Facebook IPO Securities Fraud?

We talked recently about the Facebook IPO flop. Now, things are starting to maybe look a little bit worse.

According to several news websites, including the Wall Street Journal, there may have been some forbidden communications between Facebook, its major bankers, and subsequently, between those banks and their clients.

It seems that during the Facebook IPO roadshow, Facebook disclosed, in more detail than in their amended S-1 filed with the SEC, that their earnings were rapidly declining due to the fact that a large part of their user base was shifting to accessing the Facebook service via mobile devices instead of online. The difficulty is that there is no room on most smartphones to put up the ads that populate the right side of the screen on a full desktop computer or laptop computer. As such, Facebook generates almost no revenue from mobile users. If more users access Facebook without generating revenue that is a double whammy. More users equals more expense, but not more revenue.

None of this necessarily adds up to trouble for Facebook, other than those disclosures made in private. All material information must be disclosed publicly both about a publicly traded stocks and those about to go into an initial public offering. The central question then is this:

  1. Was the amended S-1 filed publicly with the SEC a full disclosure?
  2. If so, was the additional information given verbally to underwriters, analysts and other major investors therefore minor, or immaterial to the stock price.

There will be investigations and lawsuits now. Chances are that given the dollar amounts involved we’ll see settlements (where no one admits any wrongdoing, of course) rather than big costly public trials and actions.

Stay tuned to this unintentional saga.

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