t s to
ba lance ,
in
terms of
fa i rne ss and
e f f i c i e n c y , the advantages of
a
c l a s s
ac t i o n ag a i n s t
t hose o f a l t e r n a t i v e
ava i l ab le methods of
ad jud ica t ion .
Vivendi
I ,
242
F.R.D.
a t
91; Fed.
R.
Civ.
P.
23
(b)
(3) The i n t e r e s t s of the c l a s s members in c o n t ro l l i n g
s ep a ra t e ac t ions , the ex t en t and
n a tu re
of any l i t i g a t i o n
a l read y commenced, the
d e s i r a b i l i t y
of
concen t ra t ing
the
l i t i g a t i o n
in a
p a r t i c u l a r forum, and
the d i f f i c u l t i e s
in
management a re a l l to
be
cons ide red
in the s u p e r io r i t y ana lys i s .
See
Fed. R.
Civ. P.
23 (b) (3) .
Su p er i o r i t y
o f
managing
t h i s l i t i g a t i o n
as
a c l a s s
ac t i o n
i s
r e a d i l y apparen t fo r both
subc lasses ,
as t
i s in most
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s e c ur i t i e s s u i t s . See In re Blech Sec.
Li t i g . ,
187 F.R.D.
97,
107 S.D.N.Y. 1999). As
has
been r e i t e r a t e d in
t h i s
D is t r i c t :
Most v io la t ions of
the federa l s e c ur i t i e s
laws ... i n f l i c t
economic i n ju ry on
l a rge numbers of geograph ica l ly
d i spersed persons
such
t ha t
the cos t
of pursuing ind iv idua l
l i t i g a t i o n
to
seek recovery i s of t en not f eas ib le . Mult ip le
l awsu i t s
would
be cos t ly and i ne f f i c i e n t , and the exclus ion
of
c l a s s
members who cannot a f fo rd sepa ra t e rep re sen ta t ion
would
ne i the r
be f a i r nor an ad jud ica t ion of t h e i r
c la ims . Moreover,
al though
a
l a rge number of i nd iv idua l s
may
have
been
in ju red ,
no one person may
have
been damaged
to
a
degree
which
would
induce him
to
i n s t i t u t e
l i t i ga t i on
so le ly on h is own behal f .
Pub. s.
277
F.R.D. a t 120
quot ing
In re Merr i l l
Research Sec. L i t i g . , 249 F.R.D. 124, 132 S.D.N.Y.2008)
quot ing
All of
the
Rule 23 bl 3)
fac to rs
weigh in favor o f
proceeding as a c lass : the re i s
no
weighty i n t e r e s t
for
each
c las s member to
proceed
i nd iv idua l ly
here,
and
the
i n t e r e s t s
o f
any
c l a s s
members in proceeding as separa te ac t ions can e a s i l y
be met
through
the opt -out process . Meanwhi a
c l a s s
ac t ion
ach ieves the benef i t o f al lowing a
c las s
of geograph ica l ly and
economical ly diverse
p l a i n t i f f s
t o ad jud ica t e
t h e i r cla ims
exped i t ious ly and e f f i c i e n t ly . For the i n s t i t u t i o n a l i nves to r
subc lass , t h i s al lows i n s t i t u t i o n s
for
whom it may not
be
a
sound t r adeof f of bus iness
resources
to l i t i g a t e t he i r cla ims
i nd iv idua l ly to
nonetheless
ob ta in red re ss . For the r e t a i l
i nves to r
subc lass ,
recovery
may be
obta ined
for cla ims
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f inanc ia l ly
s i g n i f i c a n t
to
an
i nd iv idua l o r
fami ly ,
but
too
minor to
j u s t i fy
h i r ing independent counsel
and proceeding
ind iv idua l ly .
3 Proceeding
as a
c las s a l so gives these smal le r
players
l everage in a
barga in ing
dynamic where
most
o f the power
l i e s in
the hands o f
a
l a rge corpora t ion .
277
F.R.D.
a t 120
( c i t ing Board
o f Tr.
of AFTRA
Ret. Fund v.
JPMorgan
Chase
Bank,
N.A., 269
F.R.D.
340, 355 (S.D.N.Y. 2010)) .
The d e s i r a b i l i t y of concen t ra t ing t h i s l i t i g a t i o n in
a
pa r t i c u l a r forum
and
reduced d i f f i c u l t y
of
case management by
c e r t i f i c a t i o n
of
a c las s
i s evidenced
by
the fac t t h a t
consol ida t ion has
helped
t h i s
case proceed
smoothly,
and
for the
admin i s t ra t ive
reasons
out l ined above tha t
make
adjudica t ion
of
a
s ing le c las s ac t ion , fol lowed by i nd iv idua l i zed
inqu i r i es
i f
necessary ,
the
super ior
method
of
process .
See
§
IV.a) .
[C)oncen t ra t ing l i t i g a t i o n in
a
s ing le forum
p la in ly
has
a
number of
benef i t s ,
including
e l imina t ing
the r i sk of
i ncons i s t en t
adjudica t ions
and promoting
the f a i r
and
e f f i c i e n t
use
of
the j ud ic i a l system,
and
the Southern D is t r i c t o f
ew
13 Defendants argue t ha t such smal l
c la ims
a re
not
an
i ssue
here
because
l a rge
cla ims can be shown. Defs . '
Opp.
a t 77.
This
case
does impl ica te
r e l a t i ve ly
smal l c la ims such as
the
Meltons '
( 13,000) and Sharon
Morley ' s
( 14,000). Pl s . ' Reply a t
88.
Moreoever, the
exis tence
of
l a rge indiv idua l
cla ims t ha t a re
su f f i c i e n t fo r
indiv idua l
s u i t s i s no bar
to
a c las s when the
advantages of uni t a ry
ad jud ica t ion e x i s t
to determine
the
de fendan t ' s
l i a b i l i t y . Pub.
Emps. '
277 F.R.D. a t
120.
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York i s well known to have exper t i s e in s e c ur i t i e s
law.
Pub.
W 5178546, a t
*12
(S.D.N.Y. Dec.
23,
2009) ( in te rna l quota t ion
marks omit ted)) .
Pl a i n t i f f s
have
met
t he i r
burden to es tab l i sh
s u p e r io r i t y .
c Ascer ta inab i l i t y
Rule 23 con ta ins an impl ied
requirement
of
a s c e r t a ina b i l i t y .
Brecher
v.
Republic
of Argent ina ,
No.
14-
4385, 2015
W 7273415, a t
*2
(2d
Cir .
Nov. 18,
2015)
( co l lec t ing
c i t a t i o n s ) . [T]he touchstone of
a s c e r t a ina b i l i t y i s
whether
the
c las s i s
usuf f i c i en t ly de f in i t e
so
t ha t
t
i s admin i s t ra t ive ly
f eas ib le
for the court to
determine
whether a
p a r t i c u l a r
ind iv idua l
i s
a
member.
Id .
(c i t a t ions
and
i n t e rna l
quota t ion
marks omi t t ed) . A c l a s s i s ascer ta inab le
when
def ined
by
objec t ive
c r i t e r i a
t ha t are admin i s t ra t ive ly
f eas ib le and when
iden t i fy ing i t s
members
would
not
requ i re a
mini -hear ing
on the
mer i t s o f each case . Id . (quot ing Charron v.
Pinnacle
Grp. N.Y.
LLC
269 F.R.D.
221,
229 (S.D.N.Y.2010)
(c i t a t ions and
in te rna l
quota t ion marks omit ted)) . Though objec t ive
c r i t e r i a
are
necessary , they are not alone s u f f i c i e n t , and must es tab l i sh
the
d e f i n i t e boundaries o f
a
r ead i ly i d e n t i f i a b l e
c l a s s . Id .
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The s tandard fo r a s c e r t a ina b i l i t y i s not
demanding.
I t
i s
designed
only to
preven t the c e r t i f i c a t i o n of
a
c las s whose
membership i s t r u ly inde te rminab le . St inson v. Ci ty o f
New
York,
282 F.R.D.
360,
374 (S.D.N.Y.
2012)
( c i t ing
Gortat v.
Capala Bros . ,
Inc . ,
No. 07-CV-3629(ILG), 2010
W
1423018, a t *2,
(E.D.N.Y.
Apr.
9, 2010) ( in te rna l quota t ion marks omi t t ed) .
This
s tandard
in mind, P l a i n t i f f s have proposed ascer ta inab le
subc lasses . Given
t h a t
the subc lasses may be asce r t a ined with
re fe rence to i nves to r
records ,
t i s admin i s t ra t ive ly f eas ib le
to determine whether an i nves to r i s a
member
of the
i n s t i t u t i ona l
inves tor
subc lass ,
the
r e t a i l
i nves to r
subc lass ,
o r no subc lass a t a l l . See Pl s . ' Reply a t 59. Though
documenta t ion
may
be
required ,
mini -hear ings
on
the
mer i t s
of
each i n v e s t o r ' s inc lus ion in the subc lasses wil l not be.
With respec t to
c l a s s a l l o ca t i o n ,
whether an IPO a l locan t
i s
a
member of
the r e t a i l
c las s or
the
i n s t i t u t i o n a l c las s i s
determined
f i r s t
by re fe rence to
Facebook's own
Fina l Al locan t
Lis t ,
which l i s t s
i n s t i t u t i ona l
i nves to rs . Graziano Deel. Ex.
42.
Obvious
i n s t i t u t i o n s t ha t
rece ived
shares from both
the
i n s t i t u t i ona l
and
r e t a i l
a l l o ca t i o n s appearing on
t h i s l st
(Morgan
Stanley Investment
Management,
Will iam Bla i ,
Levin
Capi ta l St ra t eg ie s )
remain p a r t
of the i n s t i t u t i o n a l subc lass .
The
odd few
i n s t i t u t i o n a l
inves tors
tha t
a l l eged ly received
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r e t a i l a l loca t ions remain par t of
the
i n s t i t u t i o n a l
subclass
because t h e i r i den t i ty ,
not the
source o f t he i r shares ,
con t ro l s .
Whether an
af te rmarke t
purchaser i s p a r t o f
the
r e t a i l
o r
i n s t i t u t i o n a l
c l a s s
i s determined by applying the Financ 1
Indus t ry
Regula tory Author i ty d e f in i t i o n s
to
the ind iv idua l who
made
the investment
dec i s ion . See Tr.
25:10-11.
These
objec t ive
s t eps l ead
to d e f i n i t e
boundaries ,
and
thus high ly asce r t a inab le
subc lasses (not to mention r e su l t in i n t u i t i v e
determinat ions
of
which inves to rs
belong
to which
subc la s s ) .
Defendants
p r o t e s t t h a t
P l a i n t i f f s did not provide a
d e f i n i t i o n fo r
e i t h e r
i n s t i t u t i o n a l
i nves to r
o r
r e t a i l
i nves to r in
t h e i r
moving
papers , and thus two subc lasses cannot
be c e r t i f i e d . Defs . ' Opp.
a t
72-4. I t i s
dis ingenuous
a t
bes t
r
Defendants
to
sugges t
the subc lasses a re unascer ta inab le ,
and
thus t h a t the Court
cannot
fea s ib ly determine
when
an
i n d i v i d u a l f a l l s in one c l a s s or the
other ,
while Defendants
d is t ingu ish between
r e t a i l
and
i n s t i t u t i o n a l i nves to rs
on t h e i r
own i n i t i a t i v e in t h e same motion. See
e . g . ,
Defs . ' Opp a t
11
( Defendants have compiled
unrebu t ted
evidence
showing
thousands
o f c las s members, inc lud ing both
i n s t i t u t i o n a l
and ind iv idua l
i nves to rs (emphasis
omi t t ed ) ) ;
3 ( An anal
tat
Jenn i son .
. ,
an i n s t i t u t i o n a l a l locan t ) ; 49 54
( Re ta i l Inves to rs
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Also Had Actual Knowledge o f
the
Alleged Omission
and
Misrepresenta t ion ) .
Defendants a l so
argue the damaged
thereby language
requ i re s
mer i t s
determinat ions
and
de fea t s
ascer ta inab i l i ty .14
Defs . '
Opp. a t
71-2. Notably , Defendants prov ide no Second
Circu i t au thor i ty
to
support
t he i r argument. This language
i s
s tandard ,
and
rega rd le s s ,
(w]hether
a po ten t i a l
c las s member
purchased [Defendant 's ]
shares
in
the
of fe r ing
and
held
those
shares un t i l the cor rec t ive di sc losure can be determined
via
ob jec t ive
c r i t e r i a . Thus,
members of the
c l a s s
are
as ce r t a in ab l e .
In re Bank of Am
Corp.
Sec . , Der iva t ive ,
Employee
Ret.
Income Sec. Act
(ERISA) Li t i g . , 281
F.R.D. 134,
140 (S.D.N.Y.
2012)
14 Defendants a l so
r e - r a i s e
t he i r
same
knowledge
argument , which
the Court f inds
unpersuas ive
for a l l the
reasons se t
fo r th in
the
predominance
sec t ion .
See
§ IV.a) .
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V.
Conclusion
For the foregoing reasons and as
se t
fo r th above the
motions
fo r
c l a s s
ce r t i ca t ion
appointment
as
Class
Represen ta t ives
and
appointment
of Class Counsel
are g ran ted .
In
l i gh t
o f
the
c o n f i d e n t i a l i t y s t i p u l a t i o n and
order
en te red in t h i s
case
the p a r t i e s are d i rec ted to j o i n t l y submit
redac ted vers ion o f
t h i s
opinion to be f i l e d publ i c ly .
I t i s so ordered .
ew
York
Y
December //
2015
U.S.D.J .
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B
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IN RE FACEBOOK, INC., IPO SECURITIESAND DERIVATIVE LITIGATION
MDL No. 12-2389 (RWS)
CONSOLIDATED CLASS ACTIONCOMPLAINT
JURY TRIAL DEMANDED
This document relates to theConsolidated Securities Action:
No. 12-cv-4081 No. 12-cv-4099 No. 12-cv-4131
No. 12-cv-4150 No. 12-cv-4157 No. 12-cv-4184 No. 12-cv-4194 No. 12-cv-4215 No. 12-cv-4252 No. 12-cv-4291 No. 12-cv-4312 No. 12-cv-4332 No. 12-cv-4360 No. 12-cv-4362
No. 12-cv-4551 No. 12-cv-4648
No. 12-cv-4763 No. 12-cv-4777 No. 12-cv-5511
No. 12-cv-7542 No. 12-cv-7543 No. 12-cv-7544 No. 12-cv-7545 No. 12-cv-7546 No. 12-cv-7547 No. 12-cv-7548 No. 12-cv-7550 No. 12-cv-7551 No. 12-cv-7552 No. 12-cv-7586
No. 12-cv-7587
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i
TABLE OF CONTENTS
Page
I. INTRODUCTION .............................................................................................................. 2
II. JURISDICTION AND VENUE ......................................................................................... 9
III.
PARTIES .......................................................................................................................... 10
A. Lead Plaintiffs ....................................................................................................... 10
B. Named Plaintiffs ................................................................................................... 11
C. Defendants ............................................................................................................ 12
1. Corporate Defendant ................................................................................. 12
2. The Individual Defendants ........................................................................ 12
3. The Underwriter Defendants..................................................................... 15
IV. OVERVIEW ..................................................................................................................... 18
A.
Facebook’s Meteoric Rise Creates Unprecedented Market AnticipationFor Its IPO............................................................................................................. 18
B. Facebook Files For Its IPO, And The Market Reacts Positively To Its DisclosuresConcerning Its Revenue, Growth, And Positioning In The Mobile Market ......... 20
C. The SEC Questions Facebook’s Disclosures ........................................................ 23
D. As Facebook Prepares For Its Roadshow, The Company Continues ToEmphasize Its Growth Prospects In The Mobile Market To Investors ................. 24
E. As Facebook Begins Its Roadshow, It Determines That Its Revenues For TheSecond Quarter And The Year Have Been Materially Impacted ......................... 30
F.
Facebook Discloses Its Severe Revenue Declines To A Select Group Of Investors,But Not To The Market......................................................................................... 33
G. With The Market Unaware Of The Pronounced Deterioration In Facebook’sRevenue, Facebook Increases The Price And Size Of The Offering, AndAllocates An Extremely High Number Of Shares To Small Investors ................ 39
H. Facebook Conducts Its Historic IPO..................................................................... 43
I. Facebook’s Market Debut Fizzles As Morgan Stanley Is Forced To DesperatelyProp Up The Company’s Stock Price To Prevent A “Broken Issue” ................... 45
J. Facebook Stock Collapses On Monday And Tuesday As The Truth Emerges .... 48
K. The Financial Media Acknowledges That The Declines In Facebook’s RevenueEstimates Were Not Conveyed By Facebook’s Public Disclosures, AndSignificantly Altered The Total Mix Of Information ........................................... 52
V. THE NEGATIVE CHANGE IN FACEBOOK’S REVENUE ESTIMATESSIGNIFICANTLY ALTERED THE TOTAL MIX OF INFORMATION IN THEMARKETPLACE ............................................................................................................. 54
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VI. MATERIALLY UNTRUE AND MISLEADING STATEMENTSAND OMISSIONS ........................................................................................................... 59
VII. CLASS ACTION ALLEGATIONS ................................................................................. 67
VIII. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR ANDBESPEAKS CAUTION DOCTRINE .............................................................................. 69
IX. CAUSES OF ACTION ..................................................................................................... 70
COUNT I .......................................................................................................................... 70
For Violations Of Section 11 Of The Securities Act (Against DefendantsZuckerberg, Ebersman, Spillane, The Facebook Board, And TheUnderwriter Defendants)
COUNT II ......................................................................................................................... 72
For Violations Of Section 12(a)(2) Of The Securities Act (Against Facebook,Defendants Zuckerberg, Sandberg, and Ebersman,
and The Underwriter Defendants)
COUNT III ........................................................................................................................ 75
For Violations Of Section 15 Of The Securities Act (Against the IndividualDefendants)
X. PRAYER FOR RELIEF ................................................................................................... 77
XI. JURY TRIAL DEMANDED ............................................................................................ 77
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1. Court-appointed Lead Plaintiffs, the North Carolina Department of State
Treasurer on behalf of the North Carolina Retirement Systems, Banyan Capital Master Fund
Ltd., Arkansas Teacher Retirement System, and the Fresno County Employees’ Retirement
Association (collectively, “Lead Plaintiffs”), and Named Plaintiffs Jose G. Galvan and Mary Jane
Lule Galvan, bring this action individually and on behalf of all persons and entities who
purchased or otherwise acquired the Class A common stock of Facebook, Inc. (“Facebook” or the
“Company”) in or traceable to Facebook’s initial public offering (the “IPO”), which occurred on
or about May 17, 2012, and were damaged thereby (collectively, the “Class”). Excluded from
the Class are Defendants (as set forth herein), present or former executive officers of Facebook
and their immediate family members (as defined in 17 C.F.R. § 229.404, Instructions (1)(a)(iii)
and (1)(b)(ii)).
2. Lead Plaintiffs allege the following based upon personal knowledge as to
themselves and their own acts and upon information and belief as to all other matters. Lead
Plaintiffs’ information and belief is based on, inter alia, the independent investigation of Court-
appointed Co-Lead Counsel, Bernstein Litowitz Berger & Grossmann LLP and Labaton
Sucharow LLP. This investigation included, but was not limited to, a review and analysis of: (i)
public filings with the Securities and Exchange Commission (“SEC”) by Facebook; (ii) research
reports by securities and financial analysts; (iii) transcripts of investor conference calls; (iv)
publicly available presentations by Facebook; (v) press releases and media reports; (vi) economic
analyses of securities movement and pricing data; (vii) publicly available filings in the legal
action brought against Morgan Stanley & Co. LLC by the Massachusetts Securities Division (the
“Massachusetts Enforcement Action”); (viii) consultations with relevant experts; and (ix) other
publicly available material and data identified herein. Co-Lead Counsel’s investigation into the
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2
factual allegations contained herein is continuing, and many of the relevant facts are known only
by the Defendants named herein, or are exclusively within their custody or control. Lead
Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for further discovery.
3. As set forth further below, the claims asserted herein arise solely under the
Securities Act of 1933 (the “Securities Act”). These Securities Act claims are based solely on
strict liability and negligence, and are not based on any reckless or intentionally fraudulent
conduct by or on behalf of the Defendants – i.e., these claims do not allege, arise from, or sound
in, fraud. Lead Plaintiffs specifically disclaim any allegation of fraud, scienter, or recklessness in
these non-fraud Securities Act claims.
I. INTRODUCTION
4. This case is about the integrity of the market for initial public offerings.
Facebook, the world’s largest online social network, conducted one of the biggest and most
highly anticipated initial public offerings in history on May 17, 2012. In the offering, Facebook
and its insiders sold more than 421 million shares of common stock to the investing public at $38
per share, reaping more than $16 billion in proceeds – the largest initial public offering ever
conducted by a technology company, and the third-largest ever conducted in the United States by
any company.
5. A key factor influencing the value of Facebook’s stock was its ability to generate
large and rapidly growing amounts of revenue through its core advertising business. Thus, the
Registration Statement pursuant to which Facebook conducted its IPO repeatedly represented
that the Company had experienced “rapid growth,” stating, for example, that its annual revenues
had increased from approximately $150 million to more than $3.7 billion in the four years before
its IPO. In the months and weeks leading up to the IPO, the financial press repeatedly reported
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that the Company’s revenue growth had created “extraordinary” and “astronomical” demand for
its IPO, and that Facebook was “a must-own stock.”
