Facebook IPO Lawsuit

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

------ ----------------------- ---------x
IN RE FACEBOOK, INC., IPO SECURITIES AND
DERIVATIVE LITIGATION, OPINION & ORDER
MOL No. 12-2389
- ---- -- --- ------ -------------------X
A P PEA RAN C E S:
Attorne for Co-Lead Plaintiffs and the Class
BERNSTEIN LITOWITZ BERGER & GROSSMAN LLP
1285 Avenue of the Americas
New York, NY 10019
By: Max W. Berger, Esq.
Steven B. Singer, Esq.
John J. Rizio-Hamilton, Esq.
Catherine E. McCaw, Esq.
LABATON SUCHAROW LLP
140 Broadway
New York, NY 10005
By: Thomas A. Dubbs, Esq.
James W. Johnson, Esq.
Louis Gottlieb, Esq.
Thomas G. Hoffman, Jr., Esq.
Additional Counsel for Co-Lead Plaintiff
Banyan Capital Master Fund
KESSLER TOPAZ MELTZER & CHECK LLP
280 King of Prussia Road
Radnor, Pennsylvania 19087
By: David Kessler, Esq.
Darren J. Check, Esq.
1
Case 1:12-md-02389-RWS Document 172 Filed 12/12/13 Page 1 of 83
Additional Counsel for Named Plaintiffs
Jose G, Galvan and Mar Jane Lule Galvan
LIEFF CABRASER HEIMANN & BERNSTEIN
250 Hudson Street, 8th Floor
New York, NY 10013
By: Steven E. Fineman, Esq.
Daniel P. Chiplock, Esq.
Attorneys for Facebook, Inc. and
Individual Facebook Defendants
KIRLAND & ELLIS LLP
601 Lexington Avenue
New York, NY 10022
By: Andrew B. Clubok, Esq.
Brant W. Bishop, Esq.
KIRLAND & ELLIS LLP
655 fteenth St. NW
Washington, DC 20005
By: Susan E. Engel, Esq.
Kellen S. Dwyer, Esq.
Bob Allen, Esq.
WILLKIE FARR & GALLAGHER LLP
787 Seventh Avenue
New York, NY 10019
By: Tariq Mundiya, Esq.
Todd G. Cosenza, Esq.
Sameer Advani,
WILLKIE FARR &GALLAGHER LLP
1875 K Street, NW
Washington, DC 20006
By: Ri rd D. Bernstein, Esq.
Eli J. Bower, Esq.
Attorne for Underwr r Defendants
DAVIS POLK & WARDWELL LLP
450 Lexi on Avenue
New York, NY 10017
By: James P. Rouhandeh, Esq.
Cha s S. Duggan, Esq.
Andrew Ditchfield, Esq.
2
Sweet, D.J.
s Pursuant to the trans r order from the United
1 Panel on Mul tidistrict Litigation (the "MDL Panel"),
ente on October 4, 2012, 41 actions stemming from the May 18,
2012 tial public offering ("IPO") of Facebook, Inc.
(" k" or the "Company") are sently this Court.
The instant motion relates to Plaintiffs North
Carol Department of State Treasurer on behalf of the North
Carol Retirement Systems; Banyan Capital Master Fund Ltd.;
Arkansas Teacher Retirement S and the Fresno County
Empl s' Retirement Association; and the Named Plaintif
Jose G . Galvan and Mary Jane Lule Galvan ( collectively, "Lead
Plaintif "or "Plaintiffs") consoli class act complaint
(the
"
idated ss Action Comp int" or "CAC") alleging
federal securities cIa (the "Securities Actions") against the
Defendants Facebook, certain Facebook directors officers
(the
"
dual Defendants"), 1 and underwriters of initial
public offering ("IPO") of Facebook (the "
rwriter
The Individual Defendants include Mark Zuc ("Zuckerberg"); K.
Sandberg ( "); David A. Ebersman ("Ebersman"); David M. lane
("Spillane"); Marc L. Andreessen ("Andreessen
n
); Erskine B. Bowles
("Bowles"); James B. Breyer ( "); Donald E. Graham ("Graham"); Reed
Hastings ("Ha n); and Peter A. Thiel ("Thiel
n
).
3
Defendants") 2 (collectively, "Defendants" or "Facebook
Defendants") . The Defendants have moved to dismiss the Class
Action Complaint pursuant to Federal Rules of Ci vi 1 Procedure
12 (b) (6) for failure to state a claim. Based on the conclusions
set forth below, Defendants' motion to dismiss is denied.
I. Prior Proceedings
On September 20, 2012, the MOL Panel held a hearing to
determine whether the pending 41 filed actions should be
transferred to the Southern District of New York. On October 4,
2012, the MOL Panel issued a transfer order, finding that the
"Southern District of New York is an appropriate transferee
district for pretrial proceedings in this litigation," reasoning
that "[m]uch of the relevant discovery will be located in New
York " In re Facebook. IPO Secs. & Derivative Litig.,
MOL No. 2389, 2012 WL 4748325, at *3 (Oct. 4, 2012). The cases
The Underwriter Defendants include Morgan Stanley & Co. LLC ("Morgan
Stanley"); J.P. Morgan Securities LLC ("J.P. Morgan"); Goldman, Sachs & Co.
("Goldman Sachs"); Allen & Company LLC; Barclays Capital Inc.; Blaylock
Robert Van LLC; BMO Capital Markets Corp.; C.L. King & Associates, Inc.;
Cabrera Capital Markets, LLC; CastleOak Securities, L. P.; Ci tigroup Global
Markets, Inc.; Cowen and Company, LLC; Credit Suisse Securities (USA) LLC;
Deutsche Bank Securities Inc.; E*TRADE Securities LLC; Itau BBA USA
Securities, Inc.; Lazard Capital Markets LLC; Lebenthal & Co., LLC; Loop
Capital Markets LLC; M.R. Beal & Company; Macquarie Capital (USA) Inc.;
Merrill Lynch, Pierce, Fenner & Smith Incorporated; Muriel Siebert & Co.,
Inc.; Oppenheimer & Co. Inc.; Pacific Crest Securities LLC; Piper Jaffray &
Co.; Raymond James & Associates, Inc.; RBC Capital Markets, LLC; Samuel A.
Ramirez & Company, Inc.; Stifel, Nicolaus & Company, Incorporated; Wells
Fargo Securities, LLC; The Williams Capital Group, L. P; and William Blair &
Company, L.L.C.
4
were assigned to this Court for coordination or consolidation of
the pretrial proceedings. Id.
Of the 41 actions presently before the Court due to
the MOL Panel's transfer order, 30 of these actions allege
violations of the Securities Act of 1933 (the "Securit s Act")
and the Securities Exchange Act of 1934 (the "Exchange Act")
against movants and various underwriter de s. On December
6, 2012, this Court issued an opinion, In re Facebook. IPO Sec.
& Derivati ve Lit 288 F.R.D. 26 (S.D.N.Y. 2012) (the
"December 6, 2012 Opinion"), which con idated the actions
aIle ng violations of the Securities Act and Exchange Act into
the Securities Actions and Lead Plaintiffs were appointed.
3
The
3 The Securities Actions include:
No. 12-cv-4081 (filed 5/23/12);
(filed 5/23/12);
Inc. No. 12-cv-4150 (filed
Inc., No.
4157 (filed 5/24/12); No. 12-cv-4184 (filed
5/25/12); 12-cv-4194 (filed 5/25/12);
5/30/12);
Ins:...:.., No.
4332 (filed
6/4/12);
No.
Sexton v. Facebook, No. 12-cv-4777 (filed
v Inc No. 12-cv-5511 (filed 7/17/12), which
were filed in this District. The Securities Actions also include:
12-cv-2662i 12-cv-2680;
No. 12-cv-2 12-
No.
No. in
the Northern District California and transferred to this District. In
5
class actions against the NASDAQ OMX Group Inc. and The NASDAQ
Stock Market LLC (col ctively "NASDAQ" ) alleging federal
securities (the "NASDAQ Securities Actions
fl
) and negligence
claims (the "NASDAQ Negligence Actions") (collectively, the
NASDAQ Actions") were also consolidated. The cases alleging
vati ve c ims (the "Der i vative Actions ") are currently not
consolidated, with individual plaintiffs in the Derivative
Actions having brought forth separate actions.
Lead Pla if for the Securit s Actions filed
Consolidated Class Action Complaint on February 28, 2013. The
CAC alleges violations of Sections 11, 12 (a) (2) and 15 of the
Securities Act.
The Defendants filed t instant motion to dismiss the
Securities Act s on April 30, 2013. Oral arguments were held,
and the motion was marked fully submitted, on October 8, 2013.
II. of the Consolidated Class Action Complaint
Alleged cts and prior proceedings underlying this
addition, actions plaintiffs Lawrence Corneck and Eugene Stricker under
Exchange Act include:
6
opinion are set out the December 6, 2012 Opinion.
Accordingly, only facts relevant to this motion will be provided
below. Because this is a motion to dismiss under Fed. R. Civ.
P. 12(b) (6), the lowing cts, which this Court assumes to be
true, are drawn from CAC. See Tellabs, Inc. v. Makor Issues
551 U.S. 308, 322, 127 S. Ct. 2499, 168 1. Ed.
2d 179 (2007) ("[FJaced with a Rule 12(b)(6) motion to dismiss a
10(b) act courts must, as with any motion to ss for
failure to ple a claim on which relief can granted, accept
all factual allegations in the complaint as true.").
The CAC refers to the events surrounding and a sing
out of Facebook's May 18, 2012 IPO.4 Facebook is a worldw
online social networking company that (i) builds tools that
enable users to connect, share, discover and communicate with
each other; (ii) enables devel rs to build social applications
of Facebook or to integrate their websi tes with Facebook; and
(iii) offers products that enable rtisers marketers to
engage with its users. Facebook is currently the world's
la st social network. (CAC <]I 84.) As of March 31, 2012,
Facebook reported that 901 Ilion "active users" accessed s
website each month, nearly half the people who use the Internet
Information from Securities and Exchange Commission ("SEC") fil by
Facebook, in particular its Form S-l Registration Statement and amended Form
S-l/A Registration Statements are noted where relevant.
7
and approximately 13% of the world's population.
Facebook generally does not charge its users r any of the
social networking services it provides. Instead, Facebook's
business model depe almost entirely on selling ce on its
network to companies that want to Facebook's user base
advertisements di ayed to Facebook members. The Company's
advertising revenue accounted 98%, 95% and 85% of the
Company's revenues in 2009, 2010, and 2011 respectively. Id.
<J[ 91.)
In 2011, Facebook began to explore engaging an IPO
to compete wi other rival cash-rich technology companies. The
Company's shares were traded on private exchanges, but accessing
the public markets through an IPO would provide the Company with
large amounts of ca create a highly liquid market for its
stock and had the potential to significantly increase the
Company's value, among ot r benefits. (Id. <J[ 85.)
On February I, 2012, Facebook publicly filed s
itial registration statement with the (the "Feb. 1
istration Statement").6 (CAC <J[ 89.) The 1 istration
5 All of Facebook's Form S-1 Disclosures, including amenQ'11ents, and the SEC's
declaration of effectiveness are searchable on the SEC's EDGAR search
atform at http://www.sec.gov/edgar/ .htm.
6 Facebook subsequently amended its ion statement several times
before fi their final Form S-l/A on May 16, 2012 (the on
8
atement contained historical data about Facebook's performance
and a description of risks associated with the company. It
stated that, II [s] ince January 2011, Facebook. com has been the
number one website worldwide," with more than 845 million
"monthly active users" as of December 31, 2011, who collectively
spent on average 119.7 billion minutes per y on Facebook. II
Feb. 1 Registration Statement, at 79. It further stat that
the Company has consistently "experienced rapid growth in
number of users and their engagement. II Id., at 1. Facebook's
advertising and total revenue grew from approximately $153
million to $3.2 billion from 2007 to 2011, a growth of more than
twenty times in four years. (CAC 92.) During this time
period, Facebook's annual revenue grew from $153 million to more
than $3.7 billion.
Facebook ascribed its financial results to seve
factors. The rst and principal factor was the growing usage
of Facebook on mobile devices, as oppos to the use of Facebook
through t tional, stationary desktop computers. (CAC 95.)
A second factor was the Company's "product decisions," decisions
Facebook made concerning the des and features of its website,
the type of advertising it displayed and the price of the
advertisements. (CAC 96.)
Statement") .
9
The usage of Facebook on mobile devices was critical
to Facebook's nancial performance for several reasons. First,
Facebook's mobile market was extremely large: approximately half
of FacebookI s monthly users accessed the website through their
mobile devices, either as a supplement to ir use of Facebook
through des op computers or as their only means of accessing
Facebook. Second, the Company's mobile users were growing more
rapidly than rest of the Company's user base. Facebook
anticipated the growth rate of its mobile users to exceed
growth rate of their overall member base for the foreseeable
future. Third, while Facebook showed large volumes of
advertising to users who accessed its website through desktop
computers, it d not yet show advertising to its mobile users.
