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The higher you raise your flag, the more people will shoot at it. Mark Zuckerberg, Facebook (NASDAQ:FB) founder and CEO, has come to understand that there is a lot of difference between an on-campus, social media creation and the the megalith that Facebook has become. Founded just ten years ago in a college dorm room, Facebook is now, not only a household name, but a phenomenon of social (and business) communication for most of the civilized world. It’s flag has been raised so high that it is now a target for all kinds of criticism and attack. Yesterday, just two days before Facebook is expected to be named as a component of the S&P 500, a U.S. District Court judge ruled that a potential class-action suit against Facebook and banks associated with the company’s May 2012 IPO could proceed to litigation. The decision was actually handed down on 11 December, but was not made public until yesterday.
In the Investors’ Opinion
The allegation is that investors were put unnecessarily at risk and, in fact, lost money on the IPO as a direct result of the company’s failure to adequately disclose strategic concerns that it had relative to the potential financial impact of the rapidly growing mobile market on its business.
In the Judge’s Opinion
In fact, Facebook did have strategic concerns. The issue, however, is not whether or not they had concerns. This issue is whether or not they adequately disclosed those concerns to potential investors. The rancor from the plaintiffs is that they lost money as a result of Facebook’s failure to disclose. Judge Robert Sweet wrote in his 83 page report that “The company’s purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialised. Plaintiffs have sufficiently pleaded material misrepresentation(s) that could have and did mislead investors regarding the company’s future and current revenues.”
I think it is important to note that the the issue is also not about fraud. It is about failure to disclose what the investors see as information material necessary for them to invest wisely. They allege that “Facebook should have disclosed internal projections on how increased mobile usage and product decisions might reduce future revenue.”
In Facebook’s Opinion
Facebook, on the other hand, claims that this information was not required of them nor should it have had a material effect on the investors’ decisions.
In My Humble Opinion
My father used to say that “Opinions are like belly buttons. Everyone has one, so they don’t need yours.” Generally, I keep my opinions to myself unless someone asks. So, thank you for asking.
Let’s look as a few, simple facts and then reason from there:
- The Facebook IPO was a shambles. I think we all agree on that.
- The IPO opened at $38.00 per share on 18 May 2012.
- That was a mere 18 months ago.
- The share price rose to $45.00 per share on opening day before falling on an almost continuing basis until 04 September 2012.
- The share price did not exceed $38.00 again until 02 August 2013, before falling back slightly for a few days.
- On 20 August this year, the FB share share price once again passed the $38 mark and it has never looked back.
- Facebook’s share price is currently trading at $54.79.
- It has traded at or above $45.00 since 17 September.
On the basis of these facts, I must conclude that the “investors” are not, at least by my understanding of the word, investors at all. They are, and were, speculators. The fact is that, had they really been investing, they would have held on to the stock and weathered the storm. As of this week, had they truly been investors, they would have realized a 45% return. My opinion is that the litigants are gamblers, not investors. Investing is what you do for the long haul. These so-called investors played their cards poorly and walked away from the table early. Now they want to collect damages for their own decisions and trying to make a fast buck. On the other hand, Facebook appears to have understood what it was up against and also appears to have made the right decisions.
I rule in favor of Facebook on the principle of real investing.