6. On April 16, 2012, as Facebook was preparing to market the IPO to institutional
investors through its roadshow, the Company’s CFO, Defendant David Ebersman, provided
revenue guidance to the analysts from the investment banks that were underwriting the IPO (the
“Syndicate Analysts”). Ebersman informed the Syndicate Analysts that Facebook was estimating
that it would report revenue of as much as $1.2 billion for the second quarter of 2012 – the
quarter in which Facebook was going public – and $5 billion for the year. Based on Facebook’s
guidance, the Syndicate Analysts generated revenue estimates that mirrored the figures Ebersman
had provided, and provided their estimates to the large clients of their investment banks that were
considering investing in the IPO.
7. Over the next three weeks, however, Facebook’s revenues began to rapidly
deteriorate. Indeed, by no later than May 7, 2012, the day that Facebook began its roadshow in
New York, the Company determined that two developments within its core advertising business
had materially impaired its ability to generate revenue for both the second quarter of 2012 and
the full year.
8. The first and most damaging change concerned a shift in the way that users
accessed Facebook. In particular, Facebook had determined that its users were increasingly
accessing Facebook through mobile devices, such as mobile phones, instead of through
traditional desktop computers, and that this had materially impaired the Company’s ability to
generate revenue. That is because Facebook displayed large amounts of advertising to its
desktop users, but displayed much less advertising to its mobile users. Thus, as Facebook’s users
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shifted from desktop computers to mobile devices, the Company was generating far less
advertising revenue than it had expected.
9. At the same time that Facebook determined that its users were increasingly
migrating to mobile devices, Facebook also determined that certain “product decisions” it had
made – such as decisions concerning the type of the advertisements it displayed – had
compounded the steep decline in its expected revenue. In particular, the Company’s product
decisions had reduced the number of advertisements per page that Facebook displayed to its
users, thereby exacerbating the deterioration in the Company’s advertising revenue caused by the
shift to mobile devices.
10.
As a direct result, ten days before the IPO was scheduled to occur, Facebook
drastically slashed the revenue estimates it had provided to the Syndicate Analysts only three
weeks earlier. Specifically, by no later than May 8, 2012, Facebook cut its estimated revenue for
the second quarter of 2012 by as much as $100 million, or more than 8.3%, and for the year by
as much as $175 million, or 3.5%.
11.
Facebook’s most senior executives immediately recognized that the pronounced
deterioration in Facebook’s revenue was highly material. The same day that Facebook cut its
revenue estimates, Defendant Ebersman and the head investment banker on the IPO, Michael
Grimes of lead underwriter Morgan Stanley, concluded that the decline in Facebook’s revenue
was so significant that Facebook had to promptly disclose its lowered revenue estimates.
However, rather than publicly disclose this information, Facebook decided to disclose it only to a
handful of its largest and most significant potential investors. Thus, on May 9, Facebook filed an
amended Registration Statement in which it misleadingly represented that the two factors noted
above might have a negative impact on its revenues. Specifically, in its amended Registration
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Statement, Facebook merely stated that, as a result of increasing mobile usage and the
Company’s product decisions, the Company’s users were growing more quickly than the number
of ads that company was displaying to them. At no time, however, did the Registration
Statement disclose that the Company’s revenues had been negatively impacted by these factors.
To the contrary, the amended Registration Statement stated only that these factors “may
negatively affect our revenue and financial results” – the exact same information the Company
had disclosed prior to determining that they had negatively impacted its revenue and financial
results. Accordingly, the warnings themselves in the amended Registration Statement constituted
false statements.
12.
The actions that Facebook’s own senior officers took after the amended
Registration Statement was filed confirm that they understood that the information regarding the
declines in Facebook’s revenues was highly material, not conveyed by the amended Registration
Statement, and not otherwise part of the total mix of information in the market. Thus, beginning
on the evening of May 9 – only twelve minutes after Facebook filed the amended Registration
Statement – Facebook’s Treasurer, Cipora Herman, began to conduct nineteen separate telephone
calls with the Syndicate Analysts. Each of these calls had the same purpose: to inform the
Syndicate Analysts of the material facts which the Registration Statement had not disclosed. On
these calls, Herman read from a script prepared by Grimes, and told the Syndicate Analysts that
the two factors discussed above had already materially impaired Facebook’s revenue for the
second quarter and year, and that, as a result, Facebook had sharply lowered the revenue
estimates it had given them only three weeks earlier.
13. As Facebook knew they would, the Syndicate Analysts immediately lowered their
own internal estimates for Facebook’s revenue to mirror Facebook’s revised guidance, and
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communicated these lowered estimates to a small, select group of institutions that were
considering investing in the IPO. The Syndicate Analysts did not issue any public reports with
respect to their lowered estimates of Facebook prior to the completion of the IPO.
14. The few institutions who received this information immediately recognized that it
was new, material information that reflected a highly negative change in Facebook’s financial
condition. As Reuters would subsequently report after the IPO, these institutions said that the
Syndicate Analysts’ decision to reduce their estimates during the time period when the roadshow
was occurring was “very, very unusual,” and they had “never before seen that in 10 years.”
Similarly, according to Reuters and The Wall Street Journal, the few investors who were told of
the revenue declines were “shocked” by the “deceleration” in Facebook’s revenues, which raised
a “significant red flag” about Facebook’s ability to generate the level of revenue that the market
expected, and called the Company’s value into serious question. Indeed, institutions that
received this non-public information cancelled or cut their orders for Facebook shares, dropped
the price they were willing to pay, or sold their shares immediately after the IPO.
15.
However, because the market had not been put on notice of the fact that
Facebook’s business had been materially impaired, in the week before the IPO, market demand
for Facebook shares reached levels that the financial press described as “astronomical.” In
response to this surge of demand, days before it went public, the Company and the underwriters
significantly increased the price and size of the IPO, boosting the price to $38 per share (from a
previously announced range of $28 to $35 per share), and increasing the size of the offering by
more than 80 million shares. All of the new shares made available to the public came from
selling insiders, including certain of the Company’s directors and one of its underwriters,
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Goldman Sachs, who each decided to vastly increase the number of shares they were selling to
the public.
16. With the market unaware of Facebook’s pronounced revenue deterioration,
Facebook completed its IPO as scheduled after the close of the market on May 17. The IPO not
only generated billions of dollars for Facebook, but it made many of the Company’s senior
executives and directors exceptionally rich. Based on the IPO price, the stock held by
Facebook’s 28-year-old CEO, Defendant Mark Zuckerberg, was worth $19 billion, making him
one of the wealthiest men in the world.
17.
Facebook stock began publicly trading the next day, Friday, May 18. After
opening at $42.05 on a surge of retail demand, Facebook stock immediately began to plummet,
falling back to the IPO price of $38 per share, and ultimately closing at $38.23, a performance
that analysts and the financial press concluded was surprising and disappointing.
18. Beginning on the night of May 18 and continuing over the next several days,
news of the decline in Facebook’s revenues began to emerge. On the night of May 18, Reuters
reported that, days before the IPO, Facebook had taken the “rare and disruptive” step of lowering
its guidance to analysts during the time period that its roadshow was occurring. This news swept
through the market and, over the weekend of May 19-20, members of the financial press reported
that this information was highly material and fundamentally affected the value of Facebook’s
stock. For example, on May 19, Business Insider reported that Facebook’s decision to reduce its
guidance “mid-way through a series of meetings designed for the sole purpose of selling the
stock” was “highly material information. [S]uch a late change in guidance would mean that
Facebook’s business was deteriorating rapidly – between the start of the roadshow and the
middle of the roadshow. Any time a business outlook deteriorates that rapidly, alarm bells start
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going off on Wall Street, and stocks plunge.” As Business Insider further noted, investors who
were not informed of this critical new information have “every right to be furious. Because this
would have been highly material information that some investors had and others didn’t – the
exact sort of unfair asymmetry that securities laws are designed to prevent.”
19. On the very next trading day, Monday, May 21, Facebook shares collapsed.
Facebook stock opened sharply down from the IPO price and plummeted throughout the day on
extremely high trading volume, closing down at $34.03, a decline of nearly 11% from the IPO
price.
20.
Prior to the opening of trading on May 22, Reuters again shocked the market by
reporting that, “while an investor roadshow was underway,” lead underwriters Morgan Stanley,
J.P. Morgan, and Goldman Sachs had taken the highly unusual step of “significantly” cutting
their revenue forecasts for Facebook, but appeared to have told only a few “major clients” about
this highly “negative” development. On Tuesday, May 22, Facebook shares again swiftly
plummeted. Facebook stock opened the day down sharply from the prior close, and ended the
trading session at $31 per share, a decrease of approximately 9%, again on extremely high
volume. Thus, in just two trading days over May 21 and 22 – only Facebook’s second and third
trading days as a public company – its shares had fallen more than 18% from the IPO price,
wiping out billions of dollars of Facebook’s market capitalization. As Bloomberg reported, the
collapse in Facebook’s stock on May 21 and 22 was “epic:” based on that two-day decline,
Facebook’s IPO became the single worst performing initial public offering in 10 years, making it
the “flop of the decade.”
21. Following the collapse in Facebook’s stock price, numerous market commentators
pointedly wrote that the Registration Statement failed to disclose highly material information
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regarding Facebook’s revenue declines, and that the belated disclosure of this information had
significantly altered the total mix of information in the market. For example, Business Insider
reported that, “This was selective disclosure of critical non-public information. Facebook’s
amended prospectus did not say that the company’s business had suddenly weakened and
management’s outlook had changed. And that information is vastly more important than what
the prospectus did say, which was that users are growing faster than revenue.”
22. Similarly, Venture Beat , a widely read publication that covers technology and
finance, reported that Facebook’s amended Registration Statement did not put investors on notice
that there had been a material change in Facebook’s business in the weeks leading up to the IPO:
In that May 9 update [referring to the amended Registration Statement], Ebersmandecided to use vague language when describing how the company’s secondquarter was looking. It was extremely understated, considering what we wouldlater find out. … [T]his update itself didn’t send any alarm bells to mostinvestors, and it shouldn’t have. … [T]he reality is that this wording was just toovague to be construed by normal people as meaning anything more than what hadalready been mentioned before. … The fact is, there is nothing within the S-1update on May 9 that would give normal investors the sense that there had been amaterial change about Facebook’s revenue prospects.
23.
Based on the facts alleged herein, Lead Plaintiffs assert claims under: (i) Section
11 of the Securities Act against Facebook, certain of its senior executives, its directors, and the
underwriters of its $16 billion IPO; (ii) Section 12(a)(2) of the Securities Act against Facebook,
certain of its senior executives, and the underwriters of its IPO; and (iii) Section 15 of the
Securities Act against Facebook’s senior executives and directors.
II. JURISDICTION AND VENUE
24. The claims asserted herein arise under Sections 11, 12 and 15 of the Securities
Act, 15 U.S.C. §§ 77k, 77l, and 77o.
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25. This Court has jurisdiction over the subject matter of this action pursuant to
Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1331, because this is a civil
action arising under the laws of the United States.
26. Venue is proper in this District pursuant to Section 22(a) of the Securities Act, 15
U.S.C. § 77v, and 28 U.S.C. § 1391(b), (c) and (d). Many of the acts and transactions that
constitute violations of law complained of herein, including the dissemination to the public of
untrue statements of material facts, occurred in this District.
27. In connection with the acts alleged herein, Defendants directly or indirectly used
the means and instrumentalities of interstate commerce, including, but not limited to, the United
States mails, interstate telephone communications, and the facilities of national securities
exchanges.
III. PARTIES
A. Lead Plaintiffs
28. Lead Plaintiff the North Carolina Department of the State Treasurer on behalf of
the North Carolina Retirement Systems (“North Carolina DST”) is an arm of the Government of
the State of North Carolina, which is entrusted by statute with managing the pooled funds held
on behalf of the North Carolina Retirement Systems. The North Carolina Retirement Systems
are statutory retirement and benefit plans that cover more than 850,000 public employees and
teachers. North Carolina DST purchased 685,373 shares of Facebook in the IPO. On December
6, 2012, this Court appointed North Carolina DST as a Lead Plaintiff for this litigation.
29. Lead Plaintiff the Arkansas Teacher Retirement System (“Arkansas Teacher”) is a
state-wide retirement system that provides retirement benefits for the employees of Arkansas’
public schools and other educational institutions. As of June 30, 2011, Arkansas Teacher
managed more than $11.7 billion in assets for the benefit of its members. Arkansas Teacher
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purchased 246,849 shares of Facebook in the IPO. On December 6, 2012, this Court appointed
Arkansas Teacher as a Lead Plaintiff for this litigation.
30. Lead Plaintiff the Fresno County Employees’ Retirement Association (“Fresno”)
provides retirement benefits for the employees of the County of Fresno, Superior Courts of
California Fresno, and for other participating agencies. As of March 31, 2012, Fresno managed
over $3.2 billion in assets for the benefit of its members. Fresno purchased 95,900 shares of
Facebook in the IPO. On December 6, 2012, this Court appointed Fresno as a Lead Plaintiff for
this litigation.
31.
Lead Plaintiff Banyan Capital Master Fund Ltd. (“Banyan”) is an investment fund
that has been in operation since 2004. Banyan purchased 1,415,862 shares of Facebook common
stock traceable to the IPO. On December 6, 2012, this Court appointed Banyan as a Lead
Plaintiff for this litigation.
32. Lead Plaintiffs purchased Facebook common stock in or traceable to the IPO as
detailed in the certifications already on file with the Court and attached hereto as Appendix A,
and suffered damages as a result of the violations of the federal securities laws alleged herein.
B. Named Plaintiffs
33. Named Plaintiffs Jose G. Galvan and Mary Jane Lule Galvan, a married couple,
jointly purchased 21,100 shares of Facebook stock on May 18, 2012 that were traceable to the
IPO. Named Plaintiffs’ purchases of Facebook common stock traceable to the IPO are detailed
in the certification already on file with the Court and attached hereto within Appendix A.
Named Plaintiffs suffered damages as a result of the violations of the federal securities laws
alleged herein.
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C. Defendants
1. Corporate Defendant
34.
Defendant Facebook is a Delaware corporation headquartered at 1601 Willow
Road, Menlo Park, California 94025. The Company operates the world’s largest social
networking service through its website at www.facebook.com, which is accessed by more than
900 million active users per month. Facebook provides a platform for its users to, among other
things, create their own profiles, connect with other individuals they identify as “friends,” share
communications, post photographs, and play games with one another. On or about May 17,
2012, Facebook conducted its IPO, in which it issued 421,233,615 shares of its Class A common
stock to the public, with an underwriter option to issue an additional 63,185,042 shares of Class
A common stock, generating total proceeds of more than $16 billion. The IPO was conducted
pursuant to several documents that were filed with the SEC and disseminated to the investing
public, including: (i) Facebook’s Registration Statement dated February 1, 2012 and filed with
the SEC on Form S-1, as amended by eight subsequent amendments, which contained versions
of the prospectus (the “Registration Statement”); and (ii) the final prospectus, which was filed
with the SEC on May 18, 2012 on Form 424(b)(4) (the “Prospectus”). Facebook securities
actively trade on the NASDAQ under the ticker symbol FB and, as of January 29, 2013, there
were 1,684,185,170 shares of its Class A common stock outstanding.
2. The Individual Defendants
35. Defendant Mark Zuckerberg is the founder, Chairman and Chief Executive
Officer of Facebook. Zuckerberg signed the Registration Statement filed with the SEC on
February 1, 2012 and all subsequent amendments. He also made numerous statements
concerning Facebook’s business in Facebook’s roadshow video and at Facebook’s roadshow
meetings with investors, through which the Company marketed its IPO to investors. Zuckerberg
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sold 30.2 million shares of Facebook Class A common stock in the IPO for proceeds of
approximately $1.15 billion. Following the IPO, Zuckerberg retained control of approximately
56% of the voting power of Facebook’s capital stock, rendering Facebook a “controlled
company” under the corporate governance rules for NASDAQ-listed companies. Because of his
senior position within and control of the Company, Zuckerberg possessed the power and
authority to control the contents of the Registration Statement and Prospectus, Facebook’s press
releases, investor and media presentations, and other SEC filings.
36. Defendant Sheryl K. Sandberg is Facebook’s Chief Operating Officer (“COO”),
the Company’s most senior officer behind Defendant Zuckerberg. Sandberg made numerous
statements concerning Facebook’s business in Facebook’s roadshow video and at Facebook’s
roadshow meetings with investors. Because of her senior position within and control of the
Company, Sandberg possessed the power and authority to control the contents of the Registration
Statement and Prospectus, Facebook’s press releases, investor and media presentations, and other
SEC filings.
37.
Defendant David Ebersman is Facebook’s Chief Financial Officer (“CFO”).
Ebersman signed the Registration Statement filed with the SEC on February 1, 2012 and all
subsequent amendments. Ebersman also made numerous statements concerning Facebook’s
business in Facebook’s roadshow video and at Facebook’s roadshow meetings with investors.
Because of his senior position with the Company, Ebersman possessed the power and authority
to control the contents of the Registration Statement and Prospectus, Facebook’s press releases,
investor and media presentations, and other SEC filings.
38. Defendant David M. Spillane is Facebook’s Director of Accounting (“DOA”).
Spillane signed the Registration Statement filed with the SEC on February 1, 2012 and all
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subsequent amendments. Because of his senior position with the Company, Spillane possessed
the power and authority to control the contents of the Registration Statement and Prospectus,
Facebook’s press releases, investor and media presentations, and other SEC filings.
39. Defendants Zuckerberg, Sandberg, Ebersman, and Spillane are collectively
referred to as the “Officer Defendants.”
40. Defendant Marc L. Andreessen is a Director of Facebook.
41. Defendant Erskine B. Bowles is a Director of Facebook.
42. Defendant James W. Breyer is a Director of Facebook.
43.
Defendant Donald E. Graham is a Director of Facebook.
44.
Defendant Reed Hastings is a Director of Facebook.
45. Defendant Peter A. Thiel is a Director of Facebook.
46. Defendants Andreessen, Bowles, Breyer, Graham, Hastings, and Thiel are
collectively referred to as the “Facebook Board” or the “Facebook Board Defendants.”
47. The Facebook Board Defendants approved the IPO, signed the Registration
Statement and all subsequent amendments, and were directors of the Company at the time of the
IPO. They further participated in Facebook Board meetings and conference calls. In their
capacities as signatories of the documents set forth above, as well as by virtue of their authority
to approve the IPO, the Facebook Board Defendants possessed the power and authority to
control the contents of the Registration Statement and Prospectus, Facebook’s press releases,
investor and media presentations, and other SEC filings.
48. The Officer Defendants and the Facebook Board Defendants are collectively
referred to as the “Individual Defendants.”
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3. The Underwriter Defendants
49. Defendant Morgan Stanley & Co. LLC (“Morgan Stanley”) was the lead
underwriter and lead book-running manager of the IPO, selling 162,174,942 shares of Class A
common stock in the IPO.
50. Defendant J.P. Morgan Securities LLC (“J.P. Morgan”) was a co-lead underwriter
of the IPO, selling 84,878,573 shares of Class A common stock in the IPO.
51. Defendant Goldman, Sachs & Co. (“Goldman Sachs”) was a co-lead underwriter
of the IPO, selling 63,185,042 shares of Class A common stock in the IPO.
52.
Defendant Allen & Company LLC was an underwriter of the IPO, selling
8,424,672 shares of Class A common stock in the IPO.
53. Defendant Barclays Capital Inc. was an underwriter of the IPO, selling
27,380,185 shares of Class A common stock in the IPO.
54. Defendant Blaylock Robert Van LLC was an underwriter of the IPO, selling
673,974 shares of Class A common stock in the IPO.
55.
Defendant BMO Capital Markets Corp. was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
56. Defendant C.L. King & Associates, Inc. was an underwriter of the IPO, selling
631,850 shares of Class A common stock in the IPO.
57. Defendant Cabrera Capital Markets, LLC was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
58. Defendant CastleOak Securities, L.P. was an underwriter of the IPO, selling
673,974 shares of Class A common stock in the IPO.
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59. Defendant Citigroup Global Markets Inc. was an underwriter of the IPO, selling
9,477,755 shares of Class A common stock in the IPO.
60. Defendant Cowen and Company, LLC was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
61. Defendant Credit Suisse Securities (USA) LLC was an underwriter of the IPO,
selling 9,477,755 shares of Class A common stock in the IPO.
62. Defendant Deutsche Bank Securities Inc. was an underwriter of the IPO, selling
9,477,755 shares of Class A common stock in the IPO.
63.
Defendant E*TRADE Securities LLC was an underwriter of the IPO, selling
210,617 shares of Class A common stock in the IPO.
64. Defendant Itaú BBA USA Securities, Inc. was an underwriter of the IPO, selling
210,617 shares of Class A common stock in the IPO.
65. Defendant Lazard Capital Markets LLC was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
66.
Defendant Lebenthal & Co., LLC was an underwriter of the IPO, selling 673,974
shares of Class A common stock in the IPO.
67. Defendant Loop Capital Markets LLC was an underwriter of the IPO, selling
673,974 shares of Class A common stock in the IPO.
68. Defendant M.R. Beal & Company was an underwriter of the IPO, selling 673,974
shares of Class A common stock in the IPO.