Mobi users were, at that time, an unmonetized resource and an
important factor Facebook's future growth. (CAC ']( 94.) The
Feb. 1 stration Statement emphasized that the mobile market
was a "critical" area of "growth" and a "significant
opportuni ty" that the Company was actively developing products
to talize on. Feb. 1 Registration Statement, at 4.
The Feb. 1 Registration Statement also included
warnings of risk factors to potential investors. These warnings
included spe fic disclosures on the impact of mobile us and
10
that Facebook's lity to tap into s potential revenue
stream could an effect on the Company's revenues:

"Growth in use of Facebook through our mobile products,
where we do not currently display as a substitute
for use on sonal computers may ly affect our
revenue and financial results." 1 Registration
Statement, at 5.
"Our advertisi could be adversely af cted by a
number of r including: reased user
access to and with Facebook through our mobile
products, where we do not currently rectly generate
meaningful revenue, particularly to extent that
mobile engagement is substituted for e with
Facebook on personal computers where we monetize usage by
displaying ads and other commercial content." Feb. 1
Registration Statement, at 12; accord stration
Statement, at 13.
"We had more than 425 million MADs [monthly act users]
who used Facebook mobi products in December 2011. We
anticipate that rate of growth in mobile users will
continue to exceed growth rate of our overall MAUs
for the foreseeable in part due to our s on
developing mobile p to encourage mobile us of
Facebook. Although substantial majority of our
mobile users also access and engage with Fa k on
personal computers where we display advertisi
users could decide to asingly access our s
primarily through mobile ces. We do not currently
directly generate any meaningful revenue from the use of
Facebook mobile products, and our ability to so
successfully is unproven. Accordingly, if users continue
to increasingly access k mobile products as a
s titute for access personal computers, if
we are unable to lly implement monetization
st ies for our users, our revenue and
f ial results may ively affected." 1
istration Statement, at 13; accord Registration
11
Statement, at 14.
"We believe that our ability to compete ef ively
depends upon our ability to successfully monetize
mobile usage." Feb. 1 Registrat Statement, at 14i
accord Registration Statement, at 15-16.
"We do not currently display ads to users who access
Facebook via mobi apps or our mobile website. To the
extent that increasing us of Facebook through mobile
apps or our mobile website substitutes for the use of
Facebook through personal computers where we do show ads,
the number of ads that we deliver to users and our
revenue may be negatively affected unless and until we
include ads or spons sto es on our mobile apps and
mobi website. We believe that people around the world
will continue to increase their use of Facebook from
mobile devices, and that some of this mobile usage s
been and will continue to be a substitute for use of
Facebook through personal computers." Feb. 1
Registration Statement, at 46: accord Registration
Statement, at 51.
"We do not show ads or directly generate any meaningful
revenue from users accessing Facebook through our mobile
products . .. " Feb. 1 Registration Statement, at 79;
accord Registration Statement, at 93.
"We believe that mobile us of Facebook is critical to
maintaining user growth and engagement over t long
term, and we are actively see ng to grow mobile us
although such us does not currently directly generate
any meaningful revenue.11 Feb. 1 Registration Statement,
at 81; accord Registration Statement, at 94.
The Feb. 1 Registration Statement also noted that
Facebook "prioritizes user engagement over short-term financial
12
results," and thus "frequently make[s] product decisions that
may reduce our short term revenue." 1 Registration
Statement, at 17. It also explained its revenue trends:
Our revenue t are also af cted by ad inventory
management changes affecting the number, size, or
prominence of ads we display. For example, in the
fourth quarter of 2010, we signi cantly increased the
number of on many Facebook s. As another
example, in fourth quarter of 2011, we increased
the reserve ce (i.e., the minimum price threshold)
in our rtising auction system order to reduce
the frequency with which low qual y ads are displayed
to users. s change caused a ion in the
overall r of ads shown and increased the average
price as a result of s including
removal of ads with bids were below the reserve
price some advertisers raising their bids in
to this change. For this particular
we that the decrease in the number
di the increase in average price per
approximately offset each ot r such that the impact
on total revenue was minimal.
Id. at 46-47; accord Registration atement, at 53.
The market reacted s ively to the sclosures in
the 1 Registration Statement, including Company's
posi on capitalizing mobile market. <]I 97.)
reported that Facebook expected its "next 1 billion
users to come mainly from Ie devices,II and was therefore
II increasing its focus on Ie technology to ta advantage of
13
---
the shift to smartphones and tablets. ,,7 Similarly, The New York
T s reported that "the filing shed some light on how
[Facebook's] meteoric run has turned the upstart into a
formidable money rna r. [M]any analysts believe Facebook's
fortunes will rapidly multiply as advertisers direct more and
more capital to the Web's social hive.,,8
On February 28, 2012, the Securities and Exchange
Commission "SEC") sent Facebook a "comment letter"
concerning certain of the Company's disclosures in the Feb. 1
Registration Statement "SEC Letter"). (CAC 'll 98.) In the
SEC Letter, the SEC made note that the Feb. 1 stration
Statement stated "that users 'could deci to increasingly
access your products primarily through mobile ces
"
Letter from SEC to Facebook, at 3 (Feb. 28, 2012). The SEC
instructed Facebook to "ensure that your disclosure ly
addresses the potent 1 consequences to your revenue and
financial results rather than just stating that they 'may be
negative af ed'" assuming that Facebook's mobile
monetization efforts were unsuccessful. rd. The SEC further
Brian Womack & Ari Levy,
Internet IPO on
http://www.bloomberg.com/news/2012-02-01/facebook-files 0-5-
bill social-networking-site.htm1.
Record, BLOOMBERG, Feb. 2, 2012,
8 Evelyn Rusli,
://dealbook.nytimes.
N.Y. Feb. I, 2012,
? r=O.
14
7
instructed Facebook to "describe any known trends or
uncertainties that have had, or that you reasonably expect will
have, a material favorable or unfavorable impact on sales or
results of operations." rd. at 5.
9
On March 7, 2012, Facebook responded to the SEC's
comment letter. In its response, Facebook stated that it could
not disclose the potential impact of mobile usage on its revenue
because it was unable to determine that impact. (CAC '][ 102.)
Facebook asserted that because many of its mobile users also
continued to access Facebook through ir desktop computers,
the Company "cannot specifically determine how mobile use is a
substitute for, rather than incremental to, use on personal
computers." Thus, Facebook stated that it was unable to
"specifically assess the impact of increasing mobile use on its
revenue and financial results" at that time. (Id.
Facebook subsequently revised its Registration
Statement to include more speci c information about the trend
of asing mobile usage:
9 According to the Lead Plaintiffs, the SEC makes conunent letters public "no
earlier than 20 business after it has. . declared a ion
statement effective." (Plo Op., at 9 n.3.) The SEC Le::ter was made pClblic
by the SEC on or aroClnd June 15, 2012, after the da:::e of Facebook's IPO.
(Id.)
15
"Increasing Mobile Usage. Increasing use of Facebook on
mobile devices will also af our performance,
particula y if mobile use substitutes for use on
personal computers. Historically, we have not shown ads
to users accessing Facebook through mobile apps or our
mobile website and we cannot be certain that our mobile
monetization approaches will be successful in generating
meaningful revenue. We cannot quantify the extent to
which mobile usage of Facebook is substituting for,
rather than incremental to, usage of Facebook through
personal computers, but we generally expect mobile usage
to increase at a faster rate than usage through personal
computers the foreseeable future." See Registration
Statement, Mar. 7, 2012, at 51 ("Mar. 7 Registration
Statement"); accord Registration Statement, at 53.
"We had 432 million MAUs who used Facebook mobile
products in December 2011. While most of our mobile
users also access Facebook through personal computers, we
anticipate that the rate of growth in mobile usage will
exceed the growth in usage through personal computers for
the seeable future [W]e do not currently
Facebook mobile products, and our ability to do so
successfully is unproven. Accordingly, if users
increasingly access Facebook mobile products as a
substitute for access through personal computers, and if
we are unable to successfully implement monetization
strategies for our mobile users, or if we incur excessive
expenses in this ef rt, our financial performance and
ability to grow revenue would be negat ly affected."
Mar. 7 Registration Statement, at 14; accord Registration
Statement, at 14.
"We had 488 million MAUs who used Facebook mobile
products in March 2012. While most of our mobile users
also access Facebook through personal computers, we
anticipate that the rate of growth in mobile usage will
exceed the growth in usage through personal computers for
the foreseeable future [W]e do not currently
Facebook mobile products, and our ability to do so
successfully is unproven." Registration Statement, April
16
23, 2012, at 14 ("April 23 gistration Statement"); see
also Registration Statement, at 14 (adding additional
disclosure based on information from the second quarter
that "We believe this increased usage of Facebook on
mobile devices has contributed to the recent trend of our
daily act users (DAUs) increasing more rapidly than
the increase the number of ads delivered").
Facebook also included positive statements regarding
mobile usage:
We experienced growth in DAUs [daily active users]
across major markets including the United States,
Brazil, and India. Increased mobi usage was a key
contributor to this growth. DAUs as a percentage of
MAUs [monthly active users] increased from 55% in
March 2011 to 58% in March 2012, which we believe was
driven entirely by increa mobile usage of Facebook.
We believe that increases in DAUs and in DAUs as a
percentage of MAUs generally positively affect our
revenue because increases in user engagement may
enable us to deliver more relevant commercial content
to our users and may provide us with more
opportunities for monetization.
Registration Statement, at 50.
In March and April 2C12, Facebook began to prepare for
its "roadshow." (CAC <JI 103.) Roadshows are a series of
meetings around the country, primarily with groups of
institutional investors, where a company makes presentations and
answers investor questions regarding s upcoming IPO. The
roads how is an important part of t IPO process as it directly
17
markets an IPO to itutional investors and generates interest
in the IPO. Id.) As part of this process, compan swill
typically provide s underwriters with the company's
ections, and unde ters 11 typically use these
projections to create their own analysis and provide their own
projections.
Defendant Ebersman and Facebook's Treasurer, Cipora
Herman ("Herman") , were the Facebook executives who had
principal respons ility r managing the Company's roadshow.
(CAC en 105.) Lead Underwr ers built the "book" of orders
for the IPO during roadshow, whi conta the number of
shares each inst ional investor wanted to purchase, as well
as price that each investor was willing to pay r the
stock. Facebook and the Lead Underwriters then used the orders
in the book to ermine how many shares to sell the IPO and
the price per share. (Id. )
In time leading to the roadshow, Facebook
continued to make positive public statements emphasizing its
growth. (CAC en 110.) These comments included posit remarks
on Facebook's ility to monetize the mobile mar In the
March 7, 2012 amendment to the Registration Statement, Facebook
stated tit was beginning to display one of its principal
18
advertising products to mobile users. See Mar. 7 Registration
Statement, at 14 ("In February 2012, we announced plans to
include sponsored stories in users' mobile News Feeds.").
Facebook also noted that the number of users who accessed its
webs e through mobile products had grown to 488 million as of
March 31, 2012, an increase of 15% over such users as of
December 2011, in the Company's April 23, 2012 amended
Registration Statement. April 23 Registration Statement, at 1.
On April 16, 2012, the Company's Chief Financial
Officer ("CFO"), Defendant Ebersman, provided revenue guidance
to the analysts from investment banks that were underwriting
the IPO (the "Syndicate Analysts"). (CAC CJ[ 116.) This
presentation included Facebook's estimated revenues for the
second quarter of 2012 and the full year. This information
allowed the Syndicate Analysts to generate estimates of the
Company's revenues and financial results, which would then be
incorporated into an "institutional selling memoranda" that the
Underwriter Defendants would use to market the IPO to
institutional investors. Id.)
At the meeting, Ebersman informed the Syndicate
Analysts that Facebook believed it would report revenues of as
much as $1.2 billion for the second quarter of 2012 and $5
19
billion for the full 2012 year. These figures translated into
year-over-year growth rates of as much as 34% for the second
quarter and 35% for the year. (CAC g( 107.) The Syndicate
Analysts incorporated the Company's internal estimates into
their financial models and virtually mirrored Facebook's
projections: The Syndicate Analysts' predictions translated
into expected year-over-year growth rates of up to 35% for the
second quarter and 39% for the year. The Syndicate Analysts'
estimates were then incorporated into the institutional selling
memoranda that the Underwriter Defendants used to market the IPO
to investors. (Id. cncn 108-09.)
On May 3, 2012, Facebook filed an amended Registration
Statement (the "May 3 Registration Statement ") announcing that
it was planning to sell more than 337 million shares in the IPO
at a price between $28 and $35 per share. (CAC <J1 113.) On the
same day, Facebook posted its roads how video presentation on its
website, which featured Defendant Chief Operating Officer
Sandberg stating that the mobile market was "a key area of
growth for Facebook" and that Facebook was not experiencing
challenges in the mobile market: "For most companies, the
mobile environment is a challenge, because it's so small it
requires new ad formats, but that's not the case for Facebook.II
Sandberg noted that Facebook had II just introduced [one of its
20
incipal advertising products] on mobile devices" and
that e advertisements had "become a really natural part of
Facebook mobile experience." (Id. q[ 114.)
