The Blackstone Group’s loss could be Facebook investors’ gain. Judges are citing a ruling last year against the private equity firm to push other companies for more disclosure before they go public. That could help shareholders claiming that the social network downplayed revenue doubts in regulatory filings ahead of its initial public offering.
At issue is one of the rare securities laws that actually encourage predictions. It essentially requires companies to disclose any “known trend or uncertainty” likely to hurt them in the future. In Blackstone’s case, one such trend was allegedly the weakening housing market.
When the firm went public in 2007, it didn’t disclose trouble with certain real estate investments because they were relatively small and the market’s problems were well known. But an appeals court allowed shareholders to sue nonetheless, saying they were entitled to hear how the potentially significant investments and housing woes could harm future performance.
Last week, the court relied on the Blackstone decision in reviving a lawsuit against semiconductor maker Ikanos Communications, which had offered shares without disclosing how chip defects could affect future revenue. It didn’t matter that the problem’s magnitude was unclear, the court said, given its potential to disrupt operations.
Now Facebook has been sued on similar grounds. The company’s IPO prospectus mentioned that revenue could fall if users continued to shift from computers to mobile devices when accessing the website. But disgruntled investors claim revenue growth was already weakening – as was allegedly tipped to certain institutions – and that should have been disclosed.
It’s a difficult argument, because the alleged revenue weakness may have been hard to quantify before the offering. But under the Blackstone and Ikanos cases, that’s irrelevant. All that matters is whether Facebook knew revenue could be trending downward to a significant degree.
Of course, shareholders may still have a tough time gathering evidence to prove their case. But in the securities-litigation game, that’s almost secondary to making sure a lawsuit survives a motion to dismiss and leads to negotiating a lucrative settlement. The Facebook suits may be iffy, but the Blackstone and Ikanos precedents should at least keep them tied up in court.