Facebook under fire

At least six law firms have filed class-action suits against Facebook on news it misled investors over its future earnings forecast, leading to an inflated initial offering price of $38.

Shares in the social media giant were initially expected to “pop” by as much as 50% on listing day, but settled close to its initial public offering price of $38. Since then, the group's stock has dropped sharply and closed at $32 yesterday.

On Tuesday, reports emerged that Morgan Stanley - which underwrote the $16 billion listing - had cut its earnings forecast for the firm. Reuters reported that the underwriter selectively told some investors that the new revenue forecast for 2012 was $4.85 billion, versus more than $5 billion earlier.

In the 2011 year, Facebook reported turnover of $3.7 billion and net profit of $1 billion. Its listing price of $38 a share valued the company at $104 billion.

However, at that price, it had a price-to-equity ratio that made it seven times more expensive than Apple. To be on par, in terms of price-to-earnings with Apple, Facebook would have to grow earnings eight-fold this year.

Several US-based law firms have now filed class-action suits against the social media giant in the wake of worries that its share price may have been inflated on listing. Reports indicate that the US Congress also plans to probe the matter.

Reuters notes that the lower revenue estimate came shortly before the IPO was priced at $38 a share, and before Facebook increased the number of shares being sold by 25%.

Morgan & Morgan yesterday said it had filed a class-action in the US District Court for the Southern District of New York, on behalf of stockholders linked to Facebook's listing. The law firm alleges that information in Facebook's registration statement was “materially false and misleading”.

Morgan & Morgan says the social media giant did not disclose that it was experiencing, and expecting, a “significant” drop in revenue as more people accessed the network through mobile devices.

Faruqi & Faruqi, a national securities law firm, is investigating the potential securities violations at Facebook. The law firm is specifically looking into whether Facebook's executives and Morgan Stanley did not tell the public during the pre-listing roadshow that earnings forecasts had been cut, instead sharing this information only with “certain preferred investors”.

Law firms Kahn Swick & Foti, Bernstein Liebhard, Bernard M Gross, Robbins Geller Rudman and Dowd, as well as Lieff Cabraser, have all filed similar lawsuits against the social media giant.

In Facebook's prospectus, it says one addressable market opportunity “includes portions of many existing advertising markets, including the traditional offline branded advertising, online display advertising, online performance-based advertising, and mobile advertising markets”.

Facebook adds that it intends to grow its user base through a variety of measures, including enhancing products such as mobile applications. In March, 488 million of its 901 million monthly active users accessed the site through handsets.

However, the company does cite growth in the use of Facebook through mobile products - where its ability to monetise is unproven - as a factor that could affect revenue and financial results. Actual figures are not provided.

Facebook's debut was also marred by a trading glitch, as there was a malfunction in the trading system's design for processing order cancellations, leaving individual investors in the dark on debut day over whether orders were processed.

Nasdaq has since said it aims to revamp its systems for handling stock offerings, after acknowledging that technology problems had affected trading in millions of newly-issued Facebook shares on Friday, the Wall Street Journal reported, according to Reuters.

Reuters reports that Facebook shares sank on Monday and Tuesday - their second and third days of trading - to end at $31, more than 18% below the initial public offering price of $38.