The mar interest for Facebook shares during this
t was extremely high. Investor demand to attend the roadshow
was huge, and many projected the IPO to be one of rgest
IPOs history. New York Times ed on May 3, 2012:
Fa k, which plans to make a market debut this
month that could value it at $86 billion, is stock
that everyone seems to want. excitement over
Facebook has come on the back of its rap growth.
For many, Facebook is the Internet. After a flurry of
eye-popping mar debuts by other Internet start
Facebook's will be t biggest yet. Demand
to attend Facebook [roadshow] presentations has
been extraordinarily high, with underwriters already
drawing up waiting lists for meetings[.J
10
Similarly, Reuters quoted an analyst from the research
firm IPO Boutique as stating that "I have not seen as broad
based interest in an IPO s Google. Investor demand lS
immense. I expect a roads how that will rival all roadshows
where investors will be turned away at the door."
ll
10 Susanne Craig & Rusli,
~ = = : . . . : . : . . : : : . . : . : : k N. Y. TIMES, May 3,
03/small-investors-may-get-to-own-a-bit-of-facebook/.
11 Alistair Barr & Alexei Oreskovic,
REUTERS, May 2, 2012, http:
facebook-ipo-idUSBRE8401PD20120502.
21
Facebook held s first live roadshow presentation on
May 7, 2012. (CAC <JI 118.) Based on the roads how presentation
and the Registration Statement, analysts widely recommended that
investors buy Facebook stock. Anal ts also widely report
that, r the second quarter and year-end 2012, Facebook would
experience revenue growth rates of at least 35% r-over-year,
based in part on the Company's ability to make money from its
mobi users. (rd. <JICJ[ 120-21.) Analysts did not appear worried
about the monetization issues associated with mobile usage. A
Sterne Agee report recommended a "buy" of Facebook stock, noting
that Facebook had a strong position in the mobile market "[wJ h
488 million MAUs [monthly active usersJ using Facebook mobile
products in the month of March 2012, [FacebookJ clearly has the
reach on mobile platforms " rd. <JI 121.) Sterne Agee
concluded that "mobile monetization [is] a significant long-term
growth opportunity for [Facebook]." rd.
However, on May 7, 2012, hours after its rst
roads how presentation, Facebook's management determined that the
Company was facing dif cul ty in meeting its previous revenue
projections for the second quarter of 2012 and the full year.
(CAC CJ[ 122.) Two developments were causing the change in
analysis: First, during the second quarter of 2012, Facebook's
22
users increasingly migrated from desktop computers, where the
Company dis ayed large amounts of ads, to mobile devices, where
the Company di layed much less advertising. As such, cebook
was generating less advertising revenue than projected. Second,
the Company had made certain product cis ions in the second
quarter of 2012 that reduced the avera amount of
advertisements di ayed to users on some pages, which
exacerbated the terioration in its advertising revenues caused
by increasing mobile usage. (Id.
On the evening of May 7, 2012, Ebersman approached
Ie Morgan Stanley banker on the IPO, Michael Grimes
(IfGr s If), and informed him that, based on second quarter data
received to date, Ebersman was no longer confident that Facebook
would meet s internal revenue estimates. (Id. <J[ 123.)
Ebersman informed Grimes that, " sed upon their experience in
Q2 to date, [Ebersman] was less confident in his financial
projections in reaching or exceeding his financial projections
than previously [sic]." Id. ) rsman further in rmed Grimes
that two developments had caused the deter ration in Facebook's
revenues: reasing mobile usage and the Company's product
decisions. Id.)
By May 8, 2012, Facebook had cut its projected revenue
23
figures for the second quarter 2012 by $100 million, or more
than 8.3%, and for the year by $175 million, or 3.5%. (CAC
<j[ 124.) Facebook determined that its revenue for the second
quarter would as low as $1.1 billion, or 8.3% below the top
of its prior range, and s revenue for 2012 would be between
$4.825 billion and $4.85 billion, or as much as $175 million
less than previously estimated, a decline of up to 3.5%. The
sed revenue estimates translated into sharply lower year-
over ar revenue growth rates of as little as 23% for the
second quarter and 30% for the r, as compared to growth rates
of as much as 34% for the second quarter and 35% r the year
based on the Company's prior estimates. (Id.) These figures
were far below the Syndicate Analysts' estimates. (Id. <J[ 126.)
On May 8, 2012, Facebook's most senior executives
rmined that the change was so significant that it warranted
disclosure to the Syndicate Analysts. (Id. <J[ 125.) Facebook's
Treasurer, Herman, sent an email to employees in the finance
department wi the subject line: "Q2 estimates from analysts
IMPORTANT PLS THIS MORNING." (Id. (emphasis in orig 1) ) .
Herman wrote that Facebook had "updat our forecast and we're
trying to gauge how far off our new forecast is from where the
Herman stated that and anal ts are coming out."
Morgan Stanley bankers immediately needed to see "the q2-q4 by
24
quarter revenue est s from the analysts for whom we have
detail models," and that she was H[c]opying [a Morgan Stanley
banker] on this so we can get some eff iency - I don't want to
be the bott ck getting the info to MS." (Id.) After
Morgan Stan ban rs had compared Facebook's revenue figures
with the Syndicate Analysts' estimates, Grimes advised Ebersman
that Facebook should immediately provide its new revenue figures
to the Syndicate Analysts so that they could se t ir models
ed on this new information and provide it to the Company's
largest potential investors. (Id. <J[ 126.)
The next day, May 9, 2012, Facebook filed a Free
Writ Prospectus (the HFWPII) and an Amended Registration
Statement ("May 9 Registration Statement ") . (CAC <J[ 128.) The
May 9 istration Statement and FWP both stated:
Based upon our rience in the second quarter of
2012 to date, the trend we saw in the first quarter of
DAUs [daily act users] increasing more rap y than
the se in number of ads delive has continued.
We believe s trend is dr in part by increased
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 r page as a result of
product cisions.
May 9 stration Statement, at 57; FWP.
25
9
The FWP and May 9 Registration Statement led to some
media reports on Facebook's issues th mobile monetization.
12
These sto s reported that the migration of Facebook users to
its mobi platform was compromising the Company's ability to
generate ad revenue. One report went so far as to warn that
there was a possibil y Facebook may miss its second quarter
projections.13
On May 9, 10 and 15, after ling the FWP and the May
Registration Statement, Herman, Facebook's Treasurer, made
nineteen scripted calls with the Syndicate Analysts (the "Herman
12
May 9,
April Dembosky, k Admits To Mobile Weakness FIN. TIMES,
:!!blogs.ft. tech-blcg 2012 05 facebook-admits-tc-mobile-
weakness! ("Facebook said the migration cf its users to mobile platforms is
compromising its ability to make money from them."); Henry Blodget,
Bus. INSIDER, May 10, 2012, http://www.businessinsider.com/
k-muppet-bait-2012 5 (writing that the disclosures revealed that the
company "is unli to be able to generate as much revenue per user from
mobile as it does from the web," and that this concern, combined with the
fact that "Facebook's growth is decelerating," make the offering "muppet
VENTUREBEAT, May 13,
numbers! ("Mobile is Facebook's advertising Achilles' heel, a fact the social
network was not only quick to point out to investors in the first S-l, but
also anxious to emphasize in the latest prospectus amendment.").
http:
s Faster Than
PRIVCO, May 2012,
ts-mobile-shift-damaging-
FWP "reveals fast erosion in
core advertising business," offers "a stunning preview of a lower than
Q2 as a result of the shift to mobile devices," and "Effectively
Warns Investors That Facebook Will Miss Its Second-Quarter Projections");
Jennifer Van Grove,
May 9,
.privco.com!breaking-news-facebooks-admits-mobile-shift-damaging-
business-faster-than-expected.
26
Calls"). (CAC <J[ 132.) During these calls, Herman told the
Syndicate Analysts that Facebook had sharply reduced revenue
figures that the Company had provided to them three weeks
earl r. The script for the Herman Calls stated as follows:
I wanted to rna sure you saw the disclosure we made
in our amended filing. The upshot of this is that we
believe we are going to come in [on] the lower end of
our $1.1 to $1.2 bn range for Q2 based upon the trends
we described in the disclosure. A lot of investors
have been focused on whether the trend of ad
impressions per user declining (primarily as a result
of mobile) was a one-time, or continuing, occurrence.
As you can see from our disclosure, the trend is
continuing. You can decide what you want to do with
your estimates, our long term conviction is unchanged,
but in the near term we see these trends continuing,
hence our being at the low end of the $1,100 + $1,200
range.
Id. <j[ 133.)
The Syndicate Analysts revised ir financial models
to reflect Facebook's reduction in its revenue projections:
estimates of the Company's second quarter revenue were cut by as
6
9-
much at 7% and annual revenue as much as o (Id. <j[<j[ 135-36.)
The Syndicate Analysts immediately provided this new information
to some of Facebook's most important potential investors.
14
(Id.
would later report that certain the
Syndicate Analysts' decision to reduce their revenue estimates during the
time when the roads how was occurring as "a shock," "very, very
unusual," a "bombshell," and something that they had "never before seen ...
27
14
<Jl 137.) The lowered revenue figures rai sed II a signi ficant red
flag" to those investors who received them. (Id. <Jl 139.)
Indeed, one hedge fund that was warned by an Underwriter
Defendant, Capital Research & Management, concluded that the IPO
price of $38 per share was too high. Id.
Select Syndicate Analysts' projections were revised
for the second quarter as follows:
Syndicate !Pre-May 9 Post-May 9 Percent Change
I
Analyst
I Estimate
Revised
.Estimate
i
I Goldman Sachs
I J.P.
Morgan
Morgan Stanley
1$1.207
I
$1.182
$1.175
billion
billion
billion
! $1.125
I
I $1.096
i
I $1.111
billion
billion
billion
-6.79%
-7.27%
1_
5
.
45
%
!
i
I
i
i
Bank of America $1.166 billion
1$1.100
billion -5.66%
(CAC ~ J l 108, 136.)
Similarly, the project ions for the year-end 2012 were
2012/05/22/us- facebook-forecasts-idUSBRE84LO6920120522;
in 10 years." Alistair Barr, es
REUTERS, May 22, http: .reuters.com/article/
(CAC n 14, 38,
166.) similarly wrote that the reduction in revenue
estimates during the roads how was "highly unusual" and that they
"during 20 years in and around the tech IPO business."
28
15
(reporting that Facebook was "telling that sales may not meet their
mostopt imi stic proj ect ions"); Henry B 1 -'-U-'-'H__
http://www.businessinsider.com/
"said to have told investors
ections"); Faoebook IPO:
WASH. POST, May 11, 2012,
iness/35454711 1 facebook-
Bus. INSIDER, May 10, 2012,
k-demand-2012-5 (Facebook is
http: cles.washingtonpost.
revised as llows:
!
I Syndicate Pre-May 9 I Post-May 9 ! Percent Change
Analyst Estimate Revised
Estimate
I
Goldman Sachs $5.169 billion 1$4.852 billion
1-
6
.
13
%
I
J.P. Morgan $5.044 billion $4.839 billion -4.06% I

Morgan Stanley $5.036 billion $4.854 billion -3.61
$5.040 billion $4.815 billion I Bank of America -4.46%
(Id.
FacebookI S reduction in its projections was reported
the media prior to the IPO.15 Several of these reports only
not that FacebookI s revenue "could be harmed" or that the
migration to mobile "may negatively affect" financial results.
(CAC 'll'll 140-41.) However, analysts other than the Syndicate
Serena Sai t to et al.,
Forecast May 11,2012, http: .bloomberg.
05-10/facebook-ipo-said-to-meet-weaker-than-expected-investor-demand.html
ipo-social-network-facebook-common-stock (same); Kim Peterson, I k
PO MSN MONEY, May 11, 2012, http://money.msn.com/technology-
=769ce83c-2bef-423l-b384-957272alaa25 (same);
investor should be
WALL ST. J.
Saitto Bloomberg article as
about into this weekend").
29
Analysts, who had not been called by Facebook, continued to
widely expect Faceboo k to report revenues in line with
Facebook's original guidance given in April. (Id. ':IT 142.) The
consensus estimates for those analysts were for Facebook to
report revenues of more than $1.2 billion for the second quarter
and $5 billion for the year: a level at or slightly above
Facebook's original guidance. (Id.
The demand for Facebook stock remained high after
Facebook released the FWP and May 9 Registration Statement. The
high demand allowed Facebook to significantly increase both the
size and price of the IPO in the week before the IPO. (CAC
':IT 143-44.) Raising both the price and size of an IPO is a rare
occurrence: it has occurred in only 3.4% of all IPOs s 1995.
(Id. Sl 144.) On May 15, 2012, Facebook announced that it was
increasing the price range for its stock from a range of $28 to
$35 to a new range of $34 to $38. (Id. Sl 145.) Bloombe
reported that Facebook was able to significantly raise the IPO
price because it had succeeded in "convincing investors that
[it] can make money from mobile users.,,16 (Id. Sl 146.) On May
16, 2012, Facebook increased the size of the IPO by nearly 25%,
MacMillan, et al., as IPQ
BLOOMBERG, May 14, 2012, http: .bloomberg. 2012-05-
14 facebook-ceo-focuses-investors-on-mobile-strategy-as-ipo-nears.html.
16 Douglas
30
or 84 million shares. (Id. <[<[ 147-48.)