69. Defendant Macquarie Capital (USA) Inc. was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
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70. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated was an
underwriter of the IPO, selling 27,380,185 shares of Class A common stock in the IPO.
71. Defendant Muriel Siebert & Co., Inc. was an underwriter of the IPO, selling
673,974 shares of Class A common stock in the IPO.
72. Defendant Oppenheimer & Co. Inc. was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
73. Defendant Pacific Crest Securities LLC was an underwriter of the IPO, selling
421,234 shares of Class A common stock in the IPO.
74.
Defendant Piper Jaffray & Co. was an underwriter of the IPO, selling 421,234
shares of Class A common stock in the IPO.
75. Defendant Raymond James & Associates, Inc. was an underwriter of the IPO,
selling 421,234 shares of Class A common stock in the IPO.
76. Defendant RBC Capital Markets, LLC was an underwriter of the IPO, selling
4,212,336 shares of Class A common stock in the IPO.
77.
Defendant Samuel A. Ramirez & Company, Inc. was an underwriter of the IPO,
selling 631,850 shares of Class A common stock in the IPO.
78. Defendant Stifel, Nicolaus & Company, Incorporated was an underwriter of the
IPO, selling 421,234 shares of Class A common stock in the IPO.
79. Defendant Wells Fargo Securities, LLC was an underwriter of the IPO, selling
4,212,336 shares of Class A common stock in the IPO.
80. Defendant The Williams Capital Group, L.P. was an underwriter of the IPO,
selling 589,727 shares of Class A common stock in the IPO.
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81. Defendant William Blair & Company, L.L.C. was an underwriter of the IPO,
selling 421,234 shares of Class A common stock in the IPO.
82. The Defendants named in paragraphs 49-81 are collectively referred to as the
“Underwriter Defendants.”
IV. OVERVIEW
A. Facebook’s Meteoric Rise Creates Unprecedented Market Anticipation For Its IPO
83. In February 2004, Defendant Zuckerberg founded Facebook in his Harvard
University dorm room as a social networking website through which Harvard students could
connect to one another and share information about their lives. In July 2004, Facebook was
formally incorporated as a private company. Facebook soon opened its website to other
universities and the general public, and proved to be extremely popular.
84. Between the time of its founding and its IPO in May 2012, Facebook experienced
meteoric growth in its user base and its operations. Within eight years, Facebook became the
largest social network in the world and one of the country’s best-known technology companies.
As of March 31, 2012, Facebook reported that 901 million “active users” accessed its website
each month – nearly half of all people who use the Internet and approximately 13% of the
world’s population. At the time of its IPO, Facebook’s site was the number one website in the
world as measured by the total minutes spent by users on the site and total page views.
85. In 2011, as Facebook sought to rival cash-rich technology companies such as
Google and Apple, the Company began to seriously explore engaging in an IPO. While the
Company’s shares traded on private exchanges, accessing the public markets through an IPO
would provide the Company with several unique benefits. Among other things, an IPO would
provide the Company with large amounts of cash necessary to compete with the giants in the
technology field through acquisitions and expansion of its own operations. It would also create a
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highly liquid market for its stock, and had the potential to significantly increase its value by
tapping into widespread market demand.
86. By the end of 2011, reports emerged that Facebook was exploring filing for one of
the largest IPOs in history. For example, in November 2011, The Wall Street Journal reported
that Facebook was
exploring raising $10 billion in its IPO – what would be one of the largestofferings ever – in a deal that might assign Facebook a $100 billion valuation, anumber greater than twice that of such stalwarts as Hewlett-Packard Co. and 3MCo. A Facebook IPO has been hotly anticipated for several years, and viewed asa defining moment for the latest Web investing boom.
87. By January 2012, news had spread that Facebook would file for its IPO on
February 1, and market anticipation of the offering reached nearly unprecedented levels. As
reported by TheStreet.com, analysts said that Facebook’s offering was so significant that it would
give the entire market a much-needed lift: “[A]n analyst from GreenCrest Capital said that …
‘Facebook is obviously the IPO of the year, maybe the IPO of the decade, likely the largest IPO
in dollar value in American history. The market is a pretty dim environment right now, but you
have a very bright light coming in.’” Reuters quoted the CEO of investment bank Montgomery
& Co. as stating that “[t]he Facebook IPO will be iconic.” Given the significance ascribed to
Facebook’s IPO, investor demand for Facebook stock was expected to be immense. As the Los
Angeles Times reported, “‘The minute the IPO is filed, there will be pandemonium,’ said [an
analyst from] IPO Boutique[], who says he has never seen anything quite like the pent-up
demand for Facebook shares.”
88. Against the backdrop of what was expected to be one of the largest and most
closely-watched offerings in history, the market was intently focused on the information that
would be set forth in Facebook’s Registration Statement and Prospectus. Because Facebook had
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operated as a private company, it had never before publicly disclosed detailed information
concerning its business and financial condition. As reported by the Los Angeles Times:
Can Facebook stake its fortune in social networking in the wildly profitable way
Google did with the Internet search? Swarms of investors can’t wait to find out.Even everyday users are looking forward to poring over Facebook’s prospectus –the first in-depth glimpse of Facebook’s financials …. How much money thecompany is making is a closely-guarded secret. But that will soon change.
B. Facebook Files For Its IPO, And The Market Reacts Positively To Its Disclosures
Concerning Its Revenue, Growth, And Positioning In The Mobile Market
89.
On February 1, 2012, Facebook publicly filed its initial Registration Statement
with the SEC. Investor interest in these disclosure documents was so intense that the SEC’s
“website crashed [] under the pressure of investors seeking access to the Facebook filing
document,” according to The Wall Street Journal.
90. The Registration Statement highlighted the Company’s dominant market position
and growth. It stated that, “[s]ince January 2011, Facebook.com has been the number one
website worldwide,” with more than 845 million “monthly active users” as of December 31,
2011, who collectively spent on average “9.7 billion minutes per day on Facebook.” It further
stated that the Company has consistently “experienced rapid growth in the number of users and
their engagement.”
91. As the Registration Statement explained, Facebook generally does not charge its
users for any of the social networking services it provides. Instead, Facebook’s business model
depends almost entirely on selling advertisements to companies that want to reach Facebook’s
user base, whose ads Facebook displays to its members as they use its website. Thus, the key
driver of the Company’s growth, and the principal determinant of Facebook’s value, was its
advertising revenue. Indeed, the Company’s advertising revenue accounted for 98%, 95% and
85% of the Company’s revenues in 2009, 2010, and 2011.
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92. The Registration Statement disclosed that Facebook’s advertising and total
revenue grew at a torrid pace in the years before its IPO. Between 2007 and 2011, Facebook’s
annual advertising revenue grew from approximately $153 million to $3.2 billion – multiplying
more than twenty times. In turn, during this time period, Facebook’s annual revenue grew from
$153 million to more than $3.7 billion – a 24-fold increase. Moreover, in the year before its IPO,
Facebook’s revenue surged 88%, climbing from almost $2 billion in 2010 to the aforementioned
$3.7 billion in 2011, which “was due primarily to a 69% increase in advertising revenue,”
according to the Registration Statement.
93.
Facebook also described certain factors that were critical to its financial results,
two of which are relevant here. The first and principal factor was the growing usage of
Facebook on mobile devices, as opposed to the use of Facebook through traditional, stationary
desktop computers. Mobile devices include those devices through which people access the
Internet remotely, such as “smart” mobile phones (like iPhones) and tablets (like iPads). The
usage of Facebook on mobile devices was critical to Facebook’s financial performance for three
principal reasons.
94. First, Facebook’s mobile market was extremely large. At the time Facebook filed
its initial Registration Statement, 425 million (or approximately half) of Facebook’s monthly
users accessed the website through their mobile devices, either as a supplement to their use of
Facebook through desktop computers or as their only means of accessing Facebook. Second,
Facebook’s mobile users were growing more rapidly than the rest of the Company’s user base.
As Facebook stated, the growth rate for its mobile users “will continue to exceed the growth rate
of our overall [member base] for the foreseeable future.” Third, while the Company showed
large volumes of advertising to users who accessed its website through desktop computers, it did
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not yet show advertisements to its mobile users. Thus, the mobile market was an untapped
revenue stream, and an extremely important engine of Facebook’s future growth.
95. Accordingly, in the Registration Statement, Facebook emphasized that the mobile
market was a “critical” area of “growth” and a “significant opportunity” that the Company was
actively developing products to capitalize on. Facebook stated that “[i]mproving our mobile
products and increasing mobile usage of Facebook are key company priorities,” and it was
“devoting substantial resources to developing engaging mobile products and experiences for a
wide range of platforms” by “working across the mobile industry … to improve the Facebook
experience on mobile devices and make Facebook available to more people around the world.”
96.
The second factor that Facebook identified as important to its financial results was
the Company’s “product decisions.” Facebook’s product decisions were decisions that the
Company made concerning the design and features of its website, the type of advertising it
displayed, and the price of its advertisements. These product decisions were important to the
Company’s financial results because they could result in new advertising products, the
elimination of certain advertisements, or changes in the price of advertisements – each of which
could impact the amount of advertising Facebook displayed and, in turn, its revenues.
97. The market reacted positively to the disclosures in the Registration Statement, as
the financial press reported that Facebook’s advertising revenue growth was strong, and the
Company was well-positioned to capitalize on the mobile market. For example, after the
Company filed its initial Registration Statement, Bloomberg reported that Facebook expected its
“next 1 billion users to come mainly from mobile devices,” and was therefore “increasing its
focus on mobile technology to take advantage of the shift to smartphones and tablets.” The
report quoted the director of research at investment-advisory firm Renaissance Capital as stating
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that “Investors are still very much willing to pay up for growth. There’s just phenomenal interest
in this company and its potential.” Similarly, The New York Times reported that “the filing shed
some light on how [Facebook’s] meteoric run has turned the upstart into a formidable money
maker. … [M]any analysts believe Facebook’s fortunes will rapidly multiply as advertisers
direct more and more capital to the Web’s social hive.”
C. The SEC Questions Facebook’s Disclosures
98. On February 28, 2012, the SEC sent the Company a “comment letter” concerning
certain of the Company’s disclosures in the initial Registration Statement. Among other things,
the SEC questioned certain of Facebook’s disclosures about potential factors that might impact
its revenues, including growing mobile usage, and instructed the Company to provide additional
information to investors on these subjects.
99. As the SEC noted, Facebook’s Registration Statement contained a “risk factor”
purporting to warn investors that Facebook’s revenue “may” be negatively affected by increasing
mobile usage “if” certain contingencies occurred. Specifically, this disclosure stated as follows
Growth in use of Facebook through our mobile products, where we do not
currently display ads, as a substitute for use on personal computers may
negatively affect our revenue and financial results.
We had more than 425 million MAUs [monthly active users] who used Facebookmobile products in December 2011. We anticipate that the rate of growth inmobile users will continue to exceed the growth rate of our overall MAUs for theforeseeable future, in part due to our focus on developing mobile products toencourage mobile usage of Facebook. Although the substantial majority of ourmobile users also access and engage with Facebook on personal computers wherewe display advertising, our users could decide to increasingly access our products
primarily through mobile devices. We do not currently directly generate anymeaningful revenue from the use of Facebook mobile products, and our ability todo so successfully is unproven. Accordingly, if users continue to increasinglyaccess Facebook mobile products as a substitute for access through personalcomputers, and if we are unable to successfully implement monetization strategiesfor our mobile users, our revenue and financial results may be negatively affected.
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100. The SEC instructed Facebook that, rather than merely saying that its results
“may” be negatively affected under certain circumstances, it must “fully address” the potential
impact on the Company’s revenue if the contingencies concerning mobile usage materialized.
Specifically, the SEC comment letter stated that, “assuming that the trend towards mobile
continues and your monetization efforts are unsuccessful, ensure that your disclosure fully
addresses the potential consequences to your revenue and financial results rather than just saying
that they ‘may be negatively affected.’”
101. In addition, the SEC directed Facebook to disclose any trends that were having, or
were reasonably expected to have, a material impact on its “revenue growth and advertising
revenue growth.” Specifically, the SEC instructed Facebook to disclose, pursuant to Item 303(a)
of SEC Regulation S-K, “any known trends or uncertainties that have had, or that you reasonably
expect will have, a material favorable or unfavorable impact on sales or results of operations.”
102. On March 7, 2012, Facebook responded to the SEC’s comment letter. In its
response, Facebook stated that it could not disclose the potential impact of mobile usage on its
revenue because it was unable to determine that impact. In particular, Facebook asserted that
because many of its mobile users also continued to access Facebook through their desktop
computers, the Company “cannot specifically determine how mobile use is a substitute for, rather
than incremental to, use on personal computers.” Thus, Facebook stated that it was unable to
“specifically assess the impact of increasing mobile use on its revenue and financial results” at
that time.
D. As Facebook Prepares For Its Roadshow, The Company Continues To Emphasize
Its Growth Prospects In The Mobile Market To Investors
103. During March and April 2012, Facebook was preparing for a critical part of its
IPO: its “roadshow,” which was scheduled to begin on May 7 and end on May 17. The
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roadshow consisted of a series of meetings, primarily with groups of institutional investors, held
across the country. During these meetings, Facebook’s most senior executives – including
Defendants Zuckerberg, Sandberg, and Ebersman – made presentations and answered investor
questions. The roadshow was one of the most important parts of the IPO process because it was
a principal way that Facebook and the lead underwriters marketed the IPO directly to
institutional investors, and thereby increased investor demand for the Company’s stock.
104. To track demand for the Company’s stock, during the roadshow, the lead
underwriters built the “book” of orders for the IPO. The book contained the number of shares
that each institutional investor wanted to purchase, as well as the price that each investor was
willing to pay for the stock. Based on the orders in the book, at the end of the roadshow,
Facebook and the lead underwriters determined how many shares to sell in the IPO and the price
per share. These determinations not only set the value of the IPO, but they also set Facebook’s
market value as a company.
105. The two Facebook executives who had principal responsibility for managing
Facebook’s roadshow were Defendant Ebersman and Facebook’s Treasurer, Cipora Herman.
Michael Grimes, the Head of Technology Investment Banking at lead underwriter Morgan
Stanley, served as the Company’s principal advisor on behalf of the Underwriter Defendants.
106. In preparation for the roadshow, on April 16, 2012, Defendant Ebersman met with
the Syndicate Analysts. The purpose of the meeting was for Facebook to provide the Syndicate
Analysts with information about its business, including its estimated revenues for the second
quarter of 2012 and the full year. Based on that information, the Syndicate Analysts would
generate estimates of the Company’s revenues and financial results. These estimates would then
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be incorporated into “institutional selling memoranda,” which the Underwriter Defendants’ sales
force would use to market the IPO to institutional investors.
107. At the April 16 meeting, Ebersman informed the Syndicate Analysts that
Facebook’s internal revenue estimate for the second quarter, which had begun on April 1, ranged
from $1.1 to $1.2 billion. Ebersman further informed the Syndicate Analysts that Facebook’s
internal revenue estimate for the 2012 fiscal year was $5 billion. These figures translated into
year-over-year growth rates of as much as 34% for the second quarter and 35% for the year.
108. The Syndicate Analysts incorporated the Company’s internal estimates into their
financial models and generated estimates that mirrored Facebook’s guidance. For example, the
analysts for lead underwriters Morgan Stanley, J.P. Morgan, and Goldman Sachs, as well as Bank
of America, concluded that Facebook’s revenues for the second quarter would be at the high end
of Facebook’s range of $1.1 billion to $1.2 billion, and its revenues for the full-year 2012 would
be approximately $5 billion. These estimates, which are set forth below, translated into expected
year-over-year growth rates of up to 35% for the second quarter, and 39% for the year:
Underwriter 2Q 2012 RevenueGrowth
RateAnnual Revenue Growth Rate
Goldman Sachs $1.207 billion 35% $5.169 billion 39%
J.P. Morgan $1.182 billion 32% $5.044 billion 36%
Morgan Stanley $1.175 billion 31% $5.036 billion 36%
Bank of America $1.166 billion 30% $5.040 billion 36%
109. These estimates were then incorporated into the institutional selling memoranda
that these Underwriter Defendants used to market the IPO to investors.
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110. Meanwhile, Facebook continued making positive public statements emphasizing
its growth and the steps it was taking to capitalize on the mobile market, which gave rise to
similar expectations for Facebook’s performance among analysts who published their reports to
the market. For example, in an amended Registration Statement filed on March 7, Facebook
disclosed that it had taken a key step toward generating revenue from its mobile users by starting
to display advertisements to them. Specifically, Facebook stated that it was beginning to display
one of its principal advertising products, called “Sponsored Stories,” to its mobile users.
111. Facebook also underscored that it was achieving greater penetration in the mobile
market, thereby expanding its revenue opportunities there. In its amended Registration
Statement, Facebook stated that its mobile application – the product through which mobile users
accessed the Company’s website – was the most popular mobile application “among …
smartphone users in the United States.” In an amended Registration Statement filed on April 23,
2012, Facebook further stated that, as of March 31, 2012, the number of users who accessed its
website through mobile products had grown to 488 million, an increase of 15% over such users
as of December 2011.
112. In the amended Registration Statement filed on April 23, 2012, Facebook also
disclosed its first quarter results. Facebook reported more than $1 billion in revenue for the first
quarter of 2012, an increase of 45% from the first quarter of 2011, which was driven by a 35%
increase in the number of ads delivered. Although Facebook’s revenue had declined from the
fourth quarter of 2011, Facebook stated that this was “driven by seasonal trends” in advertising
spending, which traditionally surges in the fourth quarter during the holiday season, and
decreases in the first quarter. Facebook stated that this “seasonality” may have been “partially
masked” in prior years by “[t]he rapid growth in our business.”
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113. On May 3, 2012, Facebook filed an amended Registration Statement confirming
that it was aiming to conduct an IPO of historic dimensions. Facebook announced that it was
planning to sell more than 337 million shares in the offering (consisting of 180 million shares
from Facebook, and more than 157 million from selling shareholders), and was planning to price
the shares between $28 and $35. At these levels, the IPO would raise up to approximately $12
billion in proceeds and result in a market valuation of as much as $96 billion for Facebook –
numbers that would make Facebook the largest company to go public in history, and the IPO the
largest ever for a technology company (and one of the largest ever for any U.S. company). The
IPO was also slated to make Defendant Zuckerberg one of the richest men in the world: at the
top of the price range, his Facebook holdings would be worth $18.7 billion.
114. That same day, Facebook posted its “roadshow” video presentation on its website,
which prominently featured Defendants Zuckerberg, Sandberg, and Ebersman. In the
presentation, Facebook again emphasized its continuing growth, stating that “[o]ur advertising
revenue has grown from $272 million in 2008 to $3.2 billion last year,” and “we’ve only just
begun.” Facebook also stated that the mobile market was a critical growth opportunity that the
Company was well-positioned to capitalize on. Specifically, COO Sandberg stated that the
mobile market was “a key area of growth for Facebook” and that Facebook had “just introduced
Sponsored Stories … on mobile devices” to monetize its mobile users. Sandberg further
represented that Facebook was not experiencing challenges in the mobile market, stating that,
“[f]or most companies, the mobile environment is a challenge, because it’s so small it requires
new ad formats, but that’s not the case for Facebook. Since sponsored stories are now available
… on mobile, they become a really natural part of the Facebook mobile experience.”
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115. Analysts and the financial press again reacted positively to Facebook’s
disclosures. For example, on May 4, 2012, the day after Facebook released the roadshow video,
Bloomberg ran an article with the headline “Facebook’s Sandberg Says Mobile Advertising Is
Key Growth Area,” reporting that Sandberg, “in a video recorded for prospective investors, said
one of the company’s main sources of revenue gains will be mobile advertising. ‘Mobile is a key
area of growth for Facebook,’ Sandberg said in the video, which Facebook will use to drum up
interest in its shares before a planned initial public offering.” On May 7, 2012, after Facebook
announced the price range and size of the IPO, Reuters reported that “the size of the IPO reflects
the company’s growth and bullish expectations about its money making potential as a hub for
everything from advertising to commerce.” Similarly, on May 4, 2012, The Wall Street Journal
reported that “Facebook pulled back the curtain on how much it thinks it is worth, targeting a
valuation as rich as $96 billion in what would be a record debut for an American company. …
Facebook’s IPO will be a watershed moment for Silicon Valley, spawning a new generation of
millionaires and a handful of billionaires, including founder and Chief Executive Mark
Zuckerberg, whose stake is worth as much as $18.7 billion.”
116. Thus, by the time that Facebook’s roadshow was scheduled to begin in early May,
demand for Facebook stock remained extremely high. As The New York Times reported on May
3:
Facebook, which plans to make a market debut this month that could value it at$86 billion, is the stock that everyone seems to want. … The excitement overFacebook has come on the back of its rapid growth. For many, Facebook is theInternet. After a flurry of eye-popping market debuts by other Internet start-ups,… Facebook’s will be the biggest yet. … Demand to attend the Facebook[roadshow] presentations has been extraordinarily high, with underwriters alreadydrawing up waiting lists for the meetings[.]
117. Similarly, on May 1, Reuters quoted an analyst from the research firm IPO
Boutique as stating that “I have not seen as broad based interest in an IPO since Google.
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Investor demand is immense. I expect a roadshow that will rival all roadshows where investors
will be turned away at the door.”
