United States District Court, S.D. New York
IN RE FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION, MDL No. 12-2389
MORGAN STANLEY & CO. LLC, J.P. MORGAN SECURITIES LLC, GOLDMAN SACHS & CO., and FACEBOOK, INC., Defendants. ROBERT LOWINGER, Plaintiff,
ABRAHAM, FRUTCHTER & TWERSKY, LLP, Jeffrey S. Abraham, Esq., Jack G. Fruchter, Esq., Mitchell M.Z. Twersky, Esq., Philip T. Taylor, Esq., New York, Ny, Attorneys for the Plaintiff.
DAVIS POLK & WARDWELL, LLP, James P. Rouhandeh, Esq., Charles S. Duggan, Esq., Andrew Ditchfield, Esq., New York, NY, Attorneys for Defendants.
ROBERT W. SWEET, District Judge.
This case arises out of the litigations stemming from the May 18, 2012 initial public offering ("IPO") of Facebook, Inc. ("Facebook"). Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel"), entered on October 4, 2012, 41 actions relating to this underlying event are presently before this Court.
In the instant motion, Defendants Morgan Stanley & Co. LLC ("Morgan Stanley"), J.P. Morgan Securities LLC ("J.P. Morgan"), and Goldman Sachs & Co. ("Goldman") (collectively, the "Lead Underwriters") move pursuant to Rule 12(b)(6) to dismiss the complaint (the "Complaint") filed by Plaintiff Robert Lowinger ("Plaintiff" or "Lowinger"), which seeks disgorgement of "short-swing" profits allegedly earned by the Defendants from underwriting activities performed in connection with the IPO under Section 16(b) of the Securities Exchange Act of 1934.
For the reasons set forth below, the motion is granted.
The procedural history of this litigation has been detailed extensively in various opinions by this Court. See, e.g., In re Facebook, Inc., IPO Sec. & Deriy. Litig, MDL No. 12-2389, Civ. No. 12-6439, ___ F.Supp.2d ___, 2013 WL 525191, at *9 & *9 n.4 (S.D.N.Y. Feb. 13, 2013).
With respect to the instant motion, Plaintiff alleges that he is a Facebook shareholder and that, on September 12, 2012, he made a demand on Facebook that it seek disgorgement of the profits obtained by the Lead Underwriters based on the facts alleged in the Complaint. (Compl. ¶ 47.)
When Facebook declined to bring suit, the instant action was filed on June 12, 2013. (Compl. ¶ 49.)
On October 16, 2013, the Leader Underwriters moved to dismiss Plaintiff's Complaint. This motion was heard and marked fully submitted on April 9, 2014.
Familiarity with the general background of this case is assumed. Certain allegations and facts are repeated in part as relevant to the issues presented by the instant motion.
On May 18, 2012, Facebook made a registered initial public offering of approximately 421 million shares of Class A common stock to investors at $38.00 per share. See In re Facebook, Inc., IPO Sec. & Deriy. Litig, MDL No. 12-2389, Civ. No. 12-6439, ___ F.Supp.2d ___, 2013 WL 525191, at *9 & *9 n.4 (S.D.N.Y. Feb. 13, 2013).
Prior to the IPO, the Lead Underwriters entered into "lock-up" agreements with each of the Selling Shareholders, who together allegedly held greater than ten percent of Facebook's common stock. (Compl. ¶¶ 15, 17.) The lock-up agreements committed the Selling Shareholders "not to sell or otherwise dispose" of any Facebook common stock for periods of time following the IPO without Morgan Stanley's prior consent. (Compl. ¶ 15.) Plaintiff alleges that the "common purpose" of these lock-up agreements was "to control the supply of Facebook shares available to the market, which, in turn, was expected to provide support for the trading price of Facebook common stock." (Compl. ¶ 16.) Plaintiff further contends that the Lead Underwriters and the Selling Shareholders agreed to "act together" to achieve this common purpose, and that the Lead Underwriters were therefore beneficial owners of the Facebook shares owned by the Selling Shareholders. (Compl. ¶ 18.)
In April 2012, Facebook purportedly shared internal revenue projections with the Lead Underwriters of this agreement which were incorporated into research reports prepared by the underwriters and also shared at road shows marketing Facebook's IPO. (Compl. ¶¶ 20-21.) On May 7, 2012, Facebook allegedly revised its internal revenue projections and noted a continued trend of daily active users increasing more rapidly than the number of ads delivered, which Facebook attributed to increasing mobile usage among users and certain product decisions. (Compl. ¶ 22.) Facebook purportedly shared this concern with Morgan Stanley. (Compl. ¶¶ 22, 26.)
On May 9, 2012, Facebook amended its Registration Statement, informing investors of the continuing trend that Facebook had identified:
Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of [daily active users] increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increasing usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions.
(Compl. ¶ 25.)
Similar to the consolidated complaint filed in the securities class action, Plaintiff alleges that this disclosure was false and misleading because it failed to sufficiently disclose "that these factors had already materially impaired Facebook's revenue." (Compl. ¶ 26; see also Consol. Class Action Compl. ("Securities Compl."), In re Facebook, ...