Facebook completed the IPQ as scheduled after the
close of market on May 17, 2012. (CAC <[<[ 16, 149.) De ndants
sold more than 421 million Facebook IPQ shares to the investing
public at $38 per share, reaping more than $16 billion in
proceeds, making the IPQ one of t largest initial public
of rings in history. Id. <[<[ 4, 150.) Financial news analysts
reported that the underwriters were releasing significantly more
shares to retail investors than previously expected. (Id.
<[ 148.)
Facebook stock began publicly trading on May 18, 2012.
In the days leading up to the IPQ, numerous mar commentators
predicted that Facebook would exper nce a large increase in
share price on the first day of trading due to large demand.
(CAC <[ 152.) Initially, Facebook's price did surge as expected,
with an opening share price at $42.05. Id. <[ 156.) However,
soon a er investors began to sell, which caus Facebook's
share price to drop close to its $38 IPQ ice wi thin fteen
minutes of opening. (Id. <[ 157.) The rge drop in Facebook
share ce forced the Underwriter Defendants to step and buy
millions of shares at $38 a share to ensure that the stock never
dipped low that line. (Id. <[<[ 157-59.) Facebook's stock
31
closed at $38.23. Id. <J[ 159.) Facebook's stock prices fell
even further on t next trading day, May 21, 2012. On
extremely high trading volume, Facebook stock opened sharply
down and closed at $34.03. (Id. 9191 163-64.) Facebook's stock
price dropped again on May 22, closing at $31 r share. (Id.
91 20.) This represented a drop of 18% from Facebook's i ial
IPO stock price. (Id.)
slide in share price may have been caused by news
reports on Facebook's adjusted financial projections. On the
night of May 18, 2012, Reuters reported t "Facebook []
altered its guidance for research earnings last week, during the
road show, a rare and disruptive move.,,17 Following the Reuters
report, other financial press reported that information was
highly material and that it fundamentally affected the value of
Facebook's stock. (CAC 91 161.) On May 19, 2012, Business
Ins noted that for Facebook to reduce its projection
guidance "mid-way through a series of meetings designed the
sole purpose of selling the stock" was "highly material
information" and that:
[S]uch a late change in guidance would mean that
17 Nadia Damouni & Olivia Oran,
REUTERS, May 18,2012, ://www.reuters.
morgan-stanley-idUSLlE8GIER020120519.
32
Facebook's business was deteriorating rapidly
between the start of the roadshow and the middle of
roadshow. Any time a business outlook
deteriorates that rapidly, alarm lls start going off
on Wall reet, and stocks plunge.
IS
On May 22, 2012, Reuters rther reported that the
lead underwriters, Morgan Stanley, J.P.Morgan and Goldman Sachs,
all had significantly cut their revenue figures r Facebook
while the IPO roadshow was underway, a highly unusual move, but
only told a few major ients about ir adj ustment. 19 (CAC
Sf 165.) It is highly unusual for the lead underwriters to
significantly cut their revenue figures in the mi t of a
roadshow. (Id. Sf Sf 166-68.)
The CAC alleges that Facebook iled to disclose
mate al formation in Facebook's Registration Statement and
other disclosures and the Registration Statement made mate ally
untrue and misleading statements and omissions. Lead intiffs
offer two primary theories of liabil (i) Facebook' s lure
to disclose whether increasing mobile usage and Facebook's
19 Felix Salmon, REUTERS, 22, 2012,
http://blogs.reuters. felix-sa facebook-earnings-
forecast.-scandal/ (" [H] ere's a material nonpublic fact about Facebook, which
retail investors and everybody else in the deal deserved to know: all three
underwri ters cut their estimates simultaneously, in response to some very
minor changes in t.he revised IPO prospectus.").
33
product decisions had or were reasonably expected to have a
material unfavorable impact on revenues and to what extent these
trends had or were reasonably expected to impact Facebook's
revenues were omissions or falsities of formation required for
disclosure by Item 303 of Regulation S-K; and (ii) the Company's
"may" and "if" statements regarding the impact of the increasing
mobile usage and the CompanyI s product decisions on Facebook's
revenues represented affirmative material misrepresentations.
II. Discussion
Standard of Review
On a motion to dismiss pursuant to Fed. R. Civ. P.
12(b) (6), all factual allegations in the complaint are accepted
as true, and all in rences are drawn in favor of the pleader.
Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.
1993) . "The issue is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence
to support the claims."
Real Estate Solutions, 261 F.3d 179, lS7 (2d Cir. 2001) (quoting
Pond I v. Town of Darien 56 F.3d 375, 37S (2d Cir.
1995), cert. denied, 519 U.S. SOS, 117 S. Ct. 50, 136 L. Ed. 2d
14 (1996)}.
34
~ ~
To survive a motion to dismiss pursuant to Rule
12(b) (6), "a complaint must contain sufficient factual matter,
accepted as true, to 'state a aim to relief that is plausible
on s face.'" Ashcroft v. I 556 U.S. 662, 663, 129 S. Ct.
1937, 1940, 173 L. Ed. 2d 868 (2009) (quoting Bel
Twombl, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929
(2007)) . This is not intended to be an onerous burden, as
plaintif need only aIle facts suf cient in order to
"nudge[] their aims across the line from conceivable to
plaus e." Twombly, 550 U.S. at 570.
P intif all that Defendants viola Sections
11, 12 and 15 of the Securities Act. Section 11 imposes st ct
liability on issuers and signator s, and negligence Ii ility
on underwriters, where "any part of the registration statement,
when such part became effective, contained an untrue statement
of a material or omitted to state a material ct required
to be stated therein or necessary to rna the statements therein
not misleading." 15 U.S.C. 77k(a). Section 12(a) (2) imposes
Ii lity under similar circumstances misstatements or
omissions in a prospectus, on "[a]ny rson who offers or
sells a security by means of a pro ctus or 0
communication, which includes an untrue statement of a material
35
fact or omits to state a material fact necessary order to
make the statements not misleading. If 15 U.S.C.
77l(a) (2). Section 15 of the curities Act makes a "control
person" liable for causing violations of Sections 11 and 12. 15
U.S.C. 770; see also Panther Partners v. Ikanos Commc'ns,
Inc. 681 F.3d 114, 120 (2d Cir. 2012).
CAC does not allege fraud; Lead PIa iffs instead
allege that Facebook acted negligently in preparing its
Registration Statement. Neither scienter, reliance nor loss
causation is an element of Section 11 or Section 12 (a) (2)
c ims. Id. Section 11 requires only "ordina not pleading
subject only to the 'short and plain statement'
requirements of Federal Rule of C 1 Procedure 8 (a) . " Litw
v. Blackstone L.P. 634 F.3d 706, 715 (2d Cir. 2011).
Sect ion 11 and 12 (a) (2) claims that do not sound fraud need
not satis the heightened particularity requirements of Federal
Rules of Civil Procedure 9 (b) . See In re Morgan Stanley Info.
Fund Secs. Liti ., 592 F.3d 347, 359 (2d Cir. 2010) .
Accordingly, the heightened pleading standards of the Private
Securities igation Re rm Act do not apply to the CAC. See
15 U.S.C. 78u-4(b) (1) (2); see also Litwin, 634 F.3d at 715.
To survive motion to smiss, Plaintiffs need only show
negligence under Section 11 or Section 12 (al (2). Id.
36
"Collectively, the 1 ge of [S]ections 11 and
12(a) (2) creates three potential bases for liability . (1) a
misrepresentat i
(2) an omission in contravent of an
affirmative 1 1 disclosure obI tioni and (3) an omission of
information is necessa to prevent exist disclosures
from being misleading." In re Mo 592 F.3d at 360.
Where such a misrepresentat or omission is ified, the
court must determine whe r it is mate al. See id.
The Registration Statement Omitted Material Information
Class Action Complaint aIle s that Defendants
violated Sections 11 and 12 of the Securities Act by, among
other t failing to disclose the in rmation required by
Item 303 of Regulation S-K. (CAC <]I<]I 188(c) , 197-201.)
PIa iffs allege that Defendants were requ to disclose: (i)
whet r increasing mobile usage and the Company's product
s had or were reasonably expect to have a material
unf e impact on revenueSi and (ii) to what extent those
had impacted or were reas y expected to impact
Facebook's revenue. (Id. <]I 201.) De ndants have challenged
the materiality of this information and contend that t Company
did disclose this information in Registration Statement and
37
FWP.
Item 303 requires the disclosure of all "known trends
that have had or that the registrant reasonably expects
will have a material unfavorable impact on
revenues." Regulation S-K, Item 303, 17 C.F.R.
229.303(a) (3) (ii). According to the SEC's interpretive
release regarding Item 303, "A disclosure duty exists where a
trend, demand, commitment, event or uncertainty is both
sently known to management and reasonably like to have
mat al effects on the registrant's financial condition or
resul ts of operation." Management's scussion and Analysis of
nancial Condition and Res ts of Operations, Securities Act
Release No. 6835, 54 Fed. Reg. 22427, 22429 (May 18, 1989)
("1989 SEC Release"). "Several specific provisions in Item 303
require disclosure of forward-looking information," including
"where a trend, demand, commitment, event or uncertainty is both
[1] presently known to management and [2] reasonably likely to
have material effects on the registrant's financial condition or
results of rations." Id. at 22429; see also Panther
Partners, 681 F.3d at 120 (same).20 Whether a disclosure is
required "is sed on currently known trends, events, and
20 Item 303 establishes a safe harbor for " information" made
by issuers "pursuant to paragraphs (a) (4) and (5) of this Item" but not
subsection(a) (3). 17 C.F.R. 229.303(c).
38
uncertainties that are reasonably expected to have material
ef cts [i]n contrast, optional forward-looking disclosure
invo anticipating a future trend or event or anticipating a
less predictab impact of a known event, trend or uncertainty."
54 . Reg. at 22429.
Internal forecasts are generally considered "not
material facts that are require[d] to be disclosed! in a
registration statement." In re Facebook, Inc., IPO Secs. And
Derivative Lit 922 F. Supp. 2d 445, 472 ("Derivative
Opinion11 or 11 Deri vati ve Op.") (internal quotation marks omitted)
(quoting OW Term Trust 2000, 938 F. Supp. 171,
177-78 (S.D.N.Y. 1996)); see also In re N. Telecom Ltd. Secs.
L ig., 116 F. Supp. 2d 446, 458 (S.D.N.Y. 2000) ("The federal
securities laws do not obligate companies to disclose their
internal forecasts."); Rub ital Banco 551 F.3d

1156, 1163 (9th Cir. 2009) ({"[T]here is no duty to disclose
income projections a prospectus."); In re Burli Coat
114 F.3d 1410, 1432 (3d Cir. 1997)
("Companies are not obligated either to produce or disclose
internal forecasts . ."); Glassman v. Computervision Corp.,
90 F.3d 617,631 (1st Cir. 1996) {"The federal securit slaws
impose no obligation upon an issuer to disclose forward-looking
information such as internal projections, estimates of future
39
rformance, forecasts, budgets, s lar data.") (quoting
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1209 (1st Cir.
1996)); Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th
Cir. 1993) ("[AJn issuer s no generalized duty to
unteer an economic forecast.") (internal quotation marks
omitted); In re Salesforce.com Secs. L No. C 04-03009 JSW,
2005 WL 6327481, at *5 (N.D. Cal. 2005) ("The law imposes no
duty to disclose internal ts in the context of an initial
public offering."); In re Donna Karan Int'1 Secs. Lit No.
97-CV-2011 CBA, 1998 WL 637547, at *12 & n.13 (E.D.N.Y.
1998) ("[P]1aintiffs essenti 1y seek to hold [the issuer] 1i Ie
for failing to make ections concerning post-IPQ . costs.
Sections 11 and 12(a) (2) do not require such forward-looking
disclosures."). The SEC has not required a general y to
disclose future r projections and internal va ions
because of concerns t such information can be unreli le and
misinterpreted by stors. In re Ivan F. Boes Secs. Liti .,
825 F. Supp. 623, 635 (S.D.N.Y. 1993) .21
21 Defendants argue that the SEC has even discouraged ssuers from disclosing
projections in advance of an IPO by not applying a safe harbor sion to
IPOs. Def. Mem., at 30.) The SEC conc:uded that the safe harbor should
not apply because engaging in IPOs are _y untested" and
thus al to produce uncertain Sec. Offering
Reform, Securities Act Release No. 8591, 70 Fed. 44739 (Aug. 3,
2005) (the "2005 SEC Release"); accord Letter of Mary ro, SEC Ctair
to Comm. On Oversi and Gov't Reform, O.S. House of ., at 23 (August 23,
2012) .
