Facebook, Chief Executive Mark Zuckerberg and dozens of banks must face a lawsuit accusing the social media company of misleading investors about its health before its US$16 billion initial public offering, a federal judge said.
In a decision made public on Wednesday, US District Judge Robert Sweet in Manhattan said investors could pursue claims that Facebook should have prior to its May 2012 IPO disclosed internal projections on how increased mobile usage and product decisions might reduce future revenue.
"The company's purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialised," Sweet wrote in his 83-page decision. "Plaintiffs have sufficiently pleaded material misrepresentation(s) that could have and did mislead investors regarding the company's future and current revenues."
In a statement, Facebook said: "We continue to believe this suit lacks merit and look forward to a full airing of the facts."
Facebook went public at US$38 per share. The Menlo Park, California-based company's share price rose as high as US$45 on May 18, 2012, its first day of trading, but quickly fell below the offering price and stayed there for more than a year.
Investors including pension funds in Arkansas, California and North Carolina claimed that Facebook negligently concealed material information from its IPO registration statement that it had provided to its underwriters' analysts.
They sought damages resulting from their having sold or holding onto the shares as they fell below the IPO price, bottoming at US$17.55 on September 4, 2012.
The lawsuit does not allege fraud. More than 40 defendants were sued, including Facebook Chief Operating Officer Sheryl Sandberg, lead underwriter Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co.
Facebook shares were down 60 cents at US$54.26 in afternoon trading.
FACEBOOK: LAWSUIT LACKS MERIT
In court papers, the defendants had countered that Facebook had no obligation to make the requested disclosures, which they called immaterial, and that Facebook's actual results exceeded original projections.
They added that the US Securities and Exchange Commission and other courts have said revenue projections need not be disclosed before an IPO because they are "inherently speculative and unreliable."
Morgan Stanley spokeswoman Mary Claire Delaney declined to comment.
Max Berger and Thomas Dubbs, who represent the lead plaintiffs, were not immediately available for comment.
Zuckerberg, 29, founded Facebook about a decade ago. Forbes magazine said he was worth US$19 billion in September.
Sweet oversees litigation arising from the IPO, and the investor case combined 30 lawsuits brought around the country.
On Monday, the judge issued a decision that investors could also pursue claims accusing Nasdaq OMX Group Inc of concealing technology problems that led to difficulties in processing trades on Facebook's first day of trading.
He dismissed claims over Nasdaq's decision not to halt the IPO or cancel trades.
Sweet's decisions are dated December 11 but were not made public for several days.
Facebook is expected to join the Standard & Poor's 500 index after the close of trading on Friday.