E. As Facebook Begins Its Roadshow, It Determines That Its Revenues For The Second
Quarter And The Year Have Been Materially Impacted
118. On May 7, 2012, Facebook began its roadshow with a presentation to investors in
New York City. As expected, investor interest was overwhelming. The Wall Street Journal
reported that “the line leading to a second-floor ballroom where the meeting was scheduled to be
held … stretched down the first floor and spilled out of the hotel for nearly half a city block.”
More than 500 of the country’s most prominent investors and analysts were in attendance.
119.
At the roadshow meeting, Facebook played the video presentation, described
above in paragraphs 114-115, in which Defendant Sandberg emphasized the Company’s strong
growth prospects and ability to capitalize on the mobile market. Afterwards, Defendants
Zuckerberg, Ebersman, and Sandberg took the stage and answered investors’ questions, including
a question concerning the Company’s “plans to boost revenue from mobile products,” according
to The Wall Street Journal.
120. Based on the Company’s roadshow presentation and the disclosures in the
Registration Statement, analysts widely recommended that investors buy Facebook stock. On
May 8, The Wall Street Journal summarized the overwhelmingly positive analyst coverage in an
article titled “Facebook Gets Bullish Reception – Wall Street Analysts Sound Positive Notes
Before IPO; Valuation of $160 Billion?” which reported that:
Analysts are starting to chime in with support for the bullish case on socialnetwork Facebook Inc. ahead of its initial public offering. Sterne Agee onMonday initiated coverage at “buy[.]” … It isn’t typical for analysts to publishresearch before a company goes public. But Sterne did so because many clientswere considering investing, said initiating analyst Arvind Bhatia in an interview.
[Bhatia] set a one-year price target of $46 for the stock, solidly above the range of$28 to $35 a share targeted by Facebook for its IPO. “Facebook had 48% of the
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world-wide Internet population, and they have half a percent of the advertisingmarket world-wide,” Mr. Bhatia. “We think they have significant runway aheadof them,” referencing the company’s potential for growth.
121.
Analysts also widely reported that, for the second quarter and year-end 2012,
Facebook would experience revenue growth rates of at least 35% year-over-year, based in part on
the Company’s ability to make money from its mobile users. For example, the Sterne Agee
report described in the above paragraph emphasized Facebook’s strong positioning in the mobile
market, stating that, “[w]ith 488 million MAUs [monthly active users] using Facebook mobile
products in the month of March 2012, FB clearly has the reach on mobile platforms….
Furthermore, the Facebook mobile app was the most downloaded app … in the month of January
2012….” Thus, Sterne Agee concluded that “mobile monetization [is] a significant long-term
growth opportunity for FB” and Facebook could “triple its revenue” in the next 4 years based in
part on its “mobile monetization potential.” For 2012, Sterne Agree projected that Facebook
would report more than $1.2 billion in revenue for the second quarter (a 36% increase over its
revenue for the second quarter of 2011) and more than $5 billion in revenue for the year (a 35%
increase over its revenue for full-year 2011).
122. Unbeknownst to investors, however, within hours of Facebook’s first roadshow
meeting, Facebook determined that two developments in its business had severely impaired its
estimated revenues for the second quarter and the full year, and thus, its revenues were going to
be much lower than the Company had led potential investors to believe. First, during the second
quarter of 2012, as the Company’s users had increasingly migrated from desktop computers
(where the Company displayed large amounts of ads) to mobile devices (where Facebook
showed less advertising), the Company was generating far less advertising revenue than it had
expected. Second, the Company had made certain product decisions in the second quarter of
2012 that reduced the average amount of advertisements displayed on each page of Facebook’s
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website, which, in combination with the shift to mobile usage, had exacerbated the decline in
Facebook’s expected revenues.
123. Accordingly, on the evening of May 7, 2012, Defendant Ebersman approached the
lead Morgan Stanley banker on the IPO, Michael Grimes, and informed him that, based on
second quarter data received to date, Ebersman was no longer confident that Facebook would
meet its internal revenue estimates. According to Grimes’ sworn testimony in the Massachusetts
Enforcement Action, Ebersman informed Grimes that, “based upon their experience in Q2 to
date, [Ebersman] was less confident in his financial projections – in reaching or exceeding his
financial projections than previously.” As Grimes testified, Ebersman further informed him that
the two developments noted above, i.e., increasing mobile usage and the Company’s product
decisions, had caused the rapid deterioration in Facebook’s revenues.
124. Indeed, by no later than May 8, Facebook had already materially lowered its
internal revenue figures due to these developments. Specifically, Facebook determined that its
revenue for the second quarter would be as low as $1.1 billion, or more than 8.3% below the top
of its prior range. Further, the Company determined that these factors were expected to continue
to negatively impact its revenue for the rest of the year. Thus, Facebook was now estimating that
its revenue for 2012 would be between $4.825 billion and $4.85 billion, or as much as $175
million less than previously estimated, a decline of up to 3.5%. Significantly, Facebook’s revised
revenue estimates translated into sharply lower year-over-year revenue growth rates of as little as
23% for the second quarter and 30% for the year, as compared to growth rates of as much as
34% for the second quarter and 35% for the year based on the Company’s prior estimates.
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F. Facebook Discloses Its Severe Revenue Declines To A Select Group Of Investors, But
Not To The Market
125. On May 8, 2012, immediately after Facebook had revised its expected revenues
for the second quarter and the year materially downward, its most senior executives determined
that the change was so significant that it warranted disclosure to the Syndicate Analysts. Thus,
that day, Facebook’s Treasurer, Cipora Herman, sent an email to employees in the finance
department with the subject line: “Q2 estimates from analysts IMPORTANT PLS THIS
MORNING.” Herman wrote that Facebook had “updated our forecast and we’re trying to gauge
how far off our new forecast is from where the analysts are coming out.” Herman stated that she
and Morgan Stanley bankers immediately needed to see “the q2-q4 by quarter revenue estimates
from the analysts for whom we have detailed models,” and that she was “[c]opying [a Morgan
Stanley banker] on this so we can get some efficiency – I don’t want to be the bottleneck in
getting the info to MS.”
126. As noted above, Facebook’s revised revenue figures were far below the Syndicate
Analysts’ estimates. Accordingly, later that day, after Morgan Stanley bankers had compared
Facebook’s revenue figures with the Syndicate Analysts’ estimates, Grimes advised Ebersman
that Facebook should immediately provide its new revenue figures to the Syndicate Analysts so
that they could revise their models based on this new information and provide it to the
Company’s largest potential investors, thereby informing them of the change in Facebook’s
financial condition.
127.
As emphasized by the SEC in its February 28, 2012 comment letter to Facebook,
Item 303(a) of SEC Regulation S-K requires public disclosure of “any known trends or
uncertainties that have had or that the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenues or income from continuing operations.”
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17 C.F.R. § 229.303. In addition to the identification of such “known trends,” Item 303 requires
disclosure of (i) whether those trends have had or are reasonably expected to have a material
unfavorable impact on revenue; and (ii) the extent of any such impact on revenue. Moreover,
pursuant to SEC Regulation C, registrants have an overarching duty to disclose material
information necessary to ensure that representations in a registration statement are not
misleading. Specifically, Rule 408 states that, “In addition to the information expressly required
to be included in a registration statement, there shall be added such further material information,
if any, as may be necessary to make the required statements, in light of the circumstances under
which they are made, not misleading.” 17 C.F.R. § 230.408(a).
128.
However, Facebook did not publicly disclose the information that it had decided
to provide the Syndicate Analysts. Instead, on the night of May 8, 2012, Facebook executives,
including Ebersman and Herman, with input from Grimes, decided that the Company would file
an amended Registration Statement containing an extremely vague and limited disclosure about
certain trends in the Company’s business. Notably, this new disclosure would continue to
represent only that increasing mobile usage and the Company’s product decisions might have a
negative impact on Facebook’s revenue. Accordingly, on May 9, 2012, the Company filed an
amended Registration Statement, which stated as follows:
Based upon our experience in the second quarter of 2012 to date, the trend we sawin the first quarter of DAUs [daily active users] increasing more rapidly than theincrease in number of ads delivered has continued. We believe this trend isdriven in part by increased usage of Facebook on mobile devices where we haveonly recently begun showing an immaterial number of sponsored stories in NewsFeed, and in part due to certain pages having fewer ads per page as a result of product decisions. For additional information on factors that may affect thesematters, see “Risk Factors—Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results” and“Risk Factors—Our culture emphasizes rapid innovation and prioritizes userengagement over short-term financial results.”
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129. This new disclosure was itself materially false and misleading. In the amended
Registration Statement, Facebook disclosed only that, as a result of increasing mobile usage and
its product decisions, the growth in the Company’s users was exceeding the growth in the
number of ads it was delivering. Significantly, nowhere in the amended Registration Statement
did Facebook state that these factors had already materially impaired its revenue, or otherwise
describe the impact they were having on its business. To the contrary, in the amended
Registration Statement, Facebook misleadingly repeated the same purported “risk disclosure”
that it had included in its prior registration statements: namely, that these factors only “may
negatively affect our revenue and financial results,” when, in reality, Facebook had already
determined that they had materially and negatively impacted its revenue and financial results.
130. The actions that Facebook took after the Company filed the amended Registration
Statement confirm that the decline in Facebook’s revenue estimates was highly material, not
conveyed by the May 9 amended Registration Statement, and not otherwise part of the total mix
of information in the market. Specifically, within minutes after Facebook filed its amended
Registration Statement on May 9, Facebook contacted the Syndicate Analysts to tell them what
the amended Registration Statement did not provide notice of – namely, that growing mobile
usage and the Company’s product decisions had already had a material negative impact on the
Company’s revenues, and that Facebook had cut its guidance as a direct result. Facebook
provided this information to the analysts precisely because it understood that the market was
unaware that these factors had negatively impacted its revenues, and that the magnitude of these
impacts was significant. Indeed, had the market been aware of these critical facts, or had these
facts been unimportant, there would have been no reason for Facebook to communicate this
information to the Syndicate Analysts.
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131. The manner in which Facebook chose to contact the Syndicate Analysts further
confirms that the Company’s revenue cuts were highly material and not part of the information in
the marketplace. SEC Regulation FD generally provides that, whenever an issuer discloses
“material nonpublic information” about its business to an analyst in connection with an offering,
the issuer must also disclose that same information to the public. However, under certain
circumstances, Regulation FD provides a limited exception to this disclosure requirement for
information that is conveyed through “[a]n oral communication” in connection with an offering.
Because Facebook’s senior executives understood that the Company’s lowered guidance was
“material nonpublic information” that would have to be publicly disclosed if it was
communicated in writing, they sought to avail themselves of the exception for “oral
communications.” Specifically, in an effort to avoid Regulation FD in the event that it applied,
Ebersman, Herman, and Grimes decided that Facebook would not convey the lowered guidance
to the Syndicate Analysts in writing, but would do so over the phone, by reading the information
to them, in a series of calls that lasted for days.
132.
Accordingly, within twelve minutes after Facebook filed the amended
Registration Statement, Treasurer Herman began calling the Syndicate Analysts from her
Philadelphia hotel room. With calls to the Syndicate Analysts scheduled every 15 minutes,
Herman called a total of eleven Syndicate Analysts on the night of May 9, including all of the
lead underwriters’ analysts. On May 10 and May 15, Herman called an additional eight
Syndicate Analysts to inform them of Facebook’s lowered guidance.
133. Herman conducted these nineteen separate phone calls with the aid of a script that
Grimes had prepared for her. This script provides further confirmation that the market was
unaware of the fact that growing mobile usage and the Company’s product decisions had had a
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material negative impact on Facebook’s revenue. Indeed, in contrast to the vague and inadequate
disclosure that Facebook made on May 9, the script that Herman used specifically stated that
these trends had negatively impacted Facebook’s revenue and that Facebook had significantly cut
its revenue estimates as a result. Specifically, the script stated as follows:
I wanted to make sure you saw the disclosure we made in our amended filing.The upshot of this is that we believe we are going to come in [on] the lower endof our $1.1 to $1.2 bn range for Q2 based upon the trends we described in thedisclosure. A lot of investors have been focused on whether the trend of adimpressions per user declining (primarily as a result of mobile) was a one-time, orcontinuing, occurrence. As you can see from our disclosure, the trend iscontinuing. You can decide what you want to do with your estimates, our longterm conviction is unchanged, but in the near term we see these trends continuing,
hence our being at the low end of the $1,100 + $1,200 range.
134. Although Grimes’ original script did not provide the impact of these factors on
Facebook’s yearly revenues, Herman specifically wrote this information into the script. Herman
wrote that because of “trends/headwinds over the next six to nine months as this run[s] through
the rest of the year, [Facebook] could be 3 to 3 and a half percent off the 2012 $5 billion
[revenue] target” that was previously given to the Syndicate Analysts.
135.
The actions that the Syndicate Analysts took after being informed of the cuts to
Facebook’s revenue estimates provide further confirmation that these declines were highly
material, and that the market was unaware of this significant information. Based on the new
information provided by Herman, a significant number of the Syndicate Analysts sharply
lowered their revenue estimates for Facebook to reflect the impact of the new information they
had been told. Indeed, as Morgan Stanley admitted in a statement issued after news of
Facebook’s revenue cuts was revealed to the market following the IPO, “a significant number of
research analysts in the syndicate who were participating in investor education reduced their
earnings views” after May 9 to reflect their estimate of the impact of the new information.
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136. For example, the Syndicate Analysts of the three lead underwriters, as well as
Bank of America, produced much lower revenue figures that were all within Facebook’s new
guidance and reflected significant deterioration in the Company’s business. As set forth below,
these analysts cut their estimates of Facebook’s annual revenue by as much as 6%, and their
estimates of Facebook’s second quarter revenue by as much as 7%.
Underwriter 2Q 2012 Revenue
Decrease
from April
Estimate
Annual Revenue
Decrease
from April
Estimate
Goldman Sachs $1.125 billion -6.79% $4.852 billion -6.13%
J.P. Morgan $1.096 billion -7.28% $4.839 billion -4.06%
Morgan Stanley $1.111 billion -5.45% $4.854 billion -3.61%
Bank of America $1.100 billion -5.66% $4.815 billion -4.46%
137. As Facebook understood they would, the Syndicate Analysts immediately
provided this new information to some of the Company’s most important potential investors – a
select, hand-picked group of some of the biggest hedge funds and other institutions on Wall
Street. In particular, in the days immediately following May 9, the Syndicate Analysts made a
series of private phone calls to these select investors to inform them of an extraordinary piece of
news: in the midst of the Facebook roadshow, these analysts had taken the extremely rare step of
cutting their revenue estimates for the Company they were actively promoting as a model of
rapid growth.
138. The chosen few investors who received this critical information reacted with
astonishment. As Reuters would later report after Facebook’s IPO:
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The sudden caution very close to Facebook’s initial public offering – while aninvestor road show was underway – was a big shock to some, said two investorswho were advised of the revised forecast. … ‘This was done during theroadshow – I’ve never before seen that in 10 years,’ said a source at a mutual fundfirm who was among those called by Morgan Stanley.
139.
These investors immediately recognized that the lowered revenue estimates meant
that there had been a significant negative change in Facebook’s financial condition and value. As
was reported by The Wall Street Journal after the IPO, the lowered revenue figures raised “a
significant red flag” to those investors who received them. Similarly, according to Reuters,
“That deceleration [showed by the revised revenue figures] freaked a lot of people out.” This
information caused many investors who received it to change their investment decisions by
cancelling or reducing orders, or reducing the price they were willing to pay for Facebook stock.
For example, after the IPO, The Wall Street Journal reported that when the hedge fund Capital
Research & Management was “warned” by an Underwriter Defendant “about Facebook’s
dimming revenue prospects,” the fund concluded that the IPO price of $38 per share was
“ridiculous,” and “slashed the number of shares it intended to buy,” while “[s]ome Capital
Research fund managers didn’t buy into the IPO at all.”
G. With The Market Unaware Of The Pronounced Deterioration In Facebook’s
Revenue, Facebook Increases The Price And Size Of The Offering, And Allocates An
Extremely High Number Of Shares To Small Investors
140. Given the misleading nature of the new disclosure in Facebook’s May 9 amended
Registration Statement, the financial press continued to report only that increasing mobile usage
might impact Facebook’s revenue depending on the occurrence of future events. For example,
on the night of May 9, The New York Times reported that:
The company [] warned that if Facebook users continued to gain access to thesocial network on mobile devices, instead of computers, and if Facebook was“unable to successfully implement monetization strategies for our mobile users,”the company’s revenue growth could be harmed.
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141. Similarly, on May 9, The Wall Street Journal reported that the Registration
Statement stated only that increasing mobile usage “may” negatively impact revenue:
[Facebook] has warned that, as more people use Facebook on mobile phones
rather than personal computers, that trend “may negatively affect” financialresults. … The issues are important as Facebook heads into the final stretch before its IPO, expected on May 18 in an offering that would value the companyat as much as $96 billion. Executives from the [] Company have been pitchingthe company’s stock to would-be investors this week in a roadshow, where theyhave fielded questions about Facebook’s mobile strategy and growth.
142. Further demonstrating that the market was unaware of the fact that Facebook’s
business had been materially impacted by increasing mobile usage, analysts other than the
Syndicate Analysts, who had not been called by Facebook, continued to widely expect Facebook
to report revenues that were in line with the original, higher guidance Facebook had given in
April. As of May 18, 2012, the date that Facebook went public, analysts’ consensus estimates
according to Thomson’s Institutional Brokers’ Estimate System were for Facebook to report
revenues of more than $1.2 billion for the second quarter and $5 billion for the year – exactly in
line with Facebook’s original yearly guidance and slightly above its quarterly guidance.
143.
Because the market was unaware of the impact that increasing mobile usage had
already had on Facebook’s business, investor demand for Facebook stock far exceeded the
number of shares being offered in the week before the offering was scheduled to occur. On May
11, Reuters reported that “Facebook Inc.’s record initial public offering is already oversubscribed
… days after the world’s largest social network embarked on a cross-country roadshow to drum
up investor enthusiasm.” On May 14, Bloomberg reported that demand for Facebook shares was
so intense that the Underwriter Defendants were “swamped” with orders and were going to close
the order book days before they had planned to:
Facebook plans to stop taking orders tomorrow for its initial public offering, twodays ahead of schedule…. The offer of 337.4 million shares at $28 to $35 eachhas been oversubscribed…. “They’re swamped with the orders that are in,” said
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Jon Merriman, chief executive officer at investment firm Merriman Holdings Inc.in San Francisco. “They just need time to determine the price. They can send themessage – the books are closing, send in your orders now.”
144.
Accordingly, in the week before the IPO, Facebook increased both the price and
size of its IPO. Raising both the price and size of an IPO is exceedingly rare – indeed, it has
occurred in only 3.4% of all IPOs since 1995. Demand for Facebook stock was so extreme that,
in the week before the IPO, Facebook was not only able to raise both the price and size of its
IPO, but it was able to increase them by very significant amounts.
145. Specifically, on May 14, The New York Times reported that “Facebook is planning
to increase the price for its hotly awaited initial public offering to a range of $34 to $38 a share
because of rampant investor demand.” The next day, May 15, Facebook filed an amended
Registration Statement disclosing that it was indeed increasing the price range from the previous
range of $28 to $35, to a new range of $34 to $38 – an increase of more than 21% at the bottom
of the range and nearly 9% at the top. The large size of Facebook’s price increase caused the
financial press to uniformly conclude that market demand for the Company’s stock had reached
astronomical levels, with the The Associated Press reporting that “[d]emand is obscenely high.”
146. Notably, the financial press reported that Facebook’s ability to significantly raise
the IPO price demonstrated that the Company had succeeded in “convincing investors that [it]
can make money from mobile users.” As Bloomberg reported on May 14:
Chief Executive Officer Mark Zuckerberg, in a roadshow pitch to the IPOinvestors, may be winning over skeptics who initially balked at buying the shares,said Erik Gordon, a professor at the University of Michigan’s Ross School of
Business. “Raising the range would be the best signal of what the underwritersare hearing from their institutional buyers who have seen the roadshow.” …Zuckerberg is celebrating his 28th birthday today, during the final leg of amarketing tour aimed at building demand for the IPO and convincing investorsthat Facebook can make money from mobile users.
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147. The next day, May 16, Facebook and its insiders increased the size of the offering
by nearly 25%, raising the number of shares being offered by approximately 84 million shares.
All the additional shares were offered by Facebook insiders, including directors and large, early
shareholders. Director Defendants Breyer and Thiel, and the private equity arm of Defendant
Goldman Sachs, each significantly increased the number of shares they were selling in the
offering. Specifically, as reflected in Facebook’s final Prospectus, director Defendant Breyer and
entities affiliated with his private equity fund, Accel Partners, increased the number of shares
they were selling from 38.2 million to 57.7 million, or 51%. Director Defendant Thiel more than
doubled the number of shares his private equity funds were selling in the IPO, increasing it from
7.7 million to 16.8 million, or by approximately 120%. Similarly, the private equity arm of
Defendant Goldman Sachs nearly doubled the number of shares it was selling, increasing it from
13.2 million to 24.3, or by more than 85%.
