The Securities and Exchange Commission, which began probing Facebook Inc’s May 17 IPO (initial public offering ) after its stock price plummeted, hasn’t found evidence that the company withheld material information from investors, a person familiar with the matter said.
The SEC, whose investigation is continuing, is still looking at other IPO-related issues, including whether retail investors were harmed by misleading information from brokers or selective disclosures to analysts by the company’s bankers regarding Facebook’s prospects for mobile customers, said the person, who asked not to be identified because the probe is confidential.
Any conclusion by the SEC that Facebook made adequate disclosures of risks prior to its IPO would bolster the company’s defence against civil lawsuits filed by retail customers damaged by the sudden drop in the company’s initial $38 share price, which is about half that value now. During a 2 1/2 month pre-IPO review of Facebook’s filings, the SEC pushed repeatedly for more disclosures, which were made.
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“It’s unlikely the SEC will pursue an enforcement action against Facebook based on what they were discussing before the IPO,” said Peter Henning, a former SEC lawyer who teaches at Wayne State University in Detroit. “The SEC would have objected even more strenuously if the company had not complied.” During the “back-and-forth” process of the pre-IPO review, “Facebook was doing its best to respond to the SEC by disclosing enough information” Henning said.
Facebook retained the Washington law firm Wilmer Cutler Pickering Hale & Dorr LLP to handle the SEC probe, according to two people with knowledge of the matter. William McLucas, a former SEC enforcement director who heads up the firm’s securities practice, is managing the social-media company’s interactions with the commission, according to the people. Wilmer Cutler had no immediate comment. Kevin Callahan, an SEC spokesman, declined to comment on the probe, as did Facebook in a statement.
Handling the investor lawsuits for Facebook are Kirkland & Ellis LLP and Willkie Farr & Gallagher LLP, according to court filings. Facebook has said the more than 40 suits, which have been consolidated under one judge in federal court in New York, lack merit.
The SEC is conducting an “in-depth review of all the participants” in the IPO, SEC Chairman Mary Schapiro said in an interview September 28 on Bloomberg Television. The regulator’s initial focus in the probe was whether any material information was omitted from Facebook’s prospectus by the company, whether it shared bad news only with a select group, and whether sales people misrepresented demand for the social network stock to lure small investors.
The SEC’s decision to investigate the IPO was triggered by the stock drop, not by any allegations of wrongdoing, the first person said. If sales people attached to the underwriting group led by Morgan Stanley (MS) were telling wealthy investors to stay away, while encouraging retail investors to buy all the shares they could, that might constitute illegal misrepresentation, the person said.
In the months before the offering, the SEC disclosure team that reviews filings by information technology and services companies, headed by Assistant Director Barbara Jacobs, pushed Facebook to disclose how it planned to make money from mobile customers and how much money it made per user — $1.21 from each in the first quarter.