40
Item 303 similarly does not obligate companies to
dis ose ir internal forecasts. See, e.g., In re
Authent Secs. Li ti 2009 WL 755360, at *3
(S.D.N.Y. 2009), aff'd in relevant part, 369 F. App'x 260, 265-
66 (2d r. 2010) (no duty under Item 303 to disclose that
revenue wou likely fail to meet nonpublic revenue targets); In
re Donna Karan 1998 WL 637547, at *10-12 & n.12 (company was
not requi "to make projections conce post-IPO
costs," despite 1 ion that "a negative costs-sa s trend,"
under Item 303,
"
at the time of the IPO"). Nor does a
company have a 1 duty to disclose s to internal
projections. See In re Worlds of Wonder Secs. tig., 35
F.3d 1407, 1419 Cir. 1994) (rejecting Sect 11 claim
based on the ilure "to disclose the extent to which first
quarter sales 1 behind internal projections");
Glassman v. Formica 90 F.3d 617, 631 (1st Cir. 1996)
("Plaintiffs' nondisc sure claims fail because they se their
allegations solely on discrepancies between actual (but
undisclosed) intra-quarterly information and [the
, s]
undisclosed internal jections."); Steckman v. Hart Brewing,
Inc., Civil No. 96-1077-K, 1996 WL 881659, at *4 (S.D. Cal.
1996) ("[C]ompanies have no duty to disclose intraquarter
results, even if those results are lower than the company's
internal projections."), aff'd, 143 F.3d 1293 (9th Cir. 1998).
41
However, Plaintiffs do not allege that De nts were required
to disclose the internal projections or numerical estimates.
Instead, aintiffs contend that the Company's registration
statements used language that only suggested there was a
possibili ty that Facebook would have fficul ty in the mobi
market and that Facebook' s mobile user base was growing faster
than s desktop user base when, in reality, these two trends
were occurring and af cting Facebook's advertising revenues.
Plaintiffs posit that loss of revenues caused by the
increasing mobile usage was a trend known by Facebook that the
Company had a duty to disclose.
22
The SEC requires "material rward-looking information
regarding known material trends and uncertaint s to
disclo as rt of the required scuss of those matters
and the analysis of their effects." Commission Guidance
Regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations, Securities Act Release No.
33-8350, 68 Reg. 75,056, 75, 062 (Dec. 29, 2003).
"Mate ality is an 'inherently ct-specific finding,'
that is satis ed a aintiff alleges 'a statement or
22 Plaintiffs contend that Facebook knew of the issues relating to :nobile
usage, the Company's product decisions and the potential impact the two could
and did have on the Company's r"evenues. Facebook' s statements in its
ion Statements, FWP and the Herman Calls support this al ion.
42
omission that a reasonable investor would have considered
signi cant in making investment decisions'
"
twin,
634 F.3d at 716-17 (quoting Basic Inc. v. Levinson, 485 U.S.
224, 236, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988); Ganino v.
tizens Utils. Co., 228 F.3d 154, 161-62 (2d Cir. 2000)).
II [TJhere must be a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the reasonable
investor as having significantly alte the 'total mix' of
information made available.II Id. at 717 (quoting Ganino, 228
F.3d at 162).
The Second Circuit recently decided two cases, twin
and Panther Partners, that provide further illumination on the
disclosure obligations under Item 303. Plaintiffs in Litwin
alleged that defendant Blackstone violated Sections 11 and 12 of
the Securities Act because the registration statement and
prospectus for its IPO iled to disclose that (and the extent
to which) s future revenues were expected to be impacted by
certain developments concerning its business, including: (il
downward trends in the real estate market; (ii) a shift towards
a more sky strategy by a subsidiary company, FGIC, which
insured mortgage-backed securities; and (iii) another
subsidiary, Freescale, had lost s biggest customer. See 634
F.3d at 718-19.
43
The Second r t upheld the plaintiffs' claims and
held that Item 303 requi more than the mere i ification of
trends that were occurring in the defendant's business. The
court noted that " relevant question r Item 303 is
whether [the company] reasonably expects t impact to be
material." Litwin, 634 F.3d at 719.
[T]he key ion that plaintiffs assert should
have been osed is whether, and to what extent,
the parti known trend, event, or uncertainty
might have reasonably expe to materially
affect B tone's investments. this potential
future t was certainly not knowledge .
and thus cannot be considered rt the "total mix"
of in rmation already available to investors. Again,
the focus of plaintiffs' cla is the required
disclosures under Item 303-pla iffs are not seeking
the s sure of the mere of Blackstone's
investment in FGIC, of the downward trend in the real
estate mar t, or of Freesca 's loss of its exclus
contract with Motorola. Rather, p intiffs claim that
Blac was required to e the manner in
which those then-known events, or
uncerta ies might reasonably be expected to
mat ally impact Blackstone's future revenues.
Id. at 718 19.
In holding for t p intiff, the court emphasized
that Blackstone's real estate segment played a "significant
role" Blackstone's s and that alleged
44
misstatements and omissions regarding Blackstone's real estate
"were qualitatively material because they masked a potential
change in earnings or other trends." Id. at 722. "[A]11 Item
303 requires in order to trigger a disc sure obligation [is] a
known trend that [defendant] reasonably expected would
materially affect its investments and revenues." Li twin, 634
F.3d at 721.
Approximately one year later, the Second Circuit
upheld the Litwin panel's decision in Panther Partners. In
Panther Partners, the plaintiffs alleged that the defendants
failed to disclose the extent of the impact of known product
defects on the company's financial results in advance of a
secondary offering. See 681 F.3d at 114-16. The defendants
contended that they had satisfied Item 303 by disclosing the
fact that issuer's products "frequently contain defects and
bugs;" that "[i]n the past we have experienced, and may the
future experience, defects and bugs in our products;" and that
n[i]f any of our products contains defects [that] could harm our
ability to retain existing customers and attract new customers."
See id. at 117.
In holding that the plaintiffs did adequately plead a
vio ion of Item 303's disclosure obligations, the Second
45
Ci t looked not just at the omission alleged by plaintiffs
but also at the circumstances surrounding the omission:
We believe that, viewed in the context of Item 303' s
disclosure obligations, the defect rate [the alleged
omission], in a vacuum, is not what is at issue.
Rather , it is the manner in which uncertainty
surrounding that de rate, generated by an
increasing flow of highly negative formation from
key customers, might reasonably be expect to have a
material impact on future revenues.
Id. at 120.
In its analysis, the rt noted that "the
[r]egistration [s]tatement's generic cautionary language
was incomplete and, consequently, did not fulfill [the issuer's]
duty to inform the investing public of the particular,
factually-based uncertainties of which it was aware of in the
wee ks leading up to [s] econdary [0] ffering." Id. at 122.
The court noted that the "known uncertainties" related to the
de s could have materially impacted revenues: The company's
representation that t product "'frequently conta de sand
bugs' was incomplete and . did not fulfill [the company's]
duty to inform the investing public of the particular,
factually-based uncertaint s of which was aware in the weeks
leading up to the Secondary Offering." Id.
46
In deciding for plaintiffs in Litwin and Panther
Partners, the Second Circuit emphasi zed the issuer's knowledge
of both the trend and uncertainties surrounding the issue
disclosed in its registration statement. The operative ilure
by the issuer in Panther Partners was not its omission of the
possibili ty of the defects and bugs in its products but the
omission of the company's knowledge regarding the uncertainty of
the issue. See id. at 121-22 (noting that the issuer "was aware
of the 'uncertainty'" of possible returns related to its
product's defects and that such "'known uncertainties' could
materially impact revenues").
Taking Litwin and Panther Partners together, an issuer
has a duty to disclose any trend, event or uncertainty that is
"known and existing at the time of the IPO" that "was reasonably
likely to have a material impact" on the issuer's financial
condition. Panther Partners, 681 F. 3d at 121 (quoting Litwin
634 F.3d at 716). Moreover, an issuer also has a duty to
disclose "whether, and to what extent" that known trend, event
or uncertainty that "might reasonably be expected to materially
impact future revenues." Panther Partners, 681 F. 3d at
121 (quoting Litwin, 634 F.3d at 716).
47
..-.-- ....... ~ ~ ... ~
The'scommentary on Item 303 further supports this
reading of Litwin and Panther Partners. In its 1989 SEC
Release, the S stated that if n[m]anagement is unable to
determine that a material effect is not reasonably likely
to occur,II then "MD&A disclosure of the ef s of [the known
trend, development or uncerta y], quantified to the extent
reasonably practicable, would be required." 54 Fed. Reg. at
22,430; see also 2003 SEC Release, 68 Fed. Reg. at 75,0
("Quanti tative disclosure may be ired to extent
material if quantitative information is reasonably avail .").
The "required disclosure regarding the future impact of
presently known trends, events or uncerta ies [under Item 303]
may involve some prediction or projection." 1989 SEC Release,
54 Fed. Reg. at 22,429; see also 2003 SEC Release, 68 Fed. Reg.
at 75,059 (If In addressing prospective financial condition and
operating rformance, there are circumstances, particula y
regarding known material trends and uncertainties, where
forward-looking information is required to be disclos .If).
Thus, the mere identification of a trend is, some cases, not
sufficient disclosure.
Facebook's Registration Statement did note
Company's potential issues with mobile users and advertisements.
The FWP noted that daily active users were increasing more
48
rapidly than the increase in number of ads delivered, that this
trend was likely caused by increased usage of Facebook on mobi
devices and that growth in use of Facebook through mobile
products "may" nega tively affect the Company I s revenues. See
FWP; see also Registration Statement, at 5. Facebook's
disclosures denoted a trend, the increase of mobile users, and
the uncertainty surrounding the trend, that the increase of
mobile users may affect the Company's revenues. However, two
issues arise with the Company's disclosures in the Registration
Statement.
First, Facebook used generalized and indefinite terms
in the Registration Statement and FWP when describing the impact
the increase of mobile users and product decisions could have
had on the Company's revenues and financial results. Such terms
fail to constitute suffi ent disclosure where Facebook knew of
the certainty of the trends in mobi usage. See Panther
Partners, 681 F.3d at 117 (discussing the issuer's registration
statement that cautioned in "generali terms") . The impact of
the increase in mobile users on revenues was not alleged to be a
mere uncertainty, but a trend Facebook knew was affecting its
business revenues. (CAC 122-24); see also, Panther Partners,
681 F.3d at 121; Litwin, 634 F.3d at 718-19.
49
Second, Facebook's warnings also not that the
increase in mobile users was not the sole va
t could
have affected Facebook's revenues at the time of t lPO. The
Re stration Statement noted that Facebook's "revenue trends are
also af cted by ad inventory management changes affecting the
number, size, or prominence of ads we display," Registration
Statement, at 52, and decreasing the number of a displayed to
users did not necessarily lead to a decrease in revenue.
Company, for example, was able to increase the reserve price (or
the minimum price threshold) in Facebook I s advertising auction
system which reduced the frequency of low quality ads splayed.
This caused a reduction the overall number of ads shown but
increased the average ice r ad a way that "the impact on
total revenue was minimal." Registration Statement, at 53. The
Registration Statement portrayed Facebook's product decisions as
having an impact on revenue, and an investor could reasonably
conclude that an increase in mobile users will not necessarily
negatively affect Facebook's revenues since the Company's
product decisions could offset any lost revenue. Thus,
Registration Statement did not provide the extent increasing
mobile users would af the Company I s overall revenues at a
time this trend was already affecting the Company's revenues as
a result of the Company! s product decisions. Facebook should
50
have disclosed more of this relationship to investors.
23
Thus, while Facebook made significant sclosures,
including that it "[does] not currently directly generate any
meaningful revenue from the use of Facebook mobi products, and
our ability to do so successfully is unproven [and] if
users continue to increasingly access Facebook mobile products
as a substitute for access through personal computers, and if we
are unable to success ly implement monetization strategies for
our mobile users, our revenue and financial results may be
negatively affected," Registration Statement, at 14, these
disclosures satisfy only part of Defendants' Item 303
obligations.
Identification of a past trend does not satisfy a
company's disclosure obligations under Item 303; Item 303
require speci cs disclosure of whether, and to what extent a
material trend has impact or is expected to impact future
revenues. See twin, 634 F.3d at 718-19 ("[T]he key
information that aintiffs assert should have been disclos is
whether, and to what extent, the particular known trend, event,
23 Although Facebook made numerous disclosures and identified many risk
factors to potential investors, such disclosures do not shelter Defendants
from liability under the "bespeaks caution" doctrine. See
620 F.3d 137,142 (2d Cir. 2010) (emphasizing
the "bespeaks caution" doctrine cannot apply to "alleged omissions of
information concerning existing financial and operational difficulties").
51
or uncertainty might have been reasonably expect to materially
affect Blackstone's investments."); Panther Partners, 681 F.3d
at 121 (same). Facebook's disclosures did not denote the extent
the increased mobile usage seen by the Company was already
affecting Facebook's revenues.
Changes in the number of Daily Active Users who were
using Facebook's desktop website, how much time, on average,
each user was spending on the desktop website and Facebook's
pricing for each of its ads at that time and Facebook'sown
product decisions all could have affected Facebook's revenues
and an investor's reading of the disclosures. However, Facebook
knew that increasing mobile usage and the Company's product
decisions were impacting the Company's revenues for the second
quarter and the year, as evidenced by the Company's second
quarter internal projections, but did not disclose these trends
or the impact on the Company's revenue. Because of these
variables, investors reading Facebook's disclosures had no way
of knowing what effect on revenue, if any, the Company was
currently experiencing as a result of the mobile usage trend.