148. Then, on May 17, 2012, Reuters reported that the underwriters were releasing
significantly more shares to retail investors than was previously expected. For example, the
brokerage arm of Defendant Morgan Stanley “previously set a cap of 500 shares per retail client,
but e-mailed advisers late on Thursday afternoon [May 17] that it had increased the limit to 5,000
shares.” Similarly, while Merrill Lynch “had sent multiple emails over the last several weeks
warning [brokerage] advisers not to expect to receive many shares for [individual] clients,” on
the morning of May 17, Merrill informed advisers that they would get thousands of shares per
retail client. Reuters quoted a Merrill Lynch retail investment adviser as stating that the
allocation “was about four times what he had expected. ‘It’s a hell of a lot more than I would
have anticipated.’” As an analyst from the research firm IPO Boutique confirmed to Reuters on
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May 18, “[r]etail got a lot more than I thought they did. … [S]ome of the retail clients who
called me today said they were getting 15,000 to 20,000 shares.”
H. Facebook Conducts Its Historic IPO
149.
On the afternoon of May 17, Facebook’s Registration Statement became effective.
That evening, Defendant Ebersman and representatives from the three lead underwriters,
including Grimes, held a conference call to decide on the price of the IPO. In a highly unusual
move, Morgan Stanley’s CEO, James Gorman, participated in the conference call. As Bloomberg
subsequently reported, “[t]he involvement of an investment bank’s CEO in IPO pricing
discussions is unusual, and it reflects the importance that Morgan Stanley (MS) ascribed to its
role as lead underwriter on the largest-ever technology IPO.” The participants discussed a price
range of between $36 and $41 per share, and ultimately decided to price the IPO at $38 per share
– the very top of the range that Facebook had publicly disclosed. As The New York Times
reported after the IPO occurred, “a banker involved in the process” said that the $38 figure was
chosen because “demand was astronomical.”
150.
Later that evening, Facebook announced that it had priced its stock at $38 per
share and conduced one of the largest IPOs in history, selling more than 421 million shares of the
Company’s Class A common stock to the public for proceeds of more than $16 billion. The IPO
was extraordinary by any measure. The IPO was by far the largest ever for a technology
company – indeed, it was nearly 10 times larger than the second-largest technology IPO,
Google’s $1.67 billion offering in 2004. The IPO also gave the Company a market capitalization
of more than $104 billion, the largest ever for a U.S. company at the time it went public, and
larger than the market value of such well-established companies as McDonald’s and Citigroup.
In fact, Facebook’s $104 billion valuation was almost double the valuation achieved by the
second-largest company to complete an IPO, the $60 billion valuation that United Parcel Service
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Inc. reached when it went public in 1999. The amount of proceeds raised in Facebook’s IPO was
the third-largest in U.S. history.
151. The IPO generated huge amounts of wealth for Facebook’s executives and
directors. For example, based on the IPO price, Defendant Zuckerberg’s Facebook’s holdings
were worth more than $19 billion, and he instantly became the 23rd richest person in the world.
Similarly, Director Defendant Breyer and his private equity fund, Accel, reaped approximately
$2.2 billion in proceeds from the sale of shares in the IPO, and their retained holdings were
worth nearly $5.5 billion based on the IPO price. Director Defendant Thiel and his private
equity funds received proceeds of approximately $640 million from the IPO, and the value of
their retained holdings was more than $1.05 billion. Following the IPO, Director Defendant
Marc Andreesen possessed holdings worth nearly $251 million, while the stock owned by
Defendants Ebersman and Sandberg was worth approximately $91 million and $72 million,
respectively.
152. With Facebook stock set to begin trading on the NASDAQ the next morning,
Friday, May 18, analysts and the financial press widely expected that the shares would
experience a large “pop” because demand was so “intense,” as described above. For example, on
May 15, just after Facebook raised the IPO price, Reuters reported that:
The price increase [to $38] indicates intense market demand, which meansFacebook’s shares are likely to see a big pop on their first days of trading on Nasdaq on Friday, analysts said. “It’s confounding but the evidence is that ifcompanies raise the range they will pop more,” said Josef Schuster, founder ofChicago-based financial services firm IPOX Schuster LLC “It signals that thereis such strong demand that it will create a momentum for other investors to jumpon.”
153.
On May 17, Reuters further reported that analysts expected Facebook’s shares to
rise as much as 50% on the first day of trading, and that a driving force of this expected pop was
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“frenzied” demand from retail investors eager to own a piece of a Company that they knew and
used in their everyday lives:
Frenzied demand, especially from individual investors hoping to buy into an
Internet juggernaut that touches hundreds of millions of people every day, isexpected to drive Facebook well above its initial public offering price of $38 pershare, which was already at the top end of its target of $34 to $38. Analysts weredivided on how high the price might go on the first day of trad[ing], with someexpecting a relatively modest gain of 10 percent to 20 percent while others saidanything short of a 50 percent jump would be disappointing. “It will be bananastomorrow,” said Greencrest Capital analyst Max Wolff. … “The stock couldinitially rise and then it could go parabolic on a wave of retail investor hope.”
I. Facebook’s Market Debut Fizzles As Morgan Stanley Is Forced To Desperately Prop
Up The Company’s Stock Price To Prevent A “Broken Issue”
154.
On the morning of May 18, Defendant Zuckerberg rang the opening bell on the
NASDAQ, ushering in what was expected to be an historic trading day for the Company and the
U.S. financial markets. While trading in Facebook stock was expected to begin at 11 a.m.
Eastern Standard Time, it was delayed by approximately half an hour.
155. Prior to the opening of trading, small investors placed a flood of orders to buy
Facebook stock. The Associated Press reported on May 19 that there was a “rush from small
investors” as trading was set to begin, and “Steve Quirk, who oversees trading strategy at [giant
retail broker] TD Ameritrade, said that about 60,000 orders were lined up before Facebook
opened.” Within the first 45 minutes of trading, Facebook accounted for a record 24% of all
trades executed by TD Ameritrade, as compared with a norm of between 2% to 5% on the day a
company goes public.
156.
Once trading began at 11:30, Facebook stock was buoyed by the swell of retail
demand and opened at $42.05, an immediate 11% pop from the IPO price. Soon after the initial
pop occurred, however, the price of Facebook began to drop. As was subsequently reported, the
drop occurred when investors who had been informed of Facebook’s deteriorating revenue began
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to cash out, selling their shares at $42 in order to capture the quick gain and eliminate their
exposure to a stock that, unbeknownst to the market, had become far less valuable. As The New
York Times reported on May 22:
But Facebook shares quickly began to tumble [after opening at $42]. Oneinvestor, after being briefed on Facebook’s revised forecast, unloaded all of itsholdings in the first hour of trading, according to Scott Sweet, the founder of theIPO boutique, who advises mutual funds, hedge funds and individuals. Theinvestor sold hundreds of thousands of shares at about $42. “They knew the jigwas up,” Mr. Sweet said.
157. Thus, by approximately 11:45 a.m., Facebook stock had dropped close to the IPO
price of $38. Facebook stock was thus swiftly headed below the offering price on the first
trading day, and appeared certain to become a broken issue. To prevent this outcome, the
underwriters were forced to aggressively and immediately prop up the share price by buying
massive amounts of stock. Each time the stock came close to dropping below $38 in the face of
massive selling, the underwriters were forced to “defend” the IPO price by buying huge blocks
of stock at $38 per share to ensure that the stock price never dipped below that line.
158. As the lead underwriter for the IPO, Morgan Stanley was responsible for leading
the effort to “defend” the IPO price by buying tens of millions of Facebook shares in the open
market. The shares that Morgan Stanley purchased were not retained by the underwriters, but
rather were used to cover a short position that had been created when the underwriters sold the
overallotment into the market at the time of the IPO. The underwriters sold the overallotment
into the market at the time of the IPO without having previously purchased those shares from
Facebook, thereby creating a “short” position equal to the size of the overallotment, which was
approximately 63 million shares. To support Facebook’s stock price on May 18, Morgan Stanley
began to cover this short position by buying back as much as 63 million Facebook shares at
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prices of $38 per share or higher. As The Wall Street Journal reported in a May 19, 2012 article
titled “Facebook’s Launch Sputters – Underwriters Forced to Prop Up IPO of Social Network:”
The stock had been widely predicted to soar on its first day. Instead, up until the
closing moments of the trading sessions, Facebook’s underwriters battled to keepthe stock from slipping below its offering price of $38 per share. Such a stumblewould have been a significant embarrassment, particularly for a prominent newissue like Facebook, the most heavily traded IPO of all time. … Morgan Stanleywas forced to buy Facebook shares as the price slid toward $38 in order to preventthe price from crossing into negative territory…. Morgan Stanley … had to dipinto an emergency reserve of around 63 million Facebook shares – worth morethan $2.3 billion at the offer price – to boost the price and create a floor around$38 a share…. In successful IPOs, the reserve, known as the “over-allotment” or“green shoe,” is used to meet soaring demand but in this case, it was used to propup Facebook’s ailing share price.
159.
As Morgan Stanley battled to keep Facebook’s stock price from dipping below
$38, the trading volume in Facebook shares reached enormous levels on May 18. That day, more
than 573 million shares of Facebook were traded – the largest volume in history for a Company’s
IPO. “For perspective, that is roughly equal to the combined trading volume of 28 of the 30
stocks in the Dow Jones industrial average,” The Associated Press reported. Facebook stock
closed essentially flat at $38.23. As The Washington Post reported, “[s]hare prices would have
plunged immediately if not for the intervention of Morgan Stanley.”
160. Facebook’s debut was officially a disappointment. Reuters reported that the
“Historic Facebook debut falls short of expectations. … ‘We have got some unhappy guys out
there,’ said Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on
Wall Street. ‘They were hoping for Facebook to be considerably better. I bet there are a lot of
disappointed people in the market.” Similarly, the San Jose Mercury News reported that analysts
had called the trading debut “surprising and disappointing.”
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J. Facebook Stock Collapses On Monday And Tuesday As The Truth Emerges
161. After the close of the market on Friday, May 18, and continuing through the next
two trading days, news of the decline in Facebook’s expected revenues, including the fact that
the lead underwriters had cut their revenue estimates in advance of the IPO, began to emerge.
Only hours after the close of Facebook’s first day of public trading, at approximately 10 p.m. on
Friday, May 18, Reuters reported a piece of stunning news. Specifically, Reuters revealed that
“Facebook [] altered its guidance for research earnings last week, during the road show, a rare
and disruptive move.” As Reuters further reported, the fact that Facebook cut its guidance
contributed to the stock’s “rocky first day of trading,” and was a reason why “Facebook’s shares
spent much of the day struggling to stay above the $38 IPO price,” and the “underwriters had to
absorb mountains of stock to defend the $38 level and keep the market from dipping below it.”
162. Other members of the financial press quickly picked up the Reuters report and
wrote that news of Facebook’s lowered guidance significantly altered the mix of information in
the marketplace concerning Facebook’s performance and value. For example, at approximately
7:30 a.m. on Saturday, May 19, Business Insider reported that the lowered guidance was “highly
material information,” and the selective disclosure of that information represented “the exact sort
of unfair symmetry that securities laws are designed to prevent:”
Earnings guidance is highly material information.… Any time any companygives any sort of forecast, stocks move – because the forecast offers a very wellinformed view of the future by those who have the most up-to-date informationabout a company’s business. … [I]f Facebook really had “reduced guidance”mid-way through a series of meetings designed for the sole purpose of selling the
stock this would have been even more highly material information. [S]uch a latechange in guidance would mean that Facebook’s business was deterioratingrapidly – between the start of the roadshow and the middle of the roadshow. Anytime a business outlook deteriorates that rapidly, alarm bells start going off onWall Street, and stocks plunge.
[N]ow Reuters has just reported [that] “Facebook [] altered its guidance forresearch earnings last week, during the roadshow, a rare and disruptive move.”
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Hmmm. If this really happened, anyone who placed an order for Facebook whowas unaware that 1) Facebook had issued any sort of earnings guidance, and 2)reduced that guidance during the roadshow, has every right to be furious.Because this would have been highly material information that some investorshad and others didn’t – the exact sort of unfair asymmetry that securities laws are
designed to prevent.
163. On Monday, May 21, the first trading day after it was revealed that Facebook had
cut its guidance during the roadshow, Facebook shares declined significantly on extremely high
volume. Morgan Stanley’s efforts to prop up Facebook stock were overwhelmed by the immense
selling pressure caused by news of Facebook’s reduced guidance, and Facebook opened at
$36.53, far below the IPO price, and continued to fall in the opening minutes of trading. As
Reuters reported on May 21, Facebook stock declined so rapidly at the open that it triggered
NASDAQ’s “circuit breakers” banning short sales in order to prevent any additional pressure on
the downward spiraling stock:
The drop was so steep that circuit breakers kicked in a few minutes after the opento restrict short sales in the stock, according to a notice from Nasdaq. … Withoutthat same level of defense [from Morgan Stanley], [Facebook] shares fell $4.50 to$33.73 in the first 1-1/2 hours of trading. That represented a decline of 11.8 percent from Friday’s close and 25 percent from the intra-day high of $45 pershare. … Volume was again massive, with more than 96 million shares tradinghands by 11 a.m., making it by far the most active stock on the U.S. market.
164. Facebook shares closed on May 21 at $34.03, a decline of nearly 11 percent from
the Company’s IPO price. Volume for the day was extraordinarily heavy, with more than 168
million shares traded in total. In a single day, this precipitous decline in the value of Facebook
stock wiped out more than $1.6 billion of the Company’s market capitalization.
165.
At approximately 1 a.m. on May 22, Reuters issued a report which revealed new
significant facts about Facebook’s lowered revenue estimates. Specifically, Reuters reported that
lead underwriters Morgan Stanley, J.P. Morgan, and Goldman Sachs had “significantly” cut their
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revenue forecasts for Facebook in the middle of the roadshow, but appeared to have told only a
few “major clients” about this highly “negative” and “shock[ing]” development:
In the run-up to Facebook’s $16 billion IPO, Morgan Stanley, the lead
underwriter on the deal, unexpectedly delivered some negative news to majorclients: The bank’s consumer Internet analyst, Scott Devitt, was reducing hisrevenue forecasts for the company. The sudden caution very close to the hugeinitial public offering, and while an investor roadshow was underway, was a bigshock to some, said two investors who were advised of the revised forecast. Theysay it may have contributed to the weak performance of Facebook shares, whichsank on Monday – their second day of trading – to end 10 percent below the IPO price.
The people familiar with the revised Morgan Stanley projections said Devitt cuthis revenue estimate for the current second quarter significantly, and also cut hisfull-year 2012 revenue forecast.
“That deceleration freaked a lot of people out,” said one of the investors.
166. Reuters further reported that it was almost unprecedented for a lead underwriter to
significantly cut its revenue estimates in the midst of the roadshow:
“This was done during the roadshow – I’ve never seen that before in 10 years,”said a source at a mutual fund firm who was among those called by MorganStanley. Scott Sweet, senior managing partner at the research firm IPO Boutique,… said it is unusual for analysts at lead underwriters to make such changes so
close to the IPO. “That would be very, very unusual for a book runner to do that,”he said.
167. These material new facts further confirmed the significance of Facebook’s
lowered guidance, and immediately swept through the market. Before the market opened on
May 22, Business Insider reported that the news that the lead underwriters’ analysts had cut their
revenue estimates during the time period when the roadshow was occurring was a “bombshell.”
As Business Insider explained, Facebook’s reduced revenue estimates obviously were “material
information,” that significantly changed the total mix of information available to investors
considering whether to purchase Facebook stock:
And now comes some news about the Facebook IPO that buyers deserve to beoutraged about. Reuters [] is reporting that Facebook’s lead underwriters … all
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cut their earnings forecasts for the company in the middle of the IPO roadshow.This by itself is highly unusual (I’ve never seen it during 20 years in and aroundthe tech IPO business.). But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who wasconsidering an investment in Facebook. This is a huge problem, for one big
reason:
Selective dissemination. Earnings forecasts are material information, especiallywhen they are prepared by analysts who have had privileged access to companymanagement. As lead underwriters on the IPO, these analysts would have hadmuch better information about the company than anyone else. So the fact thatthese analysts suddenly all cut their earnings forecasts at the same time, during theroadshow, and then this information was not passed on to the broader public, is ahuge problem.
Any investor considering an investment in Facebook would consider an estimatecut from the underwriters’ analysts “material information.” … [D]uring themarketing of the Facebook IPO, investors who did not hear about theseunderwriter estimates were placed at a meaningful and unfair informationdisadvantage … and they suffered for it.
168. Similarly, within hours of Reuters’ report, tech news outlet Cnet also reported
that Morgan Stanley’s lowered earnings estimates for Facebook “came as a huge shock to some,
likely contributing to the lackluster performance of the social-networking giant’s stock” and
“sink[ing] the … much anticipated offering well before its first trade.” During trading on May
22, The Wall Street Journal reported that “investors are angry” to learn that Facebook’s
underwriters lowered “their financial forecasts for the company while it was holding IPO
roadshow meetings,” and that Facebook shares were “slid[ing] sharply” as a result of this
revelation. Shortly after the market opened on May 22, Forbes also reported that, “Particularly
troubling is if the underwriters only notified select clients of their more cautious outlook on
Facebook’s growth, at a time when both the price range and the size of the offering were soon to
be increased,” and noted that Facebook stock had fallen more than 6.5% “in early trading” after
the release of this news.
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169. Indeed, on May 22, Facebook shares plunged once more. Facebook stock opened
the day down sharply at $32.61, and closed down at $31 per share, a decrease of another 9%, on
extremely high volume of almost 102 million shares traded. The financial press widely reported
that the “shocking” news of the revenue cuts had caused the nearly unprecedented decline in
Facebook stock between May 21 and 22. For example, as Reuters reported after trading on May
22:
Investors expressed disappointment, skepticism and even shock on Tuesday afterlearning that an analyst at lead underwriter Morgan Stanley cut his Facebookrevenue forecasts in the days before the company’s initial public offering –information that apparently did not reach small investors before the stock went
public and subsequently tumbled.
170. In sum, in just two trading days over May 21 and 22, Facebook’s second and third
trading days as a public company, its shares had fallen $7 per share – or more than 18% from the
IPO price – wiping out billions of dollars of Facebook’s market capitalization. While the market
had believed less than a week ago that Facebook’s IPO would go down as a momentous success,
the IPO was now an historic failure: the collapse in Facebook’s stock on May 21 and 22 made
the IPO the single worst performing initial public offering in 10 years, prompting Bloomberg to
call it an “epic fail” and label it the “flop of the decade.”
K. The Financial Media Acknowledges That The Declines In Facebook’s Revenue
Estimates Were Not Conveyed By Facebook’s Public Disclosures, And Significantly
Altered The Total Mix Of Information
171. Following the disclosure of the declines in Facebook’s revenue estimates,
contemporaneous market commentators continued to widely report that this highly material
information was not disclosed in Facebook’s Registration Statement, and that its belated
disclosure significantly altered the total mix of information in the marketplace. For example, on
May 23, 2012, Venture Beat reported that the Company’s revenue cuts were “material
information” and that the disclosures in the Registration Statement were “woefully short on hard
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data,” causing “institutional and retail investors [to] take the hit as Facebook’s stock value
tanked” when news about these facts emerged after the IPO.
172. Venture Beat also quoted the CEO of research firm PrivCo, who concluded that
the “revisions to Facebook’s earnings estimates” were “enormously material changes” that
“absolutely” should have been disclosed in the Registration Statement because they
“dramatically change the valuation of the company.” As this analyst stated:
“The reduction to Facebook’s forecasts of this magnitude – reducing the revenuegrowth rate by over 6 percentage points – is so material that it should absolutelyhave been disclosed in a revised S-1 filing before the IPO pricing,” [the analyst]said. “The combined net effect for Facebook in this case of both the reduction in
the financials and the valuation multiple would have lowered Facebook’svaluation by at least one third.”
173. Similarly, Business Insider reported on May 24 that the purported disclosures in
the Registration Statement did not disclose highly material information:
Every investor on the planet deserved to know about Facebook’s sudden businessslowdown. And the fact that only a select group of institutional investors heardabout it—verbally—is outrageous. … This was selective disclosure of critical
non-public information. Facebook’s amended prospectus did not say that thecompany’s business had suddenly weakened and management’s outlook hadchanged. And that information is vastly more important than what the prospectusdid say, which was that users are growing faster than revenue.
174. On May 25, Venture Beat reported that the purported warnings in the Registration
Statement had failed to disclose critical facts that dramatically altered the information that had
been provided to investors:
In that May 9 update, Ebersman decided to use vague language when describinghow the company’s second quarter was looking. It was extremely understated,
considering what we would later find out. According to the filing, … Facebooksaid that it was experiencing the same trend in the second quarter that it had seenin the first quarter, that growth in “daily active users” (DAUs) was increasingmore rapidly than the growth in ad impressions, driven by many users’ shift tomobile devices.
Now Facebook is generally growing quickly – and its ads are growing, even ifthey are growing more slowly on mobile – and so this update itself didn’t send
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any alarm bells to most investors, and it shouldn’t have. After all, Facebook hadlong warned about this mobile problem, ever since the first IPO prospectus filingon Feb 1, that revenues could be negatively affected by its huge mobile growth, because monetizing mobile hadn’t been proven. …
Facebook’s lawyers may, in the wake of the legal mess it has gotten into, try toargue that the new May 9 language about “DAU’s increasing more rapidly thanthe increase in number of ads delivered” pointed to something more significantthan what Facebook had released before. But the reality is that this wording was just too vague to be construed by normal people as meaning anything more thanwhat had already been mentioned before. … The fact is, there is nothing withinthe S-1 update on May 9 that would give normal investors the sense that there had been a material change about Facebook’s revenue prospects.
