Mike Isaac

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Facebook Defends Its IPO Process, Points Finger at Nasdaq

In its first public response to the trader outrage following its messy initial public stock offering, Facebook filed a joint motion on Friday to consolidate the 40-plus class-action lawsuits against the company, requesting that the many legal precedings be moved to a federal court in New York.

The 24-page filing essentially lays out Facebook’s defense strategy, claiming that the company essentially did nothing wrong in the entirety of its process during the weeks leading up to the IPO and in the aftermath, when its shares dropped more than 25 percent since its market debut. The filing also points out the Nasdaq exchange’s shortcomings in the IPO process, highlighting “technical problems and other trading-related errors affecting Facebook’s stock — which NASDAQ has subsequently admitted – created market uncertainty and caused investor losses.”

If you’ll recall, after Facebook’s rocky first day of trading, much of the attention was shifted to the last-minute amendments to its S-1 filing, specifically the May 9 update, where Facebook further emphasized its weakness on its mobile platform, an area in which the company struggles to find an effective monetization strategy.

Facebook contests that it and its underwriters did nothing wrong. As the motion says, “Plaintiffs rely heavily on post-IPO articles as sources for their allegations” — a reference to the deluge of stories that followed the lackluster IPO focused specifically on the May 9 amendment — “but they ignore that what Facebook and the Underwriter Defendants allegedly did both followed customary practices and did not violate any rules.”

As many were wont to point out later — most notably Henry Blodget of Business Insider — shortly before Facebook amended its S-1, the company cut its revenue forecast for 2012 and relayed that information verbally to analysts who worked for the underwriters, who then relayed that information to institutional investors. The retail investors, however, were cut out of the loop.

But, as Facebook notes, it wasn’t required to disclose any of that information beyond what it filed in the S-1. “As recently as 2005, however, the SEC declined to amend the rules to “require projections or other forward-looking information to be included in initial public offering registration statements.”

Instead, Facebook spends a significant portion of the document outlining Nasdaq’s egregious errors over the course of Facebook’s May 18 market debut. In one of many damning quotes from the filing, Facebook’s attorneys remind: “… the commencement of trading in Facebook shares was delayed as a result of problems with NASDAQ’s software systems, which impaired the orderly execution of trades and price levels.”

Calls and emails to Nasdaq were not immediately returned.

Spurned investors, of course, want reparations for Facebook’s weak showing. The 40 suits were filed against Facebook, Nasdaq and Facebook’s underwriters, Morgan Stanley, J.P. Morgan Chase and Goldman Sachs. Friday’s filing — which is on behalf of Facebook, its underwriters and the members of its board — requests that the myriad lawsuits be consolidated and moved to a New York court, specifically because most of the events and actions concerned in the litigation occurred in New York. “Thus,” the motion states, “in all of the Facebook IPO Actions, witnesses and documents located largely in New York would be the focus of discovery.”

The filing also comes on the heels of a small victory for Facebook earlier in the week, in which a Texas court struck down a petition requesting the deposition of key Facebook executives involved in the IPO process, including CEO Mark Zuckerberg and CFO David Ebersman.

Shares of Facebook were trading up 3.64 percent on Friday afternoon.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work