Appeal Over Facebook IPO Defeated by Goldman, JPMorgan, Morgan Stanley

A federal appeals court said that soon after underwriting its May 2012 initial public offering, Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley need not forfeit their estimated $100 million of profit from trading Facebook Inc stock. This brought some relief to the U.S. banks.

A claim that “lock-up” agreements forbade the sales because the banks and selling shareholders together formed a “group” owning more than 10 percent of the social media company’s stock, as was made by Facebook shareholder Robert Lowinger, was rejected by the 2nd U.S. Circuit Court of Appeals in Manhattan by a 3-0 vote, a unanimous decision.

After the Menlo Park, California-based company’s $16 billion IPO suffered from technical glitches and its stock price slid 54 percent within four months, the lawsuit was one of dozens targeting Facebook, the banks and others.

The charge against Facebook is that the banks were secretly and clandestinely supplied with inside pessimistic internal growth projections. The banks then did their bit and passed the news to top clients who, along with the banks themselves bet successfully against the stock. However this information was kept secret from the common public and the common shareholders and this is Lowinger’s accusation in the case filed against Facebook. The suitor, a common shareholder of Facebook has asked the court to force the banks to turn their profits over to Facebook so that they can be redistributed among the shareholders.

Noting that the lock-up agreements restricting insiders from selling stock were standard in the industry, U.S. District Judge Robert Sweet in Manhattan had dismissed the lawsuit in May 2014.

While reducing the number of companies going public, adding millions of dollars of legal exposure and the roles of the banks would get complicated if bank underwriters were subjected to similar restrictions, said the Circuit Judge Ralph Winter while upholding that May 2014 ruling on Thursday.

“IPOs contemplate the sharing of confidential financial information with underwriters, agreements between underwriters and large pre-IPO shareholders limiting disposal of their shares, and trading by underwriters in the course of the offering. Far from being nefarious, these actions benefit existing shareholders and new public investors,” he wrote.

No comments on the judgment were made by Jeffrey Abraham, a lawyer for Lowinger. There were also no comments available from Goldman  while JPMorgan spokesman Brian Marchiony, Morgan Stanley spokeswoman Mary Claire Delaney and Facebook spokeswoman Vanessa Chan did not want to make any comments to the media about the outcome f the judgment.

Separate class-action litigation against Facebook by retail and institutional investors who claim they overpaid for the company’s shares is overseen by Judge Sweet.

Despite the initial decline, there has been a more than three times enhancement in the share price of Facebook since the time of its $38 IPO price.  And according to Forbes magazine, this rise in the share prices have made Chief Executive Mark Zuckerberg the world’s fifth-richest person.

The case is Lowinger v Morgan Stanley & Co et al, 2nd U.S. Circuit Court of Appeals, No. 14-3800.

(Adapted from Reuters)


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