175. As the press also widely reported, Facebook’s IPO had conclusively demonstrated
that the market was unaware of the highly material information that Facebook had selectively
disclosed, and the market had suffered badly because of it. As The Associated Press reported on
May 24:
Wall Street appears bent on convincing Main Street that the game is rigged.Investor anger is mounting over the initial public offering of Facebook stock lastweek…. Judson Gee, a financial advisor…, placed a call on Wednesday morning[May 23] to a client who had plowed $50,000 into Facebook stock on Friday, theday of the IPO. Gee said he called to tell the client, a restaurateur, about reportsthat Morgan Stanley had told only select customers about an analyst’s reduction
of revenue estimates for Facebook just before the IPO. “I could see his jawdropping on the other side,” Gee said. “A lot of expletives came out.” He saidhis client had asked “How can they give that information to the big boys and notgive it to the public?”
V. THE NEGATIVE CHANGE IN FACEBOOK’S REVENUE ESTIMATES
SIGNIFICANTLY ALTERED THE TOTAL MIX OF INFORMATION IN THE
MARKETPLACE
176. The following facts establish that the decline in Facebook’s estimated revenue
was highly material and significantly altered the total mix of information in the marketplace
before Facebook’s IPO.
177. First, Facebook’s own actions confirm that the declines in the Company’s
estimated revenues were highly material and significantly altered the total mix of information in
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the market. As set forth above at paragraphs 125-134, immediately after Facebook filed its
amended Registration Statement on May 9, 2012, Facebook’s Treasurer made nineteen separate
phone calls over the course of three days to the Syndicate Analysts, precisely to inform them of
the material information that was omitted from the Registration Statement: namely, that the
Company’s business had been materially impacted by the shift to mobile devices and, as a result,
Facebook had significantly reduced its revenue estimates for the second quarter and the year.
Had this information been immaterial, or part of the total mix of information in the market,
Facebook obviously would not have felt the need to make these nineteen separate phone calls to
the Syndicate Analysts.
178.
Second, the actions of the lead underwriters confirm that the declines in
Facebook’s estimated revenues were material and significantly altered the total mix of
information in the market. As set forth above at paragraphs 125-134, immediately after being
informed of Facebook’s lowered guidance, the lead underwriters determined that the change in
Facebook’s financial condition was so significant that it had to be disclosed to the Syndicate
Analysts. Precisely because the amended Registration Statement filed on May 9 did not disclose
or otherwise convey the fact that Facebook’s business had been materially impaired, lead
underwriter Morgan Stanley drafted a detailed script disclosing the declines in Facebook’s
estimated revenues, which Facebook read from when it provided this new information to the
Syndicate Analysts during the 19 separate phone calls that Facebook conducted after filing its
amended Registration Statement. If the information about the declines in Facebook’s estimated
revenues was immaterial, or had otherwise been conveyed by the amended Registration
Statement, Morgan Stanley would not have determined that Facebook needed to provide this
information separately to the Syndicate Analysts.
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179. Third, the actions of the Syndicate Analysts upon being informed of Facebook’s
lowered guidance confirm that this information was highly material and significantly altered the
total mix of information in the market. As set forth above in paragraphs 135-137, immediately
after learning of Facebook’s lower revenue estimates, the Syndicate Analysts significantly
reduced their own estimates of Facebook’s revenue to reflect the impact of the new information.
The Syndicate Analysts then held a series of calls with a select group of the Company’s potential
investors and informed them of their lowered estimates. If the new information concerning
Facebook’s revenue declines was unimportant or already part of the total mix of information in
the market, the Syndicate Analysts would not have significantly lowered their revenue estimates
based on that information, and would not have felt the need to hold a series of calls with a select
group of Facebook’s potential investors specifically to inform them of this development.
180. Fourth, the reactions of the select investors who were informed of the reductions
in the Syndicate Analysts’ estimates confirm that the decline in Facebook’s revenue was highly
material, and significantly altered the total mix of information in the market. As set forth above
at paragraphs 138-139, the financial press reported that the lowered revenue figures were a “big
shock” to those investors who received them, raised “a significant red flag” about Facebook’s
financial condition, and the “deceleration [showed by the lower revenue figures] freaked a lot of
people out.” Many investors who were informed of the lowered revenue estimates cancelled or
reduced their orders, or reduced the price they were willing to pay for Facebook stock.
181. Fifth, the contemporaneous reaction of the financial media following the public
disclosure of the decline in Facebook’s revenue estimates confirms that this information was
highly material, and significantly altered the total mix of information. Significantly, as set forth
above at paragraphs 162, 167, 171-174, the financial media specifically reported that the change
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in Facebook’s revenue estimates was neither disclosed nor conveyed by Facebook’s Registration
Statement, and that such information significantly altered the total mix of information in the
market. For example, Business Insider reported that “Facebook’s amended prospectus did not
say that the company’s business had suddenly weakened and management’s outlook had
changed. And that information is vastly more important than what the prospectus did say, which
was that users are growing faster than revenue.” Similarly, Venture Beat reported that the
disclosures in Facebook’s May 9 amended Registration Statement were “extremely understated,”
“vague,” and failed to disclose highly material information. As Venture Beat explained, the May
9 Registration Statement merely stated that “the growth in daily active users [] was increasing
more rapidly than the growth in ad impressions, driven by many users’ shift to mobile devices.”
Because this disclosure represented that Facebook’s ads “are growing, even if they are growing
more slowly on mobile … this update itself didn’t send any alarm bells to most investors, and it
shouldn’t have…. [T]he reality is that this wording was just too vague to be construed by normal
people as meaning anything more than what had already been mentioned before. … The fact is,
there is nothing within the S-1 update on May 9 that would give normal investors the sense that
there had been a material change about Facebook’s revenue prospects.”
182. Sixth, the reaction of the market after Facebook filed the May 9 amended
Registration Statement confirms that it did not put the market on notice of the fact that
Facebook’s business had been materially impaired. As set forth above at paragraph 142, after
Facebook filed its amended Registration Statement on May 9, the analysts who had not been told
of the decline in Facebook’s estimated revenues continued to widely expect Facebook to report
revenues that were in-line with Facebook’s original estimates from April. Indeed, as of May 18,
the date that Facebook went public, analysts’ consensus estimates according to Thomson’s
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Institutional Brokers’ Estimate System were for Facebook to report revenues of more than $1.2
billion for the second quarter and $5 billion for the year – exactly in line with Facebook’s
original guidance. Had the May 9 amended Registration Statement conveyed to the market the
fact that increasing mobile usage and Facebook’s product decisions had materially impaired the
Company’s business, these analysts would not have continued to expect Facebook to report
revenues that were in line with its original guidance.
183. Seventh, the reaction of investors following the filing of the amended Registration
Statement on May 9 confirms that the amended Registration Statement did not put investors on
notice of the fact that Facebook’s business had been materially impaired. As noted above at
paragraphs 143-147, in the week before the IPO, investor demand for Facebook shares spiked to
“astronomical” and “rampant” levels because Facebook had succeeded in “convincing investors
that Facebook can make money from mobile users.” Because of this extraordinary surge in
investor demand, on May 15 and 16 – nearly a week after Facebook filed its amended
Registration Statement – Facebook significantly increased both the size of the IPO and the price
of its shares – something that has been done in only 3.4% of all IPOs since 1995. Had investors
been on notice of the pronounced decline in Facebook’s revenues prior to the IPO, investor
demand for Facebook shares would not have risen to “astronomical” levels, and Facebook would
not have been able to take the extremely rare step of significantly increasing both the size of the
IPO and its price days before the offering occurred.
184. Eighth, the reaction of the market when the news of Facebook’s revenue declines
was publicly revealed establishes that this information was highly material, and significantly
altered the total mix of information that previously existed in the market. As set forth above at
paragraphs 161-170, when news of Facebook’s and the Syndicate Analysts’ reduced estimates
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was disclosed to the market, investors reacted with “shock” and “anger,” and Facebook stock fell
precipitously, declining nearly 11% on May 21, and approximately 9% on May 22, on extremely
high trading volume both days. This two-day decline destroyed billions of dollars of Facebook’s
market capitalization. The financial press specifically attributed these declines to the disclosure
of Facebook’s and the Syndicate Analysts’ reduced estimates, stating that these revelations
caused Facebook shares to “slide sharply” on May 21 and 22. If the information concerning
Facebook’s revenue declines had been immaterial or otherwise part of the total mix of
information in the market, Facebook’s stock price would not have collapsed when this
information was revealed.
185.
Ninth, Facebook’s own disclosures establish the importance of Facebook’s
undisclosed revenue declines to the market. As noted above at paragraphs 89-97, the
Registration Statement repeatedly highlighted that Facebook’s revenue and advertising revenue
were Facebook’s most significant financial metrics. Similarly, the declines in these key metrics
were driven by a factor – increasing mobile usage – that the Registration Statement identified as
“critical” to Facebook’s business. Moreover, Facebook itself recognized that any decline in its
future revenues impacted the value of its stock, stating in the Registration Statement that its
“business prospects” were a “factor[] [it] considered in determining the initial public offering
price.” Accordingly, the disclosures in the Registration Statement demonstrate that the reduction
in Facebook’s estimated revenues was highly material to investors considering whether to
purchase Facebook stock.
VI. MATERIALLY UNTRUE AND MISLEADING STATEMENTS AND OMISSIONS
186.
Facebook filed its initial Registration Statement and Prospectus with the SEC on
Form S-1 on February 1, 2012. Facebook amended the Registration Statement and Prospectus
eight subsequent times, filing the final amended Registration Statement on May 16, 2012.
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Among other things, the Registration Statement described Facebook’s business, set forth its
financial results, and provided the terms of the IPO.
187. On May 17, 2012, the Registration Statement became effective. That day,
Facebook and its selling stockholders sold more than 421 million shares of Class A common
stock to the public in the Company’s IPO, at $38 per share. Through the IPO, Facebook and its
selling stockholders received proceeds of more than $16 billion. Facebook stock began trading
on the NASDAQ on May 18, 2012.
188. As set forth in detail below, the Registration Statement pursuant to which
Facebook’s common stock was issued was materially untrue and misleading for several reasons:
a.
First, the Registration Statement contained a series of statements in whichFacebook purported to warn investors only that increasing mobile usage“may” negatively affect its revenues. These statements were materially untrueand misleading because Facebook had already determined that increasingmobile usage had negatively affected its revenues to a material degree.
b. Second, the Registration Statement contained a series of statements in whichFacebook purported to warn investors only that its product decisions “may”negatively affect its revenues. These statements were materially untrue andmisleading because Facebook had already determined that its productdecisions had negatively affected its revenues to a material degree.
c. Third, the Registration Statement failed to disclose the information required by Item 303 of Regulation S-K, which required Facebook to disclose thatincreasing mobile usage and the Company’s product decisions had had amaterial negative impact on its revenues, and the magnitude of that impact.
d. Fourth, the Registration Statement failed to disclose the information required by Rule 408 of SEC Regulation C, which also required Facebook to disclosethat increasing mobile usage and the Company’s product decisions had had amaterial negative impact on its revenues, and that Facebook had alreadysignificantly lowered its estimated revenues as a result.
e. Finally, in addition to the failure to report known facts concerning thesignificant negative effects on Facebook’s revenues from increasing mobileusage and the Company’s product decisions, the Company also failed todisclose that it was going to disseminate this revised financial information tothe Syndicate Analysts only.
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189. In a section of the Registration Statement and Prospectus called “Risk Factors,”
Facebook purported to warn investors that:
Growth in use of Facebook through mobile products, where our ability to
monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.
We had 488 million MAUs [monthly active users] who used Facebook mobile
products in March 2012. While most of our mobile users also access Facebook
through personal computers, we anticipate that the rate of growth in mobileusage will exceed the growth in usage through personal computers for the
foreseeable future, in part due to our focus on developing mobile products to
encourage mobile usage of Facebook. We have historically not shown ads to
users accessing Facebook through mobile apps or our mobile website. In March2012, we began to include sponsored stories in users’ mobile News Feeds.
However, we do not currently directly generate any meaningful revenue from the
use of Facebook mobile products, and our ability to do so successfully isunproven. We believe this increased usage of Facebook on mobile devices has
contributed to the recent trend of our daily active users (DAUs) increasing more
rapidly than the increase in the number of ads delivered. If users increasinglyaccess Facebook mobile products as a substitute for access through personalcomputers, and if we are unable to successfully implement monetizationstrategies for our mobile users, or if we incur excessive expenses in this effort,our financial performance and ability to grow revenue would be negativelyaffected.
190. This statement was materially untrue and misleading. It was misleading to
represent that increasing mobile usage might negatively impact Facebook’s revenue when
Facebook had already determined that increasing mobile usage had “negatively affect[ed]” its
“revenue and financial results.” Indeed, prior to the IPO, Facebook had already determined that,
as a direct result of increasing mobile usage, the Company’s estimated revenues for the second
quarter of 2012 had declined by as much as 8.33%, and its estimated annual revenues had
declined by as much as 3.5%. As set forth above at paragraphs 176-185, these declines in
Facebook’s expected revenues for the second quarter of 2012 and the year were highly material
and significantly altered the total mix of information in the market.
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191. In the “Risk Factors” section of the Registration Statement and Prospectus,
Facebook also purported to warn investors that:
We generate a substantial majority of our revenue from advertising. The loss of
advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.
The substantial majority of our revenue is currently generated from third partiesadvertising on Facebook. In 2009, 2010, and 2011 and the first quarter of 2011and 2012, advertising accounted for 98%, 95%, 85%, 87%, and 82%,respectively, of our revenue. As is common in the industry, our advertiserstypically do not have long-term advertising commitments with us. Many of ouradvertisers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products, such assponsored stories and ads with social context, as experimental and unproven.Advertisers will not continue to do business with us, or they will reduce the pricesthey are willing to pay to advertise with us, if we do not deliver ads and othercommercial content in an effective manner, or if they do not believe that theirinvestment in advertising with us will generate a competitive return relative toother alternatives. Our advertising revenue could be adversely affected by anumber of other factors, including:
…
• increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement
with Facebook on personal computers where we monetize usage by displayingads and other commercial content;
• product changes or inventory management decisions we may make that reducethe size, frequency, or relative prominence of ads and other commercial contentdisplayed on Facebook;
…
The occurrence of any of these or other factors could result in a reduction indemand for our ads and other commercial content, which may reduce the prices
we receive for our ads and other commercial content, or cause advertisers to stopadvertising with us altogether, either of which would negatively affect ourrevenue and financial results.
192. This statement was materially untrue and misleading. It was misleading to
represent that increasing mobile usage and the Company’s product decisions might negatively
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impact revenue when Facebook had already determined that these factors had “adversely
affected” its advertising revenues. Indeed, prior to the IPO, Facebook had already determined
that, as a direct result of these factors, the Company’s estimated revenues for the second quarter
of 2012 had declined by as much as 8.33%, and its estimated annual revenues had declined by as
much as 3.5%. As set forth above at paragraphs 176-185, these declines in Facebook’s expected
revenues for the second quarter of 2012 and the year were highly material and significantly
altered the total mix of information in the market.
193. In the disclosure in the Company’s amended Registration Statement and
Prospectus filed on May 9 – one day after the Company revised its expected revenues for the
second quarter and year sharply downward due to the negative impact of increasing mobile usage
and the Company’s product decisions – Facebook continued to emphasize that any potentially
negative impact of these factors was uncertain. Specifically, this disclosure stated that:
Based on our experience in the second quarter of 2012 to date, the trend we sawin the first quarter of DAUs [daily active users] increasing more rapidly than theincrease in number of ads delivered has continued. We believe this trend isdriven in part by increased usage of Facebook on mobile devices where we haveonly recently began showing an immaterial number of sponsored stories in NewsFeed, and in part due to certain pages having fewer ads per page as a result of product decisions. For additional information on factors that may affect thesematters, see “Risk Factors—Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results” and“Risk Factors—Our culture emphasizes rapid innovation and prioritizes userengagement over short-term financial results.”
194. This statement was materially untrue and misleading. It was misleading to
represent that increasing mobile usage and the Company’s product decisions might negatively
impact its revenue when Facebook had already determined that these factors had “negatively
affect[ed]” its “revenue and financial results.” Indeed, prior to the IPO, Facebook had already
determined that, as a direct result of these factors, the Company’s estimated revenues for the
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second quarter of 2012 had declined by as much as 8.33%, and its estimated annual revenues had
declined by as much as 3.5%. As set forth above at paragraphs 176-185, these declines in
Facebook’s expected revenues for the second quarter of 2012 and the year were highly material
and significantly altered the total mix of information in the market.
195. Similarly, in the “Risk Factors” section of the Registration Statement and
Prospectus, Facebook also purported to warn investors that its product decisions might
negatively impact its revenue, stating:
[W]e frequently make product decisions that may reduce our short-termrevenue or profitability if we believe that the decisions are consistent with our
mission and benefit the aggregate user experience and will thereby improve ourfinancial performance over the long term. As an example, we believe that therecent trend of our DAUs increasing more rapidly than the increase in thenumber of ads delivered has been due in part to certain pages having fewer ads per page as a result of these kinds of product decisions. These decisions maynot produce the long-term benefits that we expect, in which case our usergrowth and engagement, our relationships with developers and advertisers, andour business and results of operations could be harmed.
196. For the reasons set forth above at paragraph 194, this statement was materially
untrue and misleading. In particular, it was materially misleading to state that the Company’s
product decisions “may reduce” its revenue when Facebook had already determined that its
product decisions had reduced its advertising revenues.
197. The Registration Statement and Prospectus was also materially untrue and
misleading because it failed to disclose the information required by Item 303 of Regulation S-K.
Item 303 requires the disclosure of all “known trends … that have had or that the registrant
reasonably expects will have a material … unfavorable impact on … revenues.” In addition to
the identification of such “known trends,” Item 303 specifically requires disclosure of (i) whether
those trends have had or are reasonably expected to have a material negative impact on revenue;
and (ii) the extent of any such impact on revenue.
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198. Accordingly, as the SEC has repeatedly emphasized, the “specific provisions in
Item 303 [set forth above] require disclosure of forward-looking information.” Indeed, the SEC
has stated that Item 303 is “intended to give the investor an opportunity to look at the company
through the eyes of management by providing both a short and long-term analysis of the business
of the company … with particular emphasis on the registrant’s prospects for the future.” See
Management’s Discussion and Analysis of Financial Condition and Results of Operation,
Securities Act Release No. 6835, 1989 WL 1092885, at *3 (May 18, 1989). Thus, “material-
forward looking information regarding known material trends and uncertainties is required to be
disclosed as part of the required discussion of those matters and the analysis of their effects.”
See Commission Guidance Regarding Management’s Discussion and Analysis of Financial
Condition and Results of Operation, Securities Act Release No. 8350, 2003 WL 22996757, at
*11 (December 29, 2003).
199. Disclosure of forward-looking information concerning the registrant’s revenue is
required by Item 303 “where a trend, demand, commitment, event or uncertainty is both [i]
presently known to management and [ii] reasonably likely to have material effects on the
registrant’s financial condition or results of operations.” See Management’s Discussion and
Analysis of Financial Condition and Results of Operation, Securities Act Release No. 6835, 1989
WL 1092885, at *4 (May 18, 1989).
200. As set forth in detail above, both of these conditions were satisfied here. First, as
set forth above at paragraphs 122-134, the two trends that were negatively impacting Facebook’s
revenue – namely, increasing mobile usage and the Company’s product decisions – were widely
“known” to Facebook’s management prior to the IPO. Second, the facts set forth above establish
that these two trends were “reasonably likely to have material effects on [Facebook’s] financial
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condition or results of operations.” Specifically, as set forth above at paragraphs 122-134, as a
direct result of the impact of these two trends, Facebook reduced its revenue estimates for the
second quarter and the year by material amounts, and immediately provided its lowered guidance
to the Syndicate Analysts so that they could inform a select group of Facebook’s potential
investors of this highly significant development.
201. Accordingly, pursuant to Item 303, Defendants were required 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 revenue.
Nevertheless, Defendants failed to disclose any of this information in the Registration Statement
and Prospectus. Specifically, in violation of Item 303, the Registration Statement and Prospectus
failed to disclose that: (i) the known trends of increasing mobile usage and the Company’s
product decisions had had a material negative impact Facebook’s revenue for the second quarter
and the year; (ii) as a result of these trends, Facebook had decreased its expected revenue for the
second quarter of 2012 by as much as 8.33%, lowering it from as much as $1.2 billion to as little
as $1.1 billion; and (iii) as a result of these trends, Facebook had decreased its expected revenue
for the year by as much as 3.5%, lowering it from $5 billion to as little as $4.825 billion.
202. Finally, the Registration Statement and Prospectus were also materially false and
misleading because they failed to disclose the information required by Rule 408 of SEC
Regulation C. Rule 408 requires that, “[i]n addition to the information expressly required to be
included in a registration statement, there shall be added such further material information, if
any, as may be necessary to make the required statements, in light of the circumstances under
which they are made, not misleading.” 17 C.F.R. § 230.408(a). The Registration Statement and
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Prospectus in their entirety, and as set forth specifically above, were materially untrue and
misleading and omitted to state material information necessary to make them not misleading, in
violation of Facebook’s duty of disclosure under Rule 408. The Registration Statement and
Prospectus specifically failed to disclose: (i) that growing mobile usage and Facebook’s product
decisions had already had a material unfavorable impact on the Company’s revenues; and (ii)
that Facebook had significantly lowered its estimated revenues as a direct result of that impact.