24
24 While this Court previously ruled that Facebook "repeatedly made express
and extensive warnings in the Company's stration Statement, drafts of the
ration Statement and in its final Documents about the trend of
increased use of mobile applications" in the Deri vati ve Actions, Deri vati ve
Op., 922 F. Supp. 2d at 469, the al ions analyzed by the Court in the
Derivative Opinion are different from the allegations set forth in the CAC.
"[TJhe essence of the Derivative Plaintiffs' complaints is that the Board
allowed Facebook to file a stration Statement that did not disclose its
52
The Defendants did not violate Item 303 when it
decided not to disclose s updated second quarter and arly
internal projections. However, the Company's changes its
internal projections and subsequent calls to the Syndicate
Analysts establish that the Company had identi a trend
leading up to its IPO alleged to be mater 1. Item 303 does
require the disclosure of a company's analysis of the future
impact of a material trend or impact such trend currently
has on an issuer. See 2003 SEC Re se, 68 Fed. Reg. at 75,059
("In addressing prospective financial condition and operating
performance, there are circumstances, particularly regarding
known material trends and uncerta ies, where forward-looking
formation is requi to be disclosed.").25 The absence of a
internal revenue ections." Id. at 472. This is not the "essence" of the
Lead Plaintiffs' complaint. The ies in the Derivative Actions did not
raise the issue of Facebook's disclosure duties under Item 303 with the Court
on Defendants' motion to dismiss or any claims under federal securities laws.
Instead, the Deri vati ve Actions alleged claims for breach of duty
of ty. See id. at 468. The complaint at issue in the Deri vati ve
Opinion also did not contain the same fact al ions as the CAC.
2S As noted by the SEC, "[uJntil the early 1970s, the [SEC] prohibited
disclosure of forward-looking information based primarily on [its
perception that such information was inherently unreliable, and that
unsophisticated investors would place undue is on the information in
making investment decisions." Safe Harbor For Forward-Looking Statements, 59
Fed. . 52723, 52723-24 (Oct. 19, 1994). When the SEC modified its rules
in 1978, it stated only that companies may "vo1untari disclose
management projections in their filings with the (SEC]." Guides for
Disclosure of Projections of Future Economic 43 Fed. Reg. 53246,
53247 (Nov. 15, 1978). In 2005, the SEC expressly rejected a rule that would
have II re[d] projections or other forward-Ioo information to be
included in [1PO] stration statements." 2005 SEC Release, Fed. . at
44739. However, "[s]ince the 1980's, [the SEC has] encouraged issuers to
disclose forward-_ooking infor:nation and, in some situations required
53
general duty to disclose projections does not mean that IPa
registrants are exempt from disclosing the analysis and trends
underlying their internal projections if a disclosure obligation
arises.
Similarly, a company has no general "obligation to
disclose the results of a quarter in progress." Arfa v. Mecox
Lane Ltd., No. 10 Civ. 9053, 2012 WL 697155, at *12 (S.D.N.Y.
March 5, 2012), aff'd, 504 F. App'x 14 (2d Cir. 2012); see also
In re Focus Media Ltd. Lit 701 F. Supp. 2d 534, 539
(S.D.N.Y. 2010) (rejecting effort "to hold Defendants liable for
[their] failure to disclose financial information about the
third quarter before that quarter had concluded"); Schoenhaut v.
Am. Sensors, Inc., 986 F. Supp. 785, 793 (S.D.N.Y. 1997) (no
duty to disclose reduction in current volume of sales to largest
customer) . However, "intra-quarter updates may be required[] if
intervening events trigger a duty to disclose." In re Bank of
Am. Sec. Corp. Derivative & ERISA Litig., 757 F. Supp. 2d 260,
304 (S.D.N.Y. 2010); see also 72
F. Supp. 2d 220, 231 (S.D.N.Y. 1999) (rejecting the defendants'
argument that " securi ties laws do not require a company to
disclose information regarding sales results for a quarter in
progress" where the plaintiffs alleged that, prior to the
them to do so." rd. ae 44736.
54
issuer IS initial pUblic offering, the
fendants had knowledge
of a trend that had already had a material negative impact on
the issuer's net sales). 26
Moreover, disclosures under Item 303
were required to be accurate and complete as of the time
Registration Statement became effective. Defendants' duty under
Item 303 was triggered before the Registration Statement became
effective: Facebook was aware of the material negative impact
on Facebook' s revenues the Company had suf red as a result of
increasing mobile usage and the Company's product decisions ten
ys before the IPO. That Facebook identified the trend intra-
quarter is of no issue; under Item 303, De ndants were required
to disclose the issues even though it arose intra-quarter.
27
Facebook's choice to make the Herman Calls to a select
group of investors just a few days before its IPO does not, by
26 While the SEC does not require disclosure of revenue data from a quarter
that is completed up to a and a half before an IPO, see ion S-X,
:7 C.F.R. 2:0.3-12(a) that registration statements contain
financial that no more than 135 days old), ion S-X is
not the only ion setting forth Defendants' disclosure
duties. See 318 F.3d 170, 180 (2d Cir. 2003) (rejecting
the argument an issuer s required to disclose only the financial
information required by Regulation S-X, noting that defendants would have a
"duty to disclose interim financial information in the prospectus" if such
disclosure were by any other SEC rule or regulations).
27 Facebook's eventual post IPO result from its completed second quarter
showed a revenue of almost 12% over the first quarter of 2012 and
32 from the second quarter in the year. As noted above, Facebook's
Item 303 disclosure duties were triggered before the completion of the second
quarter, when Defendants that the Company was facing a material
negati ve on Facebook' s proj ected revenues. See 634 F. 3d at
716 (Item 303' s disclosure requirements are triggered whenever the impact of
a known trend is expected to be "material").
55
itself, trigger a disclosure obligation.
Although sharing
projections with underwriters and institutional investors might
be "industry practice" in an IPQ, a fact- intensive issue that
the Court declines to resolve at this current stage of the
litigation, ____________~ __~ ~ ~ __ ~ n ~ c ~ . 76 F. App'x 383, 385 (2d
Cir. 2003), performance of a recognized industry practice does
not absolve a company of its disclosure duties when a duty
arises. The Herman Calls establish that the Company knew the
trend was ficiently material to warrant emergency calls to
the Syndicate Analysts.
Defendants cite to 938 F. Supp. 171, In re
N. Telecom Ltd. Sec. Litig., 116 F. Supp. 2d 446, Rubke, 551
F.3d 1156, 984
F.2d 1050 (9th Cir. 1993), and Glassman, 90 F. 3d 617, asserting
that the Company had no Item 303 disclosure obligation. The
cases Defendants rely are inapposite to the instant s uation.
Sheppard, 938 F. Supp. 171, did not concern alleged violations
of Item 303. The court reasoned that "plaintiffs do not allege
that defendants' internal calculations were belied by
defendants' actual knowledge of contradictory facts at the time
it was made" but only that defendants "fail red] to predict a
rise in interest rates," fferent claims from those asserted by
Lead Plaintiffs. Id. at 178. In re
56
tig., 116 F. Supp. 2d 446, is a summary judgment case that did
not involve an IPO. In that case, the company did publicly
disclose that its annual earnings were going to be lower than
the prior year, and plaintiffs merely contended that this
disclosure should have been made earlier. Id. at 458.
Facebook, in contrast, never disclosed the trend required by
Item 303. Rubke, 551 F.3d 1156, did not involve alleged
violations of Item 303 or an IPO. The p intiffs alleged merely
that fendants' statement that they "believe(] that [the
bank's] profitability will increase" was misleading because it
failed to state that they believed the bank's profitability will
"dramatically" increase a mere "squabble about the adverbs
used." Id. at 1163 (internal quotation marks omitted).
Moreover, while Rubke quoted Lyondell, 984 F.2d 1050, for the
proposition that "there is no duty to disclose income
projections in a prospectus," Rubke, 551 F.3d at 1163, the
Lyondell court recognized that "[t]he outcome of the present
case would be entirely different had Plaintiffs alleged
Lyondell's internal predictions were based on existing negative
factors known only to the company." 984 F.2d at 1053. Glassman,
90 F.3d 617, concerned an alleged failure to disclose that the
company was supposedly lagging behind its internal forecasts by
"less than 1% of the budget revenues for that quarter," not a
claim that the company failed to disclose that known trends had
57
materially impaired its ability to generate revenue for the
quarter and the year. See id. at 630- 31, 632 n.22 ("[M] ere fact
that intra-quarterly results lagged behind internal projections
does not, without more, require disclosure."). Moreover, all of
these cases predate the Second Circuit's Litwin and Panther
Partners decisions.
Given the reasoning above, Plaintiffs have
sufficiently pleaded that Facebook omitted material information
in violation of Item 303 of Regulation S-K in the Company's
Registration Statement.
The Registration Statement Did Contain
Material Misrepresentations
Plaintiffs also allege that Defendants violated
Sections 11 and 12 of the Securities Act by making mate al
misrepresentations in the Registration Statement concerning the
impact of increasing mobile usage and the Company's product
decisions on Facebook's revenues. (CAC q[q[ 188-96.) Plaintiffs
contend that Facebook misled investors because the statements
warned that increased mobile usage and product decisions "may
negatively affect [Facebook's] revenue" when, in fact, these
factors allegedly already "had negatively impacted [the
58
Company's] revenue." (rd. g( 11 (emphasis in CAC).) Plaintiffs
contend that the Company's purported risk warnings misleadingly
represented that this negative impact was merely possible, when
in fact, it had already materialized before the IPO. See id.
<J[<J[ 188(a) and (b), 189, 191, 193.) On the other hand,
Defendants assert that "a warning that increased mobile usage
'may' harm future revenue does not tell investors that
increased mobile usage had not already affected revenue growth."
(Def. Mem., at 16-17.) Defendants contend that the Registration
Statement made it clear that increased mobile usage was
affecting revenue growth due to Facebook's inability to generate
any meaningful revenue from mobile usage. Id., at 17.)
"Whether or not a statement is mater lly misleading
is a 'fact-specific' inquiry." In re Noah Educ. Holdings, Ltd.
Sec. Litig., No. 08 v. 9203 (RJS), 2010 WL 1372709, at *7
(S.D.N.Y. Mar. 31, 2010) ; see also Basic, 485 U.S. at 240, 108
S. Ct. at 988, 99 L. Ed. 2d 194. The fact spe fic inquiry
should not focus solely on rticular statements which, taken
separately, is literally true, but on "whether defendants'
representations, taken together and in context, would have
mislead a reasonable investor about the nature of the
[securit
] 11 McMahan & Co. v. Wherehouse Entm't, Inc., 900
F.2d 576, 579 (2d Cir. 1990); see also
59
Term Trust, Inc., 98 F.3d 2,5 (2d Cir. 1996) ("[P]rospectuses
must be read as a whole.") (internal quotation marks omitted).
Cautionary language may protect an issuer from
liability; however, "[c]autionary words about future sk cannot
insulate from liability the failure to disclose that the risk
has transpired.
"
Wilson v. Merrill Inc. 671 F.3d
120, 130 (2d r. 2011) (quoting Rombach v. 355 F.3d 164,
173 (2d Cir. 2004) ) . "To be 'meaningful, ' a 'cautionary
statement must scredit the alleged misrepresentations to such
an extent that the risk of real deception drops to nil.'" In I
re Bear Stearns Cos. Inc. Secs. Derivative & ERISA
763 F. Supp. 2d 423, 495 (S.D.N.Y. 2011) (quoting In re Immune
375 F. Supp. 2d 983, 1033 (S.D. Cal.
2005)). "[T]o warn that the untoward may occur when t event
is contingent is prudent; to caution that it is only possible
for the unfavorable events to happen when they have already
occurred is deceit." In re Van der Moolen HoI N. V. Secs.
Liti . 405 F. Supp. 2d 388, 400 (S.D.N.Y. 2005); but cf. Noah
Educ. Holdings, 2010 WL 1372709, at *8 (" [A] lengthy, forward-
looking rec at ion of risks facing [the defendant] did not imply
that none of these sks, at least to some extent, would affect
[defendant's] most recent fiscal quarter."); In re FBR Inc.
544 F. Supp. 2d 346, 362 (S.D.N.Y. 2008)
60
(" [DJ efendants' boilerplate description of its regulatory risks
could not have been misleading to a reasonable investor as the
description said nothing company-specific, no reasonable
investor would i r anything about the state of [t company's
regulatory] compliance" from defendant's 10-K filings and
"
fendants never claimed that the company was full
compliance with all regulations, or that had no outstanding
regulatory issues") (internal quotation marks omitted); In re
Leapfrog Enters., Inc. Secs. Litig., 527 F. Supp. 2d 1033, 1048
49 (N.D. Cal. 2007) (rejecting aim that "defendants should
stated that t adverse ctors 'are' affecting financial
resul ts rather than 'may' affect financial results"). "The law
is well sett that so-called 'half-truths' iterally
true statements that create a materially misleading impression-
will support claims for securities fraud." Wilson, 671 F.3d at
130 (quoting SEC v. Gabelli, 653 F.3d 49, 57 (2d Cir. 2011)).
At the same t "[d]isclosure is not are of
con ssion or exercise of cornmon law pleading." Wilson, 1
F.3d at 131 (quoting
Litig., 592 F.3d 347,365 (2d Cir. 2010)). There are limits as
to what a company must disclose in order to avoid liability.
