SecondMarket Sued Over Failed Facebook Shares Trade

Published on June 24, 2011
by Liz Gannes

Felix Investments, a firm that brokers sales of private company shares, sued SecondMarketĀ earlier this month, alleging that the private company marketplace’s negligence prevented a planned purchase of Facebook shares from a current employee from going through.

Specifically, in January 2010, Felix Investment’s Facie Libre (approximately Latin for Facebook) made a deal through SecondMarket with Facebook engineer Karl Voskuil to buy $2.475 million worth of Facebook shares with a fee of $75,000 paid to SecondMarket. (Thanks to peHUB for flagging this and posting the lawsuit on Scribd.)

However, the transaction was later nullified because it did not have final approval from Facebook’s lawyers or a formal legal opinion on the sale. These documents were allegedly SecondMarket’s responsibility and their absence was not explained to Felix Investments until three months after the closing date of March 26, when all the funds had already been transferred.

It later turned out, according to the filing, that SecondMarket had delivered the required legal opinion one day later than Facebook’s 60-day window, and had tried to restart the transaction with a new 60-day window starting in March. But then in April, Facebook changed its rules to prohibit insider trading.

Felix did eventually get its money back from Voskuil, more than a year later. But the investment firm says its lost profit which, based on Facebook’s growth in valuation during that time, was $9.5 million.

SecondMarket told peHUB it thinks the lawsuit is without merit. The company has since changed its model so it no longer facilitates these individual trades, but rather conducts larger, organized single-company offerings.

For more on Felix Investments, see this recent DealBook profile and their reviews on Quora (mostly unfavorable, but by no means a representative sample given it’s just a bunch of anonymous commenters).

Please see the disclosure about Facebook in my ethics statement.

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