VII. CLASS ACTION ALLEGATIONS
203. Lead Plaintiffs bring this action on behalf of themselves and as a class action
pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of a Class
consisting of all persons and entities who purchased or otherwise acquired the Class A common
stock of Facebook in or traceable to Facebook’s IPO, and were damaged thereby. Excluded from
the Class are Defendants (as set forth herein), and present or former executive officers of
Facebook and their immediate family members (as defined in 17 C.F.R. § 229.404, Instructions
(1)(a)(iii) and (1)(b)(ii)).
204.
The members of the Class are so numerous that joinder of all members is
impracticable. For example, Facebook issued 421,233,615 shares of Class A common stock in
its IPO, with an underwriter option to issue an additional 63,185,042 shares of Class A common
stock. After the IPO, Facebook stock actively traded on the NASDAQ. While the exact number
of Class members is unknown to Lead Plaintiffs at this time, Lead Plaintiffs believe that Class
members number in the thousands, if not millions.
205. Lead Plaintiffs’ claims are typical of the claims of the members of the Class.
Lead Plaintiffs and the other members of the Class purchased or otherwise acquired Facebook
Class A common stock in the IPO and sustained damages as a result of Defendants’ conduct
complained of herein.
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206. Lead Plaintiffs will fairly and adequately protect the interests of the members of
the Class and have retained counsel competent and experienced in class and securities litigation.
Lead Plaintiffs have no interests that are adverse or antagonistic to the Class.
207. Common questions of law and fact exist as to all members of the Class, and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. whether Defendants violated the Securities Act as alleged herein;
b. whether the Registration Statement and Prospectus containedmaterially untrue statements or failed to disclose material facts;and
c. the extent of damages sustained by the Class, and the propermeasure of damages.
208. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. Because the damages suffered by individual members of the
Class may be relatively small, the expense and burden of individual litigation make it
impracticable for Class members individually to seek redress for the wrongful conduct alleged
herein. There will be no difficulty in managing this action as a class action.
209. The names and addresses of those persons and entities that purchased or otherwise
acquired Facebook’s Class A common stock in or traceable to the IPO are available from the
Company’s transfer agent(s) or other sources. Notice may be provided to such class members
via first-class mail using techniques and a form of notice similar to those customarily used in
securities class actions.
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VIII. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR AND
BESPEAKS CAUTION DOCTRINE
210. The statutory safe harbor and/or bespeaks caution doctrine applicable to forward-
looking statements under certain circumstances do not apply to any of the untrue and misleading
statements pleaded in this Complaint.
211. First, Section 27(A) of the Securities Act provides that the statutory safe harbor
“shall not apply to a forward-looking statement … that is … made in connection with an initial
public offering.” 15 U.S.C. § 77z-2(b)(2)(D).
212. Second, none of the misstatements complained of herein were forward-looking
statements. Rather, they were misstatements concerning current facts and conditions existing at
the time the statements were made. Specifically, as set forth above at paragraphs 189-196,
Facebook’s Registration Statement and Prospectus misleadingly stated that increasing mobile
usage and the Company’s product decision might negatively impact Facebook’s revenue when
Facebook had already determined before the IPO that these factors had negatively impacted its
estimated revenues for the second quarter of 2012 and the year. Accordingly, the materially
untrue statements and omissions complained of herein concerned the then-existing fact that, as of
the time of the IPO, growing mobile usage and the Company’s product decisions had had a
material negative impact on Facebook’s business.
213. Third, those statements were not accompanied by meaningful cautionary language
identifying important facts that could cause actual results to differ materially from those in the
statements. As set forth above in detail, then-existing facts contradicted Defendants’ statements
regarding the impact of mobile usage and the Company’s product decisions on its revenue.
Given the then-existing facts contradicting Defendants’ statements, the generalized risk
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disclosures made by Defendants were not sufficient to insulate Defendants from liability for their
materially untrue and misleading statements.
IX. CAUSES OF ACTION
COUNT I
For Violations Of Section 11 Of The Securities Act
(Against Defendants Zuckerberg, Ebersman, Spillane, The Facebook Board, And The
Underwriter Defendants)
214. This claim does not sound in fraud. For the purposes of this Section 11 claim,
Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent, which
are not elements of a claim under Section 11 of the Securities Act. This claim is based solely on
strict liability as to Facebook, and negligence as to the remaining Defendants.
215. Lead Plaintiffs repeat and reallege the allegations above as if fully set forth
herein.
216. This claim is brought against the Defendants Zuckerberg, Ebersman, Spillane, the
Facebook Board, and the Underwriter Defendants pursuant to Section 11 of the Securities Act,
15 U.S.C. § 77k, on behalf of all proposed Class members who purchased or otherwise acquired
Facebook’s Class A common stock in or traceable to the IPO, and were damaged thereby.
217. At the time of the IPO, the Registration Statement, including the Prospectus,
contained untrue statements of material fact, omitted to state facts necessary to make the
statements made therein not misleading, and failed to disclose required material information, as
set forth above at paragraphs 188-202.
218. Facebook is the issuer of the Class A common stock sold pursuant to the
Registration Statement. As the issuer of the stock, Facebook is strictly liable to the members of
the Class who purchased Class A common stock in or traceable to the IPO for the materially
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untrue statements and omissions that appeared in or were omitted from the Registration
Statement.
219. Defendant Zuckerberg and the Facebook Board were signatories of the untrue and
misleading Registration Statement, and were directors of Facebook at the time of the IPO.
220. Defendants Ebersman and Spillane were signatories of the untrue and misleading
Registration Statement.
221. Each of Defendants Zuckerberg, Ebersman, Spillane and the Facebook Board is
unable to establish an affirmative defense based on a reasonable and diligent investigation of the
statements contained in the Registration Statement. These Defendants did not make a reasonable
investigation or possess reasonable grounds to believe that the statements contained in the
Registration Statement were true and not misleading, and that there were no omissions of any
material fact. Accordingly, these Defendants acted negligently, and are liable to the members of
the Class who purchased or otherwise acquired the Class A common stock in or traceable to the
IPO.
222.
The Underwriter Defendants were underwriters of the IPO.
223. Each of the Underwriter Defendants is unable to establish an affirmative defense
based on a reasonable and diligent investigation of the statements contained in the Registration
Statement. The Underwriter Defendants did not make a reasonable investigation or possess
reasonable grounds to believe that the statements contained in the Registration Statement were
true and not misleading, and that there were no omissions of any material fact. Accordingly, the
Underwriter Defendants acted negligently, and are liable to the members of the Class who
purchased or otherwise acquired the Class A common stock in or traceable to the IPO.
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224. Lead Plaintiffs and other members of the Class purchased Class A common stock
issued under or traceable to the Registration Statement.
225. Lead Plaintiffs and other members of the Class did not know, or in the exercise of
reasonable diligence could not have known, of the inaccurate statements and omissions
contained therein when they purchased or otherwise acquired the Class A common stock of
Facebook.
226. Lead Plaintiffs and the other members of the Class who purchased the Class A
common stock pursuant to the Registration Statement suffered substantial damages as a result of
the untrue statements and omissions of material facts in the Registration Statement, as they either
sold these shares at prices below the IPO price of $38 per share or still held shares as of the date
of the initial complaint containing claims under the Securities Act, May 22, 2012, when the
closing price of the common stock was $31 per share, which was below the IPO price of $38 per
share.
227. This claim is brought within the applicable statute of limitations.
228.
By reason of the foregoing, the Defendants named in this Count have violated
Section 11 of the Securities Act.
COUNT II
For Violations Of Section 12(a)(2) Of The Securities Act
(Against Facebook, Defendants Zuckerberg, Sandberg, and Ebersman,
and The Underwriter Defendants)
229. This claim does not sound in fraud. For the purposes of this Section 12(a)(2)
claim, Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent,
which are not elements of a claim under Section 12(a)(2) of the Securities Act. This claim is
based solely on negligence.
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230. Lead Plaintiffs repeat and reallege the allegations above as if fully set forth
herein.
231. This claim is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C.
§ 77l(a)(2), on behalf of all members of the Class who purchased Facebook Class A common
stock in the IPO, against Defendants Facebook, Zuckerberg, Sandberg, Ebersman, and the
Underwriter Defendants.
232. Each Defendant named in this Count was a seller, offeror, and/or solicitor of sales
of the common stock offered pursuant to the Registration Statement and Prospectus.
233.
Facebook was the issuer of 180,000,000 shares in the IPO for which it received
approximately $6.8 billion in proceeds. Facebook solicited the purchase of shares by virtue of
issuing the Registration Statement, Prospectus, and roadshow video, and was motived at least in
part to serve its own financial interests.
234. Defendant Zuckerberg sold 30.2 million shares in the IPO for proceeds of
approximately $1.15 billion. Zuckerberg also solicited the purchase of shares by virtue of
signing the Registration Statement containing the Prospectus, participating extensively in the
roadshow video, and making presentations and answering investor questions at Facebook’s
roadshow meetings. In making these solicitations, Zuckerberg was motivated in part to serve
Facebook’s financial interests and his own. In addition to receiving $1.15 billion in proceeds
from the IPO, the value of Zuckerberg’s retained shares was approximately $19 billion based on
the IPO price.
235. Defendant Sandberg solicited the purchase of shares by virtue of participating
extensively in the roadshow video, including making statements about Facebook’s business and
growth prospects, and making presentations and answering investor questions at Facebook’s
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roadshow meetings. Defendant Sandberg was motivated in part to serve Facebook’s financial
interest and her own. The value of Sandberg’s Facebook shares was more than $72 million based
on Facebook’s IPO price.
236. Defendant Ebersman solicited the purchase of shares by virtue of signing the
Registration Statement containing the Prospectus, participating extensively in the roadshow
video, including making statements about Facebook’s business, and making presentations and
answering investor questions at Facebook’s roadshow meetings. Defendant Ebersman was
motivated in part to serve Facebook’s financial interest and his own. The value of Ebersman’s
Facebook shares was more than $91 million based on Facebook’s IPO price.
237.
The Underwriter Defendants transferred title to Facebook stock to Lead Plaintiffs
and other members of the Class who purchased shares in the IPO, and transferred title of
Facebook stock to other underwriters and/or broker-dealers that sold those securities as agents
for the Underwriter Defendants. The Underwriter Defendants also solicited the purchase of
Facebook stock in the IPO by the Lead Plaintiffs and other members of the Class who purchased
in the IPO by means of the Registration Statement and Prospectus, motivated at least in part by
the desire to serve the Underwriter Defendants’ own financial interest and the interests of
Facebook, including but not limited to earning commissions on the sale of Facebook stock in the
IPO.
238. The Registration Statement and Prospectus contained untrue statements of
material fact or omitted to state material facts necessary in order to make the statements, in light
of the circumstances under which they were made, not misleading, as set forth more fully above.
239. Lead Plaintiffs and other members of the Class who purchased Facebook common
stock in the IPO made such purchases pursuant to the materially untrue and misleading
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Registration Statement and Prospectus, and did not know, or in the exercise of reasonable
diligence could not have known, of the untruths and omissions contained therein.
240. Lead Plaintiffs and the other members of the Class who purchased the common
stock in the IPO pursuant to the Registration Statement and Prospectus suffered substantial
damages as a result of the untrue statements and omissions of material facts in the Registration
Statement and Prospectus, as they either sold these shares at prices below the IPO price of $38
per share or still held shares as of the date of the initial complaint containing claims under the
Securities Act, when the price of the common stock was below the IPO price of $38 per share.
241.
Members of the Class who purchased the common stock pursuant to the
Registration Statement and Prospectus and still hold that stock have sustained substantial
damages as a result of the untrue statements of material facts and omissions contained therein,
for which they hereby elect to rescind and tender their common stock to the Defendants sued in
this Count in return for the consideration paid with interest. Those members of the Class who
have already sold their stock acquired in the IPO pursuant to the materially untrue and
misleading Registration Statement and Prospectus are entitled to damages from Defendants.
242. This claim is brought within the applicable statute of limitations.
243. By virtue of the foregoing, the Defendants named in this count violated Section
12(a)(2) of the Securities Act.
COUNT III
For Violations Of Section 15 Of The Securities Act
(Against the Individual Defendants)
244. This claim does not sound in fraud. For the purposes of this Section 15 claim,
Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent, which
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are not elements of a claim under Section 15 of the Securities Act. This claim is based solely on
negligence
245. This Count is asserted against the Individual Defendants for violations of Section
15 of the Securities Act, 15 U.S.C. § 77o, on behalf of all members of the Class who purchased
or otherwise acquired the Class A common stock issued pursuant to the Registration Statement.
246. At all relevant times, these Defendants were controlling persons of the Company
within the meaning of Section 15 of the Securities Act. Defendant Zuckerberg, at the time of the
filing of the Registration Statement and the IPO, served as Chairman of the Board of Directors
and Chief Executive Officer. At all relevant times, Defendant Zuckerberg retained a controlling
interest in Facebook and, following the IPO, controlled approximately 56% of the voting power
of the Company’s capital stock. Defendant Sandberg was COO of Facebook at the time of the
filing of the Registration Statement and the IPO. Defendant Ebersman was CFO at the time of
the filing of the Registration Statement and the IPO. Defendant Spillane was Facebook’s DOA at
the time of the filing of the Registration Statement and the IPO. The Facebook Board approved
the IPO and reviewed and approved the Registration Statement and Prospectus.
247. Defendants Zuckerberg, Sandberg, Ebersman, Spillane and the Facebook Board,
prior to and at the time of the IPO, participated in the operation and management of the
Company, and conducted and participated, directly and indirectly, in the conduct of Facebook’s
business affairs, including the IPO.
248. As officers and/or directors of a company engaging in an IPO, Defendants
Zuckerberg, Sandberg, Ebersman, Spillane and the Facebook Board had a duty to disseminate
accurate and truthful information with respect to Facebook’s business, financial condition and
results of operations. These Defendants participated in the preparation and dissemination of the
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Registration Statement and Prospectus, and otherwise participated in the process necessary to
conduct the IPO. Because of their positions of control and authority as senior officers and/or
directors of Facebook, these Defendants were able to, and did, control the contents of the
Registration Statement and Prospectus, which contained materially untrue information and failed
to disclose material facts.
249. By reason of the aforementioned conduct, the Individual Defendants are liable
under Section 15 of the Securities Act jointly and severally with and to the same extent as
Facebook is liable under Sections 11 and 12(a)(2) of the Securities Act, to Lead Plaintiffs and
members of the Class who purchased or otherwise acquired common stock issued pursuant to the
Registration Statement.
X. PRAYER FOR RELIEF
250. WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:
a. Determining that this action is a proper class action pursuant toRule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
b.
Awarding all damages and other remedies set forth in theSecurities Act in favor of Lead Plaintiffs and all members of theClass against Defendants in an amount to be proven at trial,including interest thereon;
c. Awarding Lead Plaintiffs and the Class their reasonable costs andexpenses incurred in this action, including attorneys’ fees andexpert fees; and
d. Such other and further relief as the Court may deem just and proper.
XI. JURY TRIAL DEMANDED
251. Lead Plaintiffs hereby demand a jury trial.
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 81 of 95
Dated: February 28, 2013
ew
York,
ew
York
BERNSTEIN LITOWITZ
BERGER GROSSM NN LLP
B y : ~ 6 ~
Steven B Singer
John J Rizio-Hamilton
1285 Avenue of the Americas
ew
York,
Y
10019
Tel: 212) 554-1400
Fax: 212) 554-1444
L B TON SUCH ROW LLP
By:_\_\.r
_ . V J J _ _ _
_
Thomas A. Dubbs
James W. Johnson
Louis Gottlieb
140 Broadway
ew York, Y 10005
Tel: 212) 907-0700
Fax: 212) 818-0477
Court Appointed Co Lead Counsel/or the Class
David Kessler
Darren J Check
KESSLER TOP Z MELTZER
HE KLLP
280 King ofPrussia Road
Radnor, Pennsylvania 19087
Tel: 610) 667-7706
Fax: 601) 667-7056
Additional Counsel For
ead
Plaintiff
Banyan Capital Master Fund Ltd
Steven E Fineman
Daniel P. Chip ock
LIEFF C BR SER HEIM NN
BERNSTEIN
250 Hudson Street, 8th Floor
ew
York, Y 10013
Tel: 212) 355-9500
Fax: 212) 355-9592
Additional Counsel For Named Plaintiffs
Jose
G
Galvan
and
Mary Jane Lule Galvan
78
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APPENDIX A
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 83 of 95
CERTIFIC TION PURSU NT TO
THE FEDER L SECURITIES L WS
I
Jay Chaudhuri, hereby certify for the North Carolina Department of State
Treasurer
on
behalf of
the North Carolina Retirement Systems ( North Carolina DST ),
as to the claims asserted under the federal securities laws, that:
1.
I am the General Counsel and Senior Policy Advisor
of
the North Carolina
Department of State Treasurer. I have reviewed a complaint filed in this matter.
North Carolina
DST
has authorized the filing of this motion for appointment as
lead plaintiff.
2. North Carolina DST did not purchase the securities that are the subject
of
this
action at the direction
of
counsel or in order to participate in any action arising
under the federal securities laws.
3. North Carolina
DST
is willing to serve as a lead plaintiff and representative party
on behalf of the Class, including providing testimony at deposition and trial,
if
necessary. North Carolina
DST
fully understands the duties and responsibilities
of the lead plaintiff under the Private Securities Litigation Reform Act, including
the selection and retention
of
counsel and overseeing the prosecution
of
the action
for the Class.
4. The transactions
of
North Carolina DST in the Face book, Inc. securities that are
the subject
of
this action are set forth in the chart attached hereto.
5.
North Carolina
DST
has not sought to serve as a lead plaintiff or representative
party on behalf of a class in any action under the federal securities laws filed
during the three-year period preceding the date
of
this Certification.
6.
North Carolina
DST
will not accept any payment for serving as a representative
party on behalf of the Class beyond North Carolina
DST s
pro rata share of any
recovery, except such reasonable costs and expenses (including lost wages)
directly relating to the representation
of
the Class, as ordered or approved by the
Court.
I declare under penalty
of
perjury that the foregoing is true and correct. Executed
this 23rd day
of
July, 2012.
JaYihfilldhUri
General Counsel Senior Policy Advisor
North arolina Department o State Treasurer
on
behalfo h North arolina Retirement Systems
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 84 of 95
North Carolina Retirement Systems
Transactions in Facebook Inc. FB)
Transaction Date Shares Price
Purchase 5/17/2012 67,600 38.0000
Purchase 5/17/2012 618,137 38.0000
ale
5/18/2012
29,900) 41.3016
ale
5/18/2012
4,100) 39.6854
ale
5/18/2012
18,000) 42.0000
ale 5/18/2012
15,600) 40.3683
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 85 of 95
CERTIFIC TION
I
George Hopkins, as Executive Director of Arkansas Teacher Retirement System
( Arkansas Teacher ), hereby certify as follows:
1
I am fully authorized to enter into and execute this Certification on behalf of
Arkansas Teacher. I have reviewed a complaint filed against Facebook, Inc. ( Facebook ) alleging
violations of the federal securities laws;
2 Arkansas Teacher did not purchase securities of Facebook at the direction of counsel
or in order to participate in any private action under the federal securities laws;
3
Arkansas Teacher is willing to serve as a lead plaintiff
or
representative party
in
this
matter, including providing testimony at deposition and trial,
if
necessary;
4 Arkansas Teacher's transactions in the Facebook securities that are the subject of this
action are reflected in Exhibit A, attached hereto;
5 Arkansas Teacher sought to serve as a lead plaintiff
in
the following class actions
under the federal securities laws during the last three years preceding the date of this certification:
In
MGl d
Mirage
Sec111ities
LJtigatio11,
No.
2:09-cv-1558 (D. Nev.)
JJ S1111p01ver C01p. Sec111ities
LJtigation,
No. 3:09-cv-5473 (N.D. Cal.)
City of1\1011roe FiJJJployees' Retimmnt S)•stem
v.
Hartfard
Financial
Sen1ites
Gm11p,
Inc.,
No.
1:10-cv-2835 (S.D.N.Y.)
In
1r
Go dma// Sachs Gmnp, JJc.
Secmities LJtigation,
No. 1:10-cv-3461 (S.D.N.Y.)
ArkaHsas
Teacher Retimvmt
.5)ste111 v.1Wo11sr111fo Co.,
No.
4:10-cv-1380 (E.D. Mo.)
Km'flnl
v.
Colinthian
Colleges,
Inc., No. 2:10-cv-6523 (C.D. Cal.)
In
Beckn1an
Co11lte1;
Inc.
Sec111ities LJtigation,
No.
8:10-cv-1327 (C.D. Cal.)
In
re
Gentiva Sec111ities
LJtigation,
No.
2:10-cv-5064 (E.D.N.Y.)
Pe1111ylva11ia
Public School Emplo)'ees' Retim11e11 .5)ste1J1 v. Bank ofA11mica
C01p.,
No.
1 11-cv-733 (S.D.N.Y.)
Ga111111e/ v. He1Ji/et1-Packard, No. 8:11-cv-1404 (C.D. Cal.)
In rn Netflix,
Inc.
Secmities LJtigatio11,
No.
3:12-cv-225 (N.D. Cal.)
