By Martha C. White


Retail investors with dreams of instant wealth who bought Facebook shares on opening day may have been disappointed, but they could still wind up with a windfall if lawyers seeking class-action status for lawsuits against the company and its IPO underwriters get their way.

A pair of lawsuits filed in New York and California allege that retail investors were harmed when material information about the company’s finances weren’t disclosed to them.

Experts in securities law have said whether or not plaintiffs will be able to recoup their trading floor losses in a courtroom will depend on the fine print of securities regulations. What Facebook and its underwriters, including primary underwriter Morgan Stanley, which declined to comment on the suits, knew, and when and to whom they provided information, are the issues on which both lawyers and regulators are focusing.

“It sounds like this is where that case is going to be one of the battlefields,” said David Buckner, a partner at law firm Grossman Roth P.A., whose expertise is in class action suits and securities litigation. “Who has an obligation to speak to who — that’s something that will end up being important.”

Following a Congressional hearing on Tuesday, Securities and Exchange Commission chair Mary Schapiro said, “I think there is a lot of reason to have confidence in our

SEC Chairwoman Mary Schapiro

SEC Chairwoman Mary Schapiro

markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook.”

Facebook did warn would-be investors of potential challenges to its revenue stream triggered by an increase in mobile users and Facebook’s still-poor ability to monetize its mobile base. In an uncharacteristic amendment to its S.E.C. filing just over a week before its IPO, the company warned that these factors had the ability to hurt profits.

Investors who feel burned and are pursuing legal action contend that the company’s cautionary statements weren’t specific enough, that Facebook knew that this issue was having more of a negative impact than it let on in the filing, and it tipped its hand only to its underwriters and a handful of analysts.

“The real issue is how adequate a warning was the May 9 registration statement language,” said Merritt B. Fox, law professor at Columbia University. “Without knowing the facts, it’s hard to know if what the analysts were doing was simply interpreting information that was in the May 9 statement or whether they had additional information to suggest that things were worse.”

The Wall Street Journal cited unnamed sources saying Facebook executives contacted nearly two dozen analysts following that amendment and let them ask questions about it. The lawsuits assert that this communication amounted to material information which Facebook, which has said it will defend itself “vigorously,” was legally obligated to share with all investors.

“It wasn’t the prospect” of future losses, said David Rosenfeld, an attorney at Robbins Geller Rudman & Dowd, a law firm representing plaintiffs in a suit filed in U.S. District Court in Manhattan on Wednesday. “They already knew… and they told their underwriters,” he said.