Facebook IPO and Loss Causation

Stock Drop

When a giant stumbles everyone takes notice, when they happen to be in the field of social media, people tweet, flickr, blog and otherwise talk. When investors lose money in the U.S., they also sue. They sue everyone who they can point their fingers at (and hold legally liable) who has money or insurance (SEM or someone else’s money).

When a company is going public through an Initial Public Offering (IPO), the list of alleged villains will generally include:

  • The company going public (aka the “filer”)
  • Its CEO and CFO and other assorted executives
  • The selling shareholders (who may include the CEO and CFO and other assorted executives)
  • The broker-dealers and investment banks
  • The lawyers and possibly the accountants

In the case of Facebook, this list was expanded to include the stock exchange on which the company’s shares were sold, due to some well-publicized technical gaffs in the trading process. However the dust eventually settled with the exchange, which has acknowledged the problems and recently proposed $40 million in recompense, this issue will complicate the shareholder securities litigation.

Loss Causation

Cases like this tend to turn on loss causation—that is, whether shareholders prove it was the defendant’s actions that caused them harm, specifically linking the actions (or inactions) of the defendant to their loss.

The loss causation defense is successful when the defendants are able to show that any harm the plaintiff claims to have sustained were the result of something other than the alleged misstatement or omission in the registration statement. Something else, like the documented technical problems with the sale.

Speculation has already begun that,

Facebook… is also expected to place some of the blame for the IPO’s flop at the feet of the Nasdaq stock exchange, which has already expressed regret over the decision to proceed with the blockbuster offering after a 30-minute delay in the IPO’s opening contributed to confusion among traders.”

Something we know as the loss causation defense.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
Categories: Directors & Officers, Financial Services | Tags: , ,

One Response to Facebook IPO and Loss Causation

  1. SERGIO says:

    A very interesting post Ann, I enjoyed reading it very much.

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