Hoppa11gh
v.
K12
Inc.,
No. 1:12-cv-103 (E.D. Va.)
S111ith
v.
JPM01;gan Chase Co., No. 12-cv-3852 (S.D.N.Y.)
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 86 of 95
6. Arkansas Teacher is currently serving as a lead plaintiff in the following class actions
filed under the federal securities laws during the last three years:
In MGM Mirage Sec111ities IJtigatio11, No. 2:09-cv-1558 D. Nev.)
I11
S1111poJ11er
Co1p.
Sec111ities
IJtigation, No. 3:09-cv-5473 N.D. Cal.
In Go/dma11 Sachs G1m;p, Inc. Secmities Utigation, No. 1:10-cv-3461 S.D.N.Y.)
Arkansas Teacher Retim11e11t
S stm1
/ , 1VI011sa11to Co., No. 4:10-cv-1380 E.D. ~ M o .
Ga1J1111e/ v.
I-Ieivlett-Packard,
No. 8:11-cv-1404 C.D. Cal.
In Netflix Inc. Sec11rities Litigation, No. 3:12-cv-225 N.D.
Cal.
I-Iopprmgh v. K 2 Inc., No. 1:12-cv-103 E.D. Va.)
7. Beyond its pro rata share o any recovery, Arkansas Teacher will not accept payment
for serving as a lead plaintiff on behalf o the Class, except the reimbursement o such reasonable
costs and expenses including lost wages
as
ordered or approved by the Court.
I declare under
n ~ ~
o perjury, under the laws o the United States, that the foregoing is
true and correct this :J day
o
July, 2012.
- 2 -
George opkins
Exec tive Director of
Arkansas Teacher
Retimm11t S)ste111
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 87 of 95
EXHIBIT A
TRANSACTIONS IN FACEBOOK
INC
Transaction Type
Trade
Date
Shares
Price Per
Share
Cost
/
Proceeds
Purchase
05/17/12
246,849.00 38.00
( 9,380,262.00)
Sale
05/18/12
-104,320.00 40.07
4,179,664.26
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 88 of 95
CERTlFICATION
PURSUANT
TO
THE
FEDERAL SECURITIES LAWS
l, Becky Van Wyk, on
behalf
of
the
Fresno County Employees' Retirement
Association ( FCERA ), hereby certify, as
to the
claims asserted under
the
federal
securities laws, that:
1
I
am the Assistant Retirement Administrator ofFCERA.
I
have reviewed a
complaint filed in thjs matter.
FCERA
has authorized the filing
of
this motion for
appointment
as
lead plaintiff.
2. FCERA did not purchase the securities
that
are the subject
of
this action at the
direction of counsel or in order
to
participate
n
any action arising under the
federal securities laws.
3. FCERA is willing
to
serve
as
a lead pla inti ff and representative party
on behalf
of
the Class, including providing testimony
at
deposition and trial,
if
necessary.
FCERA fully understands the duties and responsibilities
of
he lead plaintiff under
the
Private Securities Litigation Reform Act, including the selection and retention
of
counsel and overseeing the prosecution
of the
action for the Class.
4. FCERA s transactions in the Facebook, Inc. securities that are
the
subject of this
action are set forth in the chart attached hereto.
5. FCERA has sought to serve and
was
appointed as a lead plaintiff on
behalf
of a
class in the following actions under
the
federal securities laws filed dur ing the
three-
year
period preceding the date of his Certification:
Mallen
v
Alphatec Holdings, Inc.,
t
al., Case No . 10-cv-1673 (S.D.N.Y.)
Steamfitters Local 449 Pension Fund v Central European Distribution Corporation,
Case
No. 11
-cv-6247 (D.N.J.)
6. FCERA has served
as
a representative party on
behalfof
a class
n
the following
actions under the federal securities laws filed during the three-year period
preceding
the
date of this Certification:
The Fresno County Employees Retirement Association
v
Countrywide Financial
Corporation, t al., Case
No.
11-cv-811 (C.D. Cal.)
In re Toyota Motor Corporation Securities Litigation,
Case No. 1O-cv-
922
(C.D. Cal.)
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 89 of 95
7
FCERA has sought to serve s a lead plaintiff and representative party on behalf
of a class in the following action under the federal securities laws filed during the
three-year period preceding the date of this Certification, but either withdrew its
motjon for lead plaintiff
or
was
not
appointed lead plaintiff:
In re P pie Securities Litigation, Case No. I 0-md-2185 (S.D. Tex)
8 FCERA will not accept any payment for serving as a representative party on
behalfof the Class beyond FCERA s pro rata share of any recovery, except such
reasonable costs and expenses (including lost wages) directly relating to the
representation of the Class, as ordered or approved by the Court.
I
e c l ~
under penalty
of
perjury that the foregoing is true and correct.
this J..i :. day of June, 2012.
J
Executed
Fresno County Employees Retirement Association
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 90 of 95
Fresno County Employees Retirement Auociation
Transactions
in
Facebook Inc. (FB)
Transaction
Date
Sharp
Price
Purchase 7/2012 37,800 38.0000
Purchase 5/17/20L2
58,100
8.0000
Sa le
5/18/20L2 (7,900)
40.0188
Sale
512212012 (13,200)
3 1.8080
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 91 of 95
BANYAN CAm.ALMAS'IU. J.i'VND
LT.D. S
CBR'i'DlcATIONlN
SllPPOlO'·orrrsMOTION
FOR
APPOINTMENT AS LEAD
PLA.lN'111FAND
AP.PD.OVAL·OPL&U>
P.L.AINT.IFli S
SELEC170N OF
COVNSA
B3DYM
CapJtd
Master-
Fund
Ltd.
(''3anyan
or
,ftliu\itl' )
deelJres
has:
1.
ll .ym dJd M t pnrchast the· ~ t h a t i1 the aubject of thia
actlotl.
at tht
dfrootlon of
Plaintifrs CQUDSel
ot in ordor mMY private
aotion 'lllldet the federal
s.ecmities laws.
2.
Ban1an
ia
will.mg
to serw as
a
~ v e party
on
beJlaJf of
the. ClaaA..
inchWintZ pmviding teStilDD lY
• depositif>n and trlal, i fnecessary
..
3.
~ . Schedule A
to
thla ate
Ptabmft'a
tranllllCliolJ1 . in
~ o ~ 'lne.
( PAcebock ') (.NASDAQ:
.F.8) cOJl\mon
sbate8
during tbaOm
Perlcd.
4. 8enyaA has toll power aao .
mabo'dty
tJ;J
hrm&
d to 'eCOVet> l.>r IoHes
~ s
m Wt of
Jts
m'VOltme.ntm acebook.
s. Banyan 1 - .lUllJ teviovled the tBcts - allegations ofa otnpbdnt filed
iJl
ibis
~ n and ha& authorized t;fte :6Jir.lg of a
mot:io.11
ibt
app&intment as
Jaad pWntttfon its behn1f ill
$isadion..
.
.
6. Jlmay.m
~
to actively J:®nitor
ad
vigorously
PJJm:lC this
action for tho
bedt Of thf; Class.
7. . Bariy$l will
ea.dea.vo.r
tri fidr
aDd
adtqu.ato and lV(d:
direotlJr with Class tounSeI to easore that
the a r g e s t ~
1br
the Cl48& eomiskmt
witbgaod
.
. faithatd
J u d g n u m t
i i
obtained.
.
.
8. Banyan ooujht to serve ('btit wu o t ~
as
~ party b a
class
aCltUm
filed --the
federal
sec:lttiriel
~
dudng
t11e· tbda yeata priut to the date Of
this
. ~ in
Josq1h
e ~ ~
st
al v. Jon S.
Cf» (ine.
t al. No..· 11-cv
..
786fi..VM
(S.D.N.Y.).
9. Banyaa
will not accept
any ~ iO.r: acrving
u
~ _ cm
J;dtalf of
thB CJess °'yood FJa.inlifrs
pro tata
W
of
any
reoove:ry, except aeJi Nl8CllllbJD.
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 92 of 95
coats
md m ~ lOst; waga) dln ;ctly :rdating to the rcp:esentotion
o tile
ClAss l l
f;)IdemiOtappmved by thl Court.
10.
Wo
R o s ~
Ntmson
and Alan. · 1 ~ s Dh flttol s ut
.
BQym
and am
aud:l>rimd to
make
legal
decirdwi
on
bdalt
Gf
Bu-yan.
We
•
aDfiim:ked
to
s i t J l t b i s ~ o n B a n y a • t o d c d f . W a r e . a J a o ~ t o m a k e t h c ~ f O l
forth
heteio.. . . .
We deomre Wlderpenalty
f ~
t ld
h e ~
ia Ct;11e am
corteet.
BANYAN CAPJTALMASTERIUm LTD.
lbls.i.LJ.:v..t
: r ~
,2012. / ti
.....
By:
h e c i l t e d t h i s ~ y o f
:fu\..Y 20J2..
~ B e n e d k i t
~
~ N J d
AJao l llmcr
Dimctor
2
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 93 of 95
SCBJIDULIA
Sseritf
BuvN
11*
QM@ ,
r&1s
Com Set
Buy
512JJ2012
~ 8
35.79
OmlStt
Buy
sn:JJ'JJJl'l
195,474.
32.19-
ComstK
Sell
512lfl012 446. 70 · 34.19
ComSik
Sell
5122f2012
24,039
$31..6.1
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Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 94 of 95
CERTIFICATIONQ ·PROPOSED LEAD PLAINTIFF
We,
Jose G.
and
Mary Jane Lu1e Galvan, certi fy that:
1. We
have reviewed the·
facts
and
allegations
of
he
complaint
filed.in
this
action.
2.
We did not acquire the common stock that are
the-subject of this
action atthe direction of
plaintiff's
counsel
odn
order to
participate in this
private
action or any
other
litigation
under
.the federal securitieslaws. . ·
··
3.
We
are
willliig
to serve
as a Lead
Plaintiff either
individually
or as
part
of
a group.
We
understand th t
a Lead Plaintiff is .a .representative party who
acts on behalf of other
class
members :in
directing the action, and whose duties
may include
providing testimony at
_deposition
and _trial · i
necessary.
4. We
represent.and
warrant
that we
are
authorizedto execute-this Certification on
behalf of
the
purchasers
of
the
common
stock described
herein
(ineluding,
as
the case may be, u r s e l v ~
any o - o ~ e r s any_ o r p o ~ a t i q n s
or
t h ~ r . e n t i t i e s and/or·any
beneficial
owners).
5.
We
will
not.accept
any
payments for·serving
as
a
representative
partY
on behalf
of
the
class
beyond
the
·purchaser s
pro
rata
share
of any
recovery, except
such e a ~ o n a b l e costs and
expenses
(ineluding.lostwages) directly relating to-the.representationof he class s ordered,
or approved by the court. ·
. .
6. We understand·tb.at this
is
not
a claim
form and that
our
ability
to share
in
any
recovery
as
a
member
of the class is. unaffected by our decision to setye as a representative party or Lead
Plaintiff.
7. We have listed all our relevant transactions involving common
stock
of Facebookt Inc.
that are
the subject
of this
actioP.
in the attached
sclledule.
8. During the th:r:eeyears
prior
to the date
of his
Certification, we
have
not sought
to
serve and
we have.not
served
s a r e p r e s e n ~ t i v e _ p a r t y f o r a class in an action.filed
under
the federal
securities
laws except
if any):. ·
. We dedare·under pe:rialty
.of
perjury,
under the laWs
of
United States, that the information
herein.is accurate. · · · ·
J1J<i,cuted
this 1 dayof ::r.,
L· :\ . , 2 · · · ·
.. ·
. . . l
.
Executed this zg__
Y
of
r..s1... 1
. · , 2012 ~ , , . . , . . , _ . . . - - - - - ~ - . . . _ . . ____
~ n e Lule Galv · . ·. .
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C
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1
I N THE UNI TED STATES COURT OF APPEALS
FOR THE SECOND CI RCUI T
_____________________________) )GAYE J ONES, HOLLY )McCONNAUGHEY, Der i vat i vel y on)Behal f of Facebook I nc. , ) ) Pl ai nt i f f s - Appel l ant s) ) vs. ) Case No. 14- 632- cv )MARC L. ANDREESSEN, et al . , ) ) Def endant s- Appel l ees. ) _____________________________) )( Capt i on cont i nued on next )page. ) ) _____________________________)
APRI L 27, 2015 ORAL ARGUMENT
TRANSCRI BED BY:
PATRI CI A L. HUBBARD, CSR #3400 J ob No. 39198
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450 Seventh Avenue - Ste 500, New York, NY 10123 1.800.642.1099
DAVID FELDMAN WORLDWIDE, INC.
2
1
2 I N THE UNI TED STATES COURT OF APPEALS
3 FOR THE SECOND CI RCUI T
4 _____________________________ )
5 ( Cont i nued Capt i on. ) ) _____________________________)
6 ROBERT CROCI TTO, Der i vat i vel y)on Behal f of Facebook I nc. , )
7 ) Pl ai nt i f f - Appel l ant , )
8 ) vs. ) Case No. 14- 1309- cv
9 )MARK E. ZUCKERBERG, et al . , )
10 ) Nomi nal )
11 Def endant s- Appel l ee ) _____________________________)
12 LI DI A LEVY, on behal f of )her sel f and al l ot her s )
13 si mi l ar l y s i t uat ed, ) )
14 Pl ai nt i f f - Appel l ant - ) Case Nos. 14- 1445- cv Cr oss- Appel l ee, ) 14- 1515- cv
15 ) 14- 1784- cv
vs. ) 14- 1788- cv16 )MARC L. ANDREESSEN, et al . , )
17 ) Def endant - Appel l ee- )
18 Cr oss- Appel l ant . ) _____________________________)
19
20
21
22
23
24
25
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450 Seventh Avenue - Ste 500, New York, NY 10123 1.800.642.1099
DAVID FELDMAN WORLDWIDE, INC.
3
1
2
3
4
5 TRANSCRI PTI ON OF APRI L 27, 2015
6 ORAL ARGUMENT by PATRI CI A L.
7 HUBBARD, CSR #3400, a Cer t i f i ed
8 Shor t hand Repor t er i n and f or t he
9 St at e of Cal i f or ni a.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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450 Seventh Avenue - Ste 500, New York, NY 10123 1.800.642.1099
DAVID FELDMAN WORLDWIDE, INC.
4
1 APPEARANCES OF COUNSEL:
2 For t he Appel l ee: LYDI A LEVY
3 SCOTT & SCOTT, LLP
4 12434 Cedar Road Sui t e 12
5 Cl evel and Hei ght s, Ohi o 44106 216. 229. 6088
6 BY: GEOFFREY M. J OHNSON, ESQ. gj ohnson@scot t - scot t . com
7
8 For t he Appel l ee: GAYE J ONES
9 ROBBI NS GELLER RUDMAN & DOWD, LLP Post Montgomer y Center
10 One Mont gomer y St r eet Sui t e 1800
11 San Franci sco, Cal i f or ni a 94104 BY: ANDREW LOVE, ESQ.
12 al ove@r gr dl aw. com
13 For t he Appel l ee: ROBERT CROCI TTO
14 GLANCY PRONGAY & MURRAY, LLP
15 122 East 42nd St r eet
Sui t e 292016 New Yor k, New Yor k 10168 212. 682. 5340
17 BY: GREGORY B. LI NKH, ESQ. gl i nkh@gl ancyl aw. com
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19 For t he Appel l ant : FACEBOOK
20 KI RKLAND & ELLI S, LLP 601 Lexi ngt on Avenue
21 New Yor k, New Yor k 10022
212. 446. 480022 BY: ANDREW CLUBOK, ESQ. andr ew. cl ubok@ki r kl and. com
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DAVID FELDMAN WORLDWIDE, INC.
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1 APPEARANCES: ( Cont i nued)
2 DENNI S J ACOBS, J UDGE
3 ROSEMARY POOLER, J UDGE
4 PETER HALL, J UDGE
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1 anyway.
2 And as - - as Appel l ees poi nt out , whi l e
3 t he pr oposed si ze and pr i ce of an I PO wi l l of t en
4 f l uctuat e, i t shoul dn' t be i ncreasi ng whi l e at t he
5 same t i me t here i s mater i al bad news.
6 Thi s conduct was t he subj ect of t he
7 secur i t i es di sput e - - deci si on. As you know, t he
8 secur i t i es deci si on was - - t he cl ai ms wer e - - I di d
9 a mot i on t o di smi ss. I t was deni ed. Di scover y i s
10 under way. Cl ass cer t has been br i ef ed and wi l l be
11 heard next month.
12 Now, t hi s conduct i s al so exacer bat ed by
13 t he magni t ude of t he sal es t hat Zucker ber g, Br eyer
14 and - -
15 J UDGE J ACOBS: Looki ng at t he
16 di scl osure, and I mean i f you want t o go t o t he
17 mer i t s, i t basi cal l y says t hat somet hi ng i s
18 happeni ng. Even as we speak somet hi ng i s happeni ng.
19 Ther e i s - - t her e i s an i ncrease - - t her e i s an
20 i ncr ease i n t he number of act i ve dai l y user s t hat ' s
21 i ncr easi ng more r api dl y t han i ncr easi ng t he number
22 of ads. That ' s not good.
23 MR. LI NKH: Wel l , t hat was - - t hat was
24 t he key on - - one of t he key i ssues t hat was
25 di scussed i n t he secur i t i es opi ni on.
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1 And, yes, t her e was - - i t was di scl osed
2 t hat t here was somethi ng goi ng on wi t h mobi l e
3 adver t i si ng. I t was not di scl osed - -
4 J UDGE J ACOBS: Somet hi ng bad was goi ng
5 on wi t h mobi l e adver t i si ng.
6 MR. LI NKH: Wel l , somet hi ng bad was
7 goi ng on. But t hey di dn' t make t hat f ur t her l eap
8 t hat t he r evenues wer e act ual l y decreasi ng. And
9 t hat was t he subj ect t hat was t he vi ol at i on of i t em
10 303 - -
11 J UDGE J ACOBS: Woul dn' t somebody assume
12 t hat i f you have mor e adver t i si ng, you' r e get t i ng
13 mor e r evenue; and i f you have l ess adver t i si ng,
14 you' r e get t i ng l ess r evenue?
15 MR. LI NKH: Wel l , I mean you - -
16 J UDGE J ACOBS: Thi s i s not bei ng wr i t t en
17 f or i di ot s .
18 MR. LI NKH: Wel l , you can assume t hat .
19 But under r egul at e - - I guess i t em 303 of
20 Regul at i on SK, you act ual l y have t o di scl ose t hat
21 t her e i s mat er i al - - you know, a mat er i al decr ease
22 i n r evenues i f t her e' s a chance t hat t her e wi l l be a
23 mat er i al decr ease i n r evenues.
24 And t hat was t he i ssue t hat was - - t hat
25 was t he i ssue t hat was bef or e t he - - bef or e J udge
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Evidence For Class Members Evidence For Investors Excluded By
The District Court And Plaintiffs’
Counsel
KKR: “KKR purchased shares in
Facebook’s IPO . . . with my knowledgethat . . . Facebook had determined that a
shift to mobile usage had been having,
and was expected in the future to
continue having, a negative impact on
Facebook revenues for 2nd Quarter and
full year 2012.” (A-26)
Blue Ridge: “When Blue Ridge made
this decision [to buy Facebookshares] . . . Blue Ridge further
understood that Facebook had
determined that these trends had
negatively impacted and would continue
to negatively impact revenue growth
(act as “headwinds” as we called it)
unless and until Facebook could
monetize the mobile usage of its site.”
(A-91)
Waddell: “At the time of the initial
public offering, the Company [Waddell]
was aware that Facebook Inc. had
recently revised its revenue projections
for 2012 due to increased use of
Facebook on mobile devices which was
negatively impacting revenues more
than had been previously expected.”
(A-81)
Columbia: “Columbia had been
informed prior to Columbia’s purchase
of shares in Facebook’s IPO [that]
(a) Facebook had revised its internal
revenue numbers to project decreased
growth for 2012 and (b) Facebook had
made those revisions based on the shift
to mobile devices and related product
decisions.” (A-1552)
UBS: “I recommended that UBS
purchase shares with the knowledge that
Facebook’s revenue projections had
been revised downward due to the
impact that the shift to mobile usage
was already having on Facebook’s
revenues.” (A-86)
Capital Research: “When the funds
purchased these shares, CRGI
understood that (a) Facebook had
revised its internal forecast of future
revenue to project decreased revenue
growth for 2012, and (b) the revised
forecast reflected the expected impact of
growing user migration to mobile
devices and certain product changes.”
(A-6)
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Evidence For Class Members Evidence For Investors Excluded By
The District Court And Plaintiffs’
Counsel
Winslow: “After speaking with
Ms. Herman, I had conversations withanalysts and portfolio managers from at
least two dozen institutional investors,
including for example, Justin Kelly at
Winslow Capital Management . . . I
remember being careful in my calls with
each of these individuals, and with the
other potential investors with whom I
spoke, to ensure that they knew that
Facebook had revised its projections as
Turner: “After speaking with
Ms. Herman, I had conversations withanalysts and portfolio managers from at
least two dozen institutional investors,
including for example . . . Christopher
Bagini of Turner Investments. I
remember being careful in my calls with
each of these individuals, and with the
other potential investors with whom I
spoke, to ensure that they knew that
Facebook had revised its projections as