"It would be as serious an ingement of [SEC] regulat to
overstate the finiteness of the plans as to understate them."
61
Id. (quoting Elec. Specialty Co. v. Int'1 Controls Corp., 409
ce
F.2d937, 948 (2dCir. 1969)).
Courts in this Circuit have ld that a company's
purported risk disclosures are misleading where the company
warns only that a ris k may impact its bus ss when that risk
has already mate aliz "[EJven apparently spe fic risk
disclosures like those in [a defendant company's] prospectus are
misleading if the risks are professionally stamped in internal
undisclosed analyses as significantly greater or more
than those portrayed in t prospectus." In re
Prudent cs. Inc. Ltd. pI ., 930 F. Supp. 68, 72
(S.D.N.Y. 1996); see also In re Van der Moolen, 405 F. Supp. 2d
at 400, 415 (statements purporting to warn that a company's
business "could" be negatively impacted "if" it iled to comply
with industry regulations were materially misleading where the
company was violating industry regulations at the time it issued
those purported warnings); Dodona I LLC v. Goldman Sachs &

Co., 847 F. Supp. 2d 624, 646 (S.D.N.Y. 2012) ("Since the
Offering Circulars contained affirmative representations
regarding the risks of investing, . Defendants had a duty to
ensure that those statements were accurate and complete.").
"[G]eneric risk disclosures are inadequate to shield defendants
from liability for failing to disclose known spe fic risks. In
62
re Am. Int'l Grp., Inc. 2008 Secs. Litig., 741 F. Supp. 2d 511,
531 (S.D.N.Y. 2010).
As noted above, Facebook's Registration Statement did
not disclose that increased mobile usage and the Company's
product decisions had already had a negative impact on the
Company's revenues and revenue growth. The Company's purported
risk warnings misleadingly represented that this revenue cut was
merely possible when, in fact, it had already materialized. The
warnings only warned what might occur if certain contingencies
were met; the disclosures did not make clear that such
contingenc s had, in fact, already occurred.
Indeed, the Registration Statement included language
that created ambiguity as to whether the Company's risk warnings
re rding mobile use would have an impact on t Company's
revenues. Facebook specifically informed investors that "the
substantial majority of our mobile users also access and engage
with Facebook on personal computers where we displ
advertising." February 1 Registration Statement, at 13.
Facebook also told investors that could not determine the
degree to which mobile use was substituting for desktop use.
Registration Statement, at 53 ("We cannot quantify the extent to
wh mobile usage of Facebook is substituting for, rather than
63
incremental to, usage of Facebook through personal computers
.") . Al though the Regist ra t Statement disclosed that
the Company did not "directly rate any meaningful revenue
from t use of Facebook mobi s, " Registration
Statement, at 14, this disclosure is not adequate to disclose
that mobi usage and product decisions were harming Facebook's
revenues. Facebook did not discuss whet r revenue from use of
Facebook on rsonal computers or r Company product
decisions could offset the loss caused by t increase in mobile
usage. Investors had no way of knowing if this was occurring or
not from tion provided by the Company.
The istration Statement even contai positive
statements concerning the impact of mobile us on Facebook's
financial pro cts: Facebook repeatedly undersco that it
was actively ta ng steps to capitalize on its mobile users,
including that it had roduced paid advertisements on mobile
weeks before the IPQ, thus opening up a potentially si i cant
mobile revenue stream. (CAC <Jl<Jl 95, 110-11); stration
Statement, at 14 ("In March 2 012, we began to
stories in users' News Feeds."). The stration
Statement further resented that increased mobile usage would
have a "generally posit "
effect on the CompanyI s revenues.
Registration Statement, at 50 ("We experienced growth DAUs
64
[daily active users] across major markets Increased
mobile usage was a key contributor to this growth. DAUs as a
percentage of MAUs [monthly active users] increased from 55% in
March 2011 to 58% in March 2012, which we believe was driven
entirely by increased mobile usage of Facebook. We believe that
increases in DAUs and in DAUs as a percentage of MAUs generally
posit ly af our revenue because increases in user
engagement may enable us to deliver more relevant commercial
content to our users and may provide us with more opportunities
for monetization.") . Since "[a] statement is misleading if a
reasonable investor would have received a false impression from
the statement," 712 F. Supp.
2d 171, 180 (S.D.N.Y. 2010), the Registration Statement, read as
a whole, and despite its warnings regarding mobile usage, did
constitute a misrepresentation.
Plaintiffs' allegations regarding the events after
the Company filed the May 9 Registration Statement support a
finding that Facebook did not disclose the fact that mobile
usage was already affecting revenue growth. Plaintiffs allege
that Facebook's Treasurer Herman made nineteen phone calls to
the Syndicate Analysts beginning only minutes after filing the
May 9 amendment to the Registration Statement to tell them of
the Company's revenue cuts. (CAC '][ 132.) The Syndicate
65
Analysts then privately contacted certain r investors to
inform them of their reduced estimates.
Further, market commentators specifically reported
that Facebook had not previous disclosed its projected revenue
cuts prior to the alleged May 21 and 22 sclosures that
revealed the cuts. (CAC <J[<J[ 173-74.) Plaintiffs contend that
investors reacted with "shock" and "anger" to the post-IPO
revelation of the Company's cuts, and that the Company's stock
price collapsed after this reveal. Op., at 40.) These
allegations, along with the language in the Registration
Statement, constitute adequate allegations that the Company did
materially misrepresent to investors the impact increasing
mobile usage was having on the Company's revenues.
While Facebook used "may" statements in s
Registration Statement, construing its warnings as mere
"opinions" about the ure does not preclude a Securities Act
violation. "[M]isstatements of lief and opinion" can g
rise to liability only "to the extent that the [belief or
opinion] was both object ly false and disbelieved by the
defendant at the time it was expressed." Friedus v. Barcl
Bank PLC, 734 F.3d 132, 141 (2d Cir. 2013) (quoting Fait v.
655 F.3d lOS, 110 (2d Cir. 2011)). "[T]he
66
pleading required for beliefs and opinions 'does not amount to
requirement of scienter.'" Id. (quoting Fait, 655 F. 3d at 112
n. 5) The CAC alleges that Facebook discovered that mobile
usage was impacting its revenues be re its IPO, cut its revenue
projections and the Defendants knew that increasing mobile usage
and the Company's product decisions had materially impacted its
revenues as of the time of the IPO from the Herman Call.
Plaintiffs have adequately pleaded that the Registration
Statements contained "false" information that was "disbelieved"
by Defendants at the time it was filed. But cf., Freeman
V. RBS Grp., No. 12-3642-cv, 2013 WL 5340476, at *2 3 (2d Cir.
Sept. 25, 2013) (finding that company's assurances of efficacy
qualified as opinion statements that did not violate the
Secur ies Act since plaintiffs only pleaded that defendants did
not have a "reasonable basis" for believing the statements at
issue where reports at the time supported statements) .
Moreover, Facebook' s risk warnings are alleged to be
more than mere opinions, they were misstatements of present
fact, warning that something "may" occur when that event "had"
already occurred, and not mere opinions of future
possibili ties. 28
28 That Facebook ultimately reported revenues in line with its
estimates does not change the Court's analysis. "The truth of a statement
made in the tration statement is judged by the facts as they existed
67
While In re Noah and In re FBR found defendants not
liable for its cautionary statements in its security
disclosures, the facts in those cases are distinct from those in
the instant action. Unlike in In re Noah, 2010 WL 1372709, at
*7-8 (finding that a "lengthyI forward-looking rec ation of
risks facing [the defendant] did not imply that none of these
risks, at least to some extent, would af ct [defendant's] most
recent fiscal quarter"), the Registration Statements included
statements regarding mobile usage and revenue, including
positive statements, that clashed with the Company's risk
warnings on the same issues. See supra. Thus, the "central
issue is not whether the particular statements, taken
separately, were literally true, but whether defendants'
representations, taken together and in context, would have
misl[ a reasonable investor about the nature of the
98 F.3d at 5 (quoting McMahan, 900 F.2d [securities]."
at 579). The company Noah warned in its registration
statement that increases in the cost of raw materials "could"
cause a drop in the company's gross margin when, at the time of
the IPO, a spike in the cost of raw material had already
affected the company's gross margin. In re 2010 WL
when the ration statement became effective.If
358 F. Supp. 2d 189, 205 (S.D.N.Y. 2004). Defendants' hinds
not render them innocent.
68
1372709, at *7. The company in Noah did not state that there
were other variables which could mitigate the effects of
increasing cost of raw materials. By contrast, the Registration
Statement suggested that the Company's product decisions and ads
on personal computers could mil ate revenue cuts caused by
mobile usage.
Similarly, the regulatory filings and risk factor
warnings at issue in 544 F. Supp. 2d
346, "said nothing company-specific," and the Court reasoned
that "no reasonable investor would infer anything about the
state of [the company's regulatory] compliance" from the
specifics-less warning. Id. at 362. In contrast, Facebook' s
Registration Statement did contain specific representations
regarding mobile usage risks that construed a present certainty
as a future possibility.
Reading the Registration Statement as a who and
taking the events alleged by Plaintiffs surrounding Facebook' s
IPO into context, Plaintiffs have sufficiently pleaded material
misrepresentation by Defendants violation of Sections 11 and
12 of the Securities Act by making misrepresentations in its
Registration Statement that could have and did mislead investors
regarding the Company's future and current revenues.
69
The Allegations of Materiality Are Adequately Pled
Mater lity is suf ciently pled "by alleging a
statement or omission that a reasonable investor would have
considered significant in making investment decisions." Ganino,
228 F.3d at 161. A statement or omission is considered material
if "viewed by a reasonable investor as having significantly
altered the 'total mix' of information made available. TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct.
2126, 2132, 48 L. Ed. 2d 757 (1976) . "Material facts include
facts which affect the probable future of the company and
those which may affect the sire of investors to buy, sell, or
hold the company's securi t
"
Freudenbe v. E*Trade Fin.
712 F. Supp. 2d 171, 181 (S.D.N.Y. 2010).
"Where the principal issue is materiality, an
inherently fact-specific finding, the burden on plaintiffs to
state a claim is even lower" than the "relatively minimal
burden" applicable to other elements of their claims under Rule
8 of the Federal Ru of Civil Procedure." Litwin, 634 F.3d at
718. A "complaint may not properly be dismissed on the
ground that the alleged misstatements or omissions are not
material unless they are so obviously unimportant to a
70
reasonable investor that reasonable minds could not differ on
the question of their importance." Ganino, 228 F.3d at 162; see
also Freudenberg, 712 F. Supp. 2d at 181 (" [T] he trier of fact
usually decides the issue materiality.") .
Facebook reduced its revenue gures for t second
quarter of 2012 in its internal proj ections from $1.1 $1.2
billion range to $1.1 billion. This was a more than 8.3%
downward shift from its initial estimate; the Company also cut
its revenue figures for the year by as much as $175 million, or
3.5%. The Syndicate Analysts also made signi cant cuts to its
own projections for the second quarter by as much at 7% and
annual revenue as much as 6%. Such reductions have been found
to be sufficiently material in this Circuit. See Litwin, 634
F.3d at 713, 713 n.8, 717-22 (write-down equal to nearly 4% of
annual revenue material); Ganino, 228 F.3d at 162-66 (1.7%
decrease in annual revenue was material when viewed in context);
but cf. 202
F. Supp. 2d 8, 13 (S.D.N.Y. 2001) (finding 9% drop in operating
income from first to second quarter not sufficient to warrant
disclosure) 29
and In re Turkcell, the courts treated
comparable variances in actual results as immaterial as a matter of law. See
90 F. 3d at 633 n. 26 (explaining that deviations of 3% to 9% were
The 3% to 9% deviations at issue in were with
regards to the company's backlogs. 90 F.3d at: 632-34. The al
Defendants note that in
71
not material).
Further, the istrat Statement repeatedly
highlighted that Facebook' s revenue and advertising revenue was
Facebook's most significant nancial metric. (CAC <[<[ 88-97,
185. ) "[O]ne factor affecting. . materiality is whether the
misstatement or omission relates to a segment that plays a
'significant role' in the istrant's business."
F.3d at 720. The declines in advertising revenue were driven by
a trend, increasing mobile usage, that t Registration
Statement stated was "criti
"
to Facebook' s business. (CAC
<[ 185.)
Defendants' actions once Fa k sed s
second quarter projections establish the significance of the
cuts and the connection between mobile us and revenues.
Immediate after rmining that its revenues for quarter
and the year were being negat ly impacted by shifting mobile
usage, Facebook and Morgan Stanley both determined that
formation had to be disclosed to the Syndicate Analysts who
were considering the ce and quantity of the shares to be
o red. Herman made the tial scripted phone calls to
Syndicate Analysts minutes after Facebook filed its May 9
nondisclosures related to the company's internal forecasts was for "less than
1 of the revenues for that quarter." Id. at 630-31, 632 n.22.
