ATRS, others agree to $35 million federal court settlement with Facebook

Facebook Inc. on Monday (April 9) reached a $35 million pact with the Arkansas Teacher Retirement System (ATRS) and other class-action plaintiffs concerning allegations that the social media giant propped up growth projections ahead of its much-anticipated initial public offering (IPO) in the summer of 2012.

Arkansas largest public pension fund – along with the North Carolina Retirement System, Banyan Capital Master Fund, and the Fresno County Employees’ Retirement – were the lead plaintiffs in a federal lawsuit filed in the U.S. District Court of Southern New York in February 2013 against Facebook, CEO Mark Zuckerberg, other company executives, and several Wall Street investment firms handling the IPO on May 17, 2012.

In the original complaint filed in the New York City-based federal court, ATRS and the other plaintiffs said they were damaged following the immediate decline of Facebook stock following one of the largest IPOs for a U.S. technology concern in stock market history.

“This case is about the integrity of the market for initial public offerings. Facebook, the world’s largest online social network, conducted one of the biggest and most highly anticipated initial public offerings in history …,” the lawsuit states. “In the offering, Facebook and its insiders sold more than 421 million shares of common stock to the investing public at $38  per share, reaping more than $16 billion in proceeds – the largest initial public offering ever  conducted by a technology company, and the third-largest ever conducted in the U.S. by any company.”

According to the lawsuit, as Facebook was preparing to market the IPO to institutional investors through its multiple roadshows, the company’s former CFO David Ebersman provided outsized revenue projections of as much as $1.2 billion for the second quarter of 2012 – and $5 billion for the year.

“Over the next three weeks, however, Facebook’s revenues began to rapidly deteriorate. Indeed, by no later than May 7, 2012, the day that Facebook began its roadshow in New York, the (company) determined that two developments within its core advertising business had materially impaired its ability to generate revenue for both the second quarter of 2012 and the full year,” the federal court filing states.

ATRS also alleged that “the first and most damaging change” in Facebook’s operations concerned a shift in the way that users accessed the social media network.

“In particular, Facebook had determined that its users were increasingly accessing Facebook through mobile devices, such as mobile phones, instead of through traditional desktop computers, and that this had materially impaired the company’s ability to generate revenue” through display advertisements, the lawsuit states.

In his court order filed Monday, U.S. District Judge Robert Sweet set a Sept. 5 settlement hearing for the pending agreement at the U.S. Southern District Court of New York. The $35 million deal, which resolves all claims against Facebook, pales in comparison company’s market capitalization of $457 billion at the close of business today.

The settlement was reached just as Facebook’s Zuckerberg prepared to testify before Congress Tuesda that the social media network was too slow in responding to Russian interference in the U.S. 2016 election. The Menlo Park, Calif.-based technology concern plans to announce its first quarter 2018 financial results on April 25.

ATRS Executive Director George Hopkins did not provide details of how many Facebook shares the state’s largest public pension fund purchased during the 2012 IPO, which determines the amount of the system’s loss or settlement award. He said ATRS usually does not comment on the details of such litigation. However, Hopkins did say the fund manager who purchased Facebook shares during the IPO immediately sold off ATRS shares after news reports led to a massive drop in value for shareholders.

At the end of fiscal 2017, the ATRS fund had a market value of approximately $16.9 billion, according to board minutes. At the system’s most recent meeting on April 2, the board authorized new investments of $410 million in 2018.