in re Facebook - petition to appeal class cert ruling.pdf

7/23/2019 in re Facebook - petition to appeal class cert ruling.pdf

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15-_____IN THE

United States Court of AppealsFOR THE SECOND CIRCUIT

I N RE FACEBOOK , I NC., IPO SECURITIES

AND DERIVATIVE LITIGATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

MDL NO. 12-2389

PETITION BY DEFENDANTS FOR LEAVE TO APPEAL

CLASS CERTIFICATION ORDER PURSUANT TO FED. R. CIV. P. 23(f )

Counsel for Facebook, Inc. and Individual Facebook Defendants

(Counsel continued on inside cover )

d

TARIQ MUNDIYA

TODD G. COSENZA

SAMEER ADVANI

WILLKIE FARR & GALLAGHER LLP

787 Seventh Avenue

New York, New York 10019

(212) 728-8000

R ICHARD D. BERNSTEIN

ELIZABETH J. BOWER

WILLKIE FARR & GALLAGHER LLP

1875 K Street, NW

Washington, D.C. 20006

(202) 303-1000

A NDREW B. CLUBOK

BRANT W. BISHOP

NATHANIEL K RITZER

ADAM B. STERN

K IRKLAND & ELLIS LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

SUSAN E. E NGEL

K IRKLAND & ELLIS LLP

655 Fifteenth Street NW

Washington, D.C. 20005

(202) 879-5000



JAMES P. R OUHANDEH

CHARLES S. DUGGAN

A NDRE W DITCHFIELD

DAVIS POLK & WARDWELL LLP

450 Lexington Avenue New York, New York 10017

(212) 450-4000

Counsel for the Underwriter

Defendants



i

CORPORATE DISCLOSURE STATEMENT

Pursuant to Fed. R. App. P. 26.1, I hereby certify that Facebook, Inc. has no

parent company, and no publicly held company owns more than ten percent of its

stock.

/s/ Andrew B. Clubok

Andrew B. ClubokKIRKLAND & ELLIS LLP601 Lexington Avenue

New York, NY 10022Telephone: (212) 446-4800

Facsimile: (212) 446-4900

Counsel for Facebook, Inc. and

Individual Facebook Defendants

Pursuant to Fed. R. App. P. 26.1, I hereby certify as follows:

Morgan Stanley & Co. LLC is a limited liability company whose sole

member is Morgan Stanley Domestic Holdings, Inc., a corporation wholly owned

by Morgan Stanley Capital Management, LLC, a limited liability company whose

sole member is Morgan Stanley. Morgan Stanley is a publicly held corporation

that has no parent corporation. Based on Securities and Exchange Commission

Rules regarding beneficial ownership, Mitsubishi UFJ Financial Group, Inc. 7-1

Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8330, beneficially owns greater

than 10% of Morgan Stanley’s outstanding common stock.



ii

J.P. Morgan Securities LLC is a wholly-owned subsidiary of J.P. Morgan

Broker-Dealer Holdings Inc., which, in turn, is a wholly-owned subsidiary of

JPMorgan Chase & Co., a publicly held company. JPMorgan Chase & Co. has no

parent company and no publicly held corporation owns 10% or more of its stock.

Goldman, Sachs & Co. is an indirect wholly owned subsidiary of The

Goldman Sachs Group, Inc. (“GS Group”), which is a corporation organized under

the laws of Delaware and whose shares are publicly traded on the New York Stock

Exchange. GS Group has no parent corporation and, to the best of GS Group’s

knowledge, no publicly held company owns 10% or more of the common stock of

GS Group.

Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned

subsidiary of BAC North America Holding Company. BAC North America

Holding Company is a wholly-owned subsidiary of NB Holdings Corporation. NB

Holdings Corporation is a direct subsidiary of Bank of America Corporation,

which owns all of the common stock of NB Holdings Corporation. Bank of

America Corporation is a publicly held company whose shares are traded on the

New York Stock Exchange. Bank of America Corporation has no parent company

and no publicly held corporation owns more than 10% of Bank of America

Corporation’s shares.



iii

Barclays Capital Inc. identifies the following as parent corporations or

publicly held corporations that own 10% or more of any class of its equity

interests: Barclays PLC, Barclays Bank PLC and Barclays Group US Inc.

Allen & Company LLC is a wholly owned subsidiary of Allen Operations

LLC, which is a privately held LLC. Allen Operations LLC is, in turn, owned by

employees of Allen & Company LLC and a minority position is also held by Allen

Holding Inc., a closely held company. No publicly held corporation owns 10% or

more of Allen & Company LLC’s stock.

Citigroup Global Markets Inc. (“CGMI”) is a wholly owned subsidiary of

Citigroup Financial Products, Inc., which, in turn, is a wholly owned subsidiary of

Citigroup Global Markets Holdings Inc., which, in turn, is a wholly owned

subsidiary of Citigroup Inc., a publicly held company. Citigroup Inc. has no parent

company and, to the best of CGMI’s knowledge, no publicly held corporation

owns 10% or more of Citigroup Inc.’s stock.

Credit Suisse Securities (USA) LLC is a wholly owned indirect subsidiary of

Credit Suisse Group AG. Credit Suisse Group AG has no parent company, and no

publicly held corporation owns 10 percent or more of its stock.

Deutsche Bank Securities Inc. is a wholly-owned subsidiary of DB U.S.

Financial Markets Holding Corporation, which in turn is a wholly-owned

subsidiary of DB USA Corporation, which in turn is a wholly-owned subsidiary of



iv

Deutsche Bank AG, which is a publicly held corporation. No other publicly held

corporation owns 10 percent or more of Deutsche Bank Securities Inc.’s stock.

RBC Capital Markets, LLC is an indirect wholly owned subsidiary of the

Royal Bank of Canada, a public company whose shares are traded on the New

York Stock Exchange and Toronto Stock Exchange. The Royal Bank of Canada

has no parent company and no publicly held corporation owns 10% or more of its

stock.

Wells Fargo Securities, LLC, a limited liability company organized under

the laws of Delaware, is a wholly-owned subsidiary of EVEREN Capital Corp.

EVEREN Capital Corp. is a wholly owned subsidiary of Wells Fargo & Company,

a publicly traded corporation organized under the laws of the State of Delaware.

There is no person or entity that owns more than 10 percent of the shares of Wells

Fargo & Company.

Blaylock Beal Van, LLC (formerly known as Blaylock Robert Van LLC) is

a privately held limited liability company that has no parent company, and no

publicly held corporation owns ten percent or more of Blaylock Robert Van, LLC.

BMO Capital Markets Corp. is an indirect wholly-owned subsidiary of Bank

of Montreal, a publicly held company. Bank of Montreal has no parent company

and no publicly held corporation owns 10% or more of its stock.



v

C.L. King & Associates is a privately held company. No public company

owns 10 percent or more of C.L. King & Associates.

Cabrera Capital Markets, LLC is a privately held company that is owned by

Cabrera Capital Inc. and RCF-Cabrera Holdings, Inc. No public company owns 10

percent or more of Cabrera Capital Markets, LLC.

CastleOak Securities, L.P. is a limited partnership in which the partners are

CastleOak Management, LLC and CastleOak Management Holdings, LLC.

CastleOak Management Holdings, LLC is a wholly owned subsidiary of Cantor

Fitzgerald, L.P. No publicly held company owns 10 percent or more of the stock

of Cantor Fitzgerald, L.P.

Cowen and Company, LLC is owned by Cowen Group Inc., a publicly

traded company. No publicly held company owns 10% or more of the stock of

Cowen Group Inc.

E*TRADE Securities LLC states that its corporate parent is E*TRADE

Financial Corporation, a publicly traded company. E*TRADE Securities further

states that no publicly traded company owns more than 10% of E*TRADE

Financial Corporation’s stock.

Itau BBA USA Securities, Inc. is wholly owned by Itau USA Inc. Itau USA

Inc. is 99.9% owned by ITB Holding Brasil Participações S.A., which is 99.9%

owned by Itaú Unibanco S.A., which, in turn, is a wholly owned subsidiary of Itaú



vi

Unibanco Holding S.A., a publicly held company. Itaú Unibanco Holding S.A. is

controlled by Itaú Unibanco Participações S.A., which is controlled, in part, by

Itaúsa - Investimentos Itau S.A., a publicly held company. Itaúsa - Investimentos

Itau S.A. has no parent company and no publicly held company owns 10% or more

of its stock.

FM Partners Holdings LLC (formerly known as Lazard Capital Markets

LLC) is a wholly owned subsidiary of LMDC Holdings LLC, a private limited

liability company. No publicly held company owns ten percent or more of FM

Partners Holdings LLC.

Lebenthal & Co., LLC, is an affiliate of Lebenthal Holdings, LLC. No

publicly held corporation owns ten percent or more of Lebenthal & Co., LLC or

Lebenthal Holdings, LLC.

Loop Capital Markets LLC is 69% owned by Loop Capital, LLC, a non-

operating limited liability company. No publicly owned company owns ten

percent or more of Loop Capital LLC.

M.R. Beal & Company is no longer a separate legal entity following the

formation of Blaylock Beal Van, LLC. M.R. Beal & Company has no parent

company, and no publicly held corporation owns ten percent or more of M.R. Beal

& Company.



vii

Macquarie Capital (USA) Inc. (“Macquarie”) is a wholly owned indirect

subsidiary of Macquarie Group Limited, a publicly held corporation. No public

company owns more than ten percent of Macquarie Group Limited. No other

publicly held corporation owns more than ten percent of Macquarie.

Muriel Siebert & Co