72
Registration Statement solely to inform them of the revenue
projection cuts and continuing trend of declining ad impressions
per user. The Syndicate Analysts then held a series of calls
wi th a select group of the Company's potential investors and
informed them of their reduced estimates. DefendantsI actions
to disclose the nonpublic information to IPO-cr ical part s
undermine their contention that the information was not
mater 1. See, e.g., SEC v. Wyly, 788 F. Supp. 2d 92, 123
(S.D.N.Y. 2011) ("(T]he [defendants] themselves demonstrated the
importance they attached to [the information] by acting on that
nonpublic information short order" and, n[g]iven the
importance that the [defendants] attached to this formation,
it is hard for them now to protest at the motion to dismiss
stage that no reasonable investor could have found it
875 F. SUpp. 2d 359, 368 (S.D.N.Y. 2012) (reasoning that
the reactions of securities analysts supported an inference of
materiality at the motion to dismiss stage).30
Defendants contend that it followed industry custom in providing its
and revised projections to the Syndicate Analysts. See Def. Mem.,
at 43). However, when the revised projections were disclosed, highly
experienced industry cipants stated that what Facebook did was "very,
very unusual," "rare," and something they had "never seen [J during 20 years
in and around the tech IPO business. (CAC '['[ 161, 166-67.) As discussed
above, industry custom, whatever it may De established to be, does not
justify dismissal on the grounds of materiality at the motion to dismiss
stage.
material.");
73
The market reaction to the revenue projections also
supports the adequacy of materiality allegations. In
week before the lPO, investor demand for cebook shares was
reported to be at high levels. The financial ss reported
that the revenue cuts were a "big shock" to investors who
learned of them, raised "a significant red flag" about
Facebook's financial condition and that the
"
laration" in
Facebook's revenues "frea a lot of people out." (CAC 'IT'lT 138-
39, 180); see also SEC v. Mayhew, 121 F.3d 44, 52 (2d Cir. 1997)
(" [A] major factor in determining whether information was
material is the importance attached to it by those who knew
about it. "); Li 11 v. State Teachers Ret. S of Ohio Pension

Fund, 608 F. 55, 58 (2d Cir. 1979) (" [TJhe manner in which the
information was rded by those privy to it and the importance
attached to ormation by the recipients were
entirely consistent with a conclusion t the information was
material information."). 31
31 At the motion to dismiss stage, allegation of sharply negative market
reaction can be used to other allegations of materiality. See Rules
and Regulations, Securities Exchange Cornmission, 64 Fed. Reg. 45,150, 45,152
. 19, 1999) ("Considerations of potential market reaction to disclosure
of a misstatement is by itself too blunt an instrument to be depended on in
w h e ther a fa c tis ma t e ria1 . "); see a 1 so .:.:N..=e..:..:w-,--:::..::::..:=-=-=,-=.=---=.:..::,-,--=..:.::....:...:..:
Inc., 455 F. App'x 10, 16 (2d Cir. 2011)
decrease in share price that occurred after
tru[thl" support an inference of materiality at the motion to
dismiss stage); 875 F. . 2d at 368 (
misstatements were not immaterial as a matter of law where, inter alia, the
issuer's "share declined by almost 10%" after the alleged corrective
disclosure) .
74
This Court the Deri vati ve Opinion has previously
stated:
[Facebook] repeatedly made express and extensive
warnings in the Company's Registration Statement,
dra s of the Registration Statement and in its final
Offering Documents about the trend of increased use of
mobi applications. Thus, even if internal
projections could be consider material to the IPO, []
Plaintiffs have not demonstrated that the Facebook
projections would have signi cantly altered the total
mix of information in the marketplace, considering
that these disclosures were publicly disseminated.
Derivative Op., 922 F. Supp. 2d at 469.
The Derivative Op ion's dicta does not change the
analysis here. In the Derivative Opinion, the Court applied a
different standard that does not govern Secur ies Act claims.
Id. Securities Act claims need only satisfy a burden that is
"even lower" than the "relatively minimal burden" imposed by
Fed. R. Civ. P. 8 to plead materiality. Litwin, 634 F.3d at
718.
Furthermore, the facts alleged the CAC are
different from the facts alleged in the DerivatiVe Actions: the
Derivative Plainti did not assert any particularized facts
establishing materiality. Derivative Op., 922 F. Supp. 2d at
75
469 ("Derivative Plaintiffs have not alleged particu zed
s that support an inference that Board possessed
information that was materially dif rent from what existed in
the marketplace."). The complaints filed the Der tive
Actions contained only conclusory materiality al ions.
~
Complaint, No. 12-CV-7815, <j[ 40
(assert that "a reduction ln earnings guidance is plainly
mate 1 in rmation that must be, and was not, shared with all
of the public"). In contrast, Lead Pia iffs have pled with
far more particular y. (See CAC <j[<j[ 177-85). The "essence" of
the vat complaint this Court reviewed in the Deri vati ve
Opinion was that Facebook iled to "disclose its internal
revenue projections." Derivative Op. 922 F. Supp. 2d at 472.
In contrast, the CAC alleges that Defendants failed to sclose
that known trends had already had a material impact on
Facebook's revenues at the time of the IPO.
Defendants contends that the nancial media widely
reported that the impact of mobile usage and product decisions
were continuing to harm Facebook's revenue growth when
Facebook issued the FWP, and any subsequent sclosures a er
the IPO were immaterial. (See Def. Mem., at 43.) Under the
"t on the market" fense, a corollary to the "fraud on the
market" doctrine, Ita misrepresentation is immaterial if the
76
information is already known to the market because the
misrepresentation cannot then defraud the market." Ganino, 228
F.3d at 167. In order for the truth on the market defense to be
successful, "the corrective information must be conveyed to the
public with a degree of intens y and credibility suffi ent to
counter-balance ef cti vely any misleading formation created
by the alleged misstatements." Id. (internal quotation marks
omitted). However,
"
mere presence in the media of sporadic
news reports should not be cons red to be part of the
total mix of information that would ari or place in proper
context the company's representations in its proxy materials."
Uni rworkers Int' 1 Union v. Int' 1 r Co., 985 F.2d

1190, 1199 (2d Cir. 1993); see also Kronfeld v. Trans World
Airlines, Inc., 832 F.2d 726, 736 (2d Cir. 1987) ("There are
serious limitations on a corporation r s ability to charge its
stockholders with knowledge of in rmation omitted from a
document such as a prospectus on t basis that t information
is public knowledge and otherwise available to them."). The
Company also explicitly instructed investors to disregard
accounts the media:
In ma ng your investment decision, you should not
rely on in rmation in public media that is published
by third parties. You should rely only on statements
made in this prospectus in determining whether to
purchase our shares. We have in the past
77
rece and may continue to receive, a gh
of media coverage, including coverage that is not
rectly attributable to statements made by our
officers and employees, that incorrectly reports on
st ements made by our officers or employees, or that
is sleading as a result of omitting information
p by us, our officers, or employees.
istrat Statement, at 31. A reasonable investor will not
be charged to press reports as a reliable source of
informat a r having such advice. See SEC v. Bank of
Am. 677 F. S 2d 717, 719 (S.D.N.Y. 2010) ("[SJince
the [company] itself wa investors not to rely on the media,
it would be unreasonab r a shareholder to consider the media
pronouncements to part of relevant mix of information.").
Defendants Did Fail To Disclose Under e 408
Plaintiffs have all t the Registration
Statement failed to dis ose mat ion required to be
disclosed by Rule 408 of SEC lation C because known
financial effects related to reasing mobi usage and certain
product decisions were not dis (CAC <][<][ 188, 197-202;
Def. Op., at 61.)
that an issuer's
disclosures must be complete and accurate. See
Rule 408 (a) reflects the pr
ierce
78
Techs. Inc. v. Southri ., No. 02 Civ. 0767, 2003 ______ ____________________L___ ______L___
WL 22882137, at *4 (S.D.N.Y. Dec. 4, 2003). Rule 408 states
that, n[i]n addition to the information ressly required to be
included in a registration statement, there shall be added such
further material informat if as may be necessary to
make the required statements, light of the circumstances
under which they are made, not misleading." 17 C.F.R.
230.408 (a). De s are " r a duty to disclose interim
financial information in stration Statement]," if "the
[undisclosed] information was mater 1 light of the financial
information already disc s to stors." Nanopierce, 2003
WL 22882137 , at * 4 318 F.3d 1 at 180). As
previously noted, stration Statement contained material
omissions and mis entations that rendered it misleading to
investors, and De s iled to adequately disclose all
required material in rmation to make the Registration Statement
not misleading.
The 1 ions With Respect To
Loss Causat Do Not ire Dismissal
Defendants assert that Plaintiffs il to state a
e the absence of loss causation is rent on the
complaint. Defendants contend t Plainti Sl
79
allegations loss causation are inadequate because none of the
all cor recti ve disclosures mentions FacebookI s "product
decisions" and the fact that Facebook had lowe its
projections was publiciz in at least 16 media reports prior to
the IPO. (Def. Mem., at 46-47.) Defendants contend that
Plaintiff's own allegations show the sence of any tie between
the May 21 and 22 stock drops and the revelation any new
information about such decisions. (Id., at 46.)
Generally, loss causation is not an element of a claim
under either Section 11 or 12. In re Giant
.=I____ e:....::r ac __ _________ ___________ t_i-""--'--., 643 F. Supp. 2d 562, 571 n t__ ______ v__ Inc ._-=-Sec. Li __
(S.D.N.Y. 2009) ("[L]oss causation is not an element of a aim
under either Section 11 or 12."); Levine v. AtriCure, Inc., 508
F. Supp. 2d 268, 272 (S.D.N.Y. 2007) ("Loss causation is
not an element of a [Section] 11 claim under the Secur ies
Act.") (citing In re Flag Telecom Holdings, Ltd. Sec. Li tig. ,
411 F. Supp. 2d 377, 382 (S.D.N.Y. 2006), __o_n__o_t_h_e_r
grounds, 574 F.3d 29 (2d Cir. 2009)); Adair v. Kotts

Assocs., No. 97 Civ. 3375(SS), 1998 WL 142353, at *7 (S.D.N.Y.
Mar. 24, 1998) ("Loss causation is not an element of a Section
11 claim."); 792 F.
Supp. 244, 259 (S.D.N.Y. 1992) (not statutory sellers "may
now be liable under section 12 whether or not loss
80
causation is shown." (quoting Wilson v. Saint oration and
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
Drill 872 F.2d 1124, 1126 (2d Cir. 1989))); Freeland
v. Iridium World Commc'ns, Ltd., 233 F.R.D. 40, 46 (D. D.C. 2006)
( " absence of loss causat is an affirmative de se under
both Section 11 and 12 of the Securit s Act rather than an
element of Plaintiff's prima fac case."). "p intiffs are not
required to plead loss causation in Complaint." ant, 643
F. Supp. at 572.
While "a plaintiff pursuing a Securities Act claim is
not red to affirmatively plead causation, a negative
causation de se may be considered on a dismissal motion where
the absence of loss causation is apparent on the ce of the
complaint." Blackmoss Inv. Inc. v. ACA Capital Holdings, Inc.,
No. 07 Civ. 10528, 2010 WL 148617, at *11 (S.D.N.Y. 2010). "The
absence of loss causation is an affirmat defense under both
Section 11 and 12 of Securities Act rather than an element
of aintiff's prima facie case." Freeland v. Iridium Wo
Commc'ns, Ltd., 233 F.R.D. 40,46 (D.D.C. 2006) (citing 15
U.S.C. 77k(e)). Defendants bear t burden of demonstrating
that something other than t alleged omissions or misstatements
at issue caused aintiffs I loss. In re Flag Telecom Holdings,
Ltd. Sec. Litig., 574 F.3d 29, 36 (2d Cir. 2009).
81
Defendants have not sufficiently shown the lack of
loss causation or t existence of negative causation. Whether
the May 19 and May 22 Reuters reports consti ed correct
disclosures that revealed FacebookIS alleged omissions or
srepresentations and whether such sclosures actually caused
the drop in Facebook stock prices are issues of ct and are not
appropriate for resolution in the motion to smiss stage. See
Giant, 643 F. Supp. 2d at 572 ("[T]he affirmat de e of
negati ve causation is generally not properly raised on a Rule
12(b) (6) motion."); 634 F. Supp.
2d 419, 444 (S.D.N.Y. 2009) ("Given the burden on [d]efendants
to establi an affirmative fense such as negative causation,
Court finds that dismissal on this ground is more properly
cons red on a motion summary judgment."); In re Ci tigroup
Inc. Bond Litig., 723 F. Supp. 2d 568, 588 n.5 (same).
The alleged corrective dis osures do not specifically
mention t Company's product decisions, but this is not al
to Plaintiffs claim. See, e.g., Freudenbe , 712 F. Supp. 2d at
202 (noting that loss causation may exist when "'truth' about
the company's underlying condition, when revealed, causes the
'economic loss''').
82
Conclusion
Based on the conclusions determined above, Defendants'
motion to dismiss is denied.
The part s will meet and confer upon the schedule for
further proceedings which will be the subject of a pretrial
conference at 10 a.m. February 4, 2014, or at such other time as
determined by counsel and the Court.
It is so ordered.
New York, NY
December /1 ' 2013
83

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

J.P. Morgan $5.044 billion $4.839 billion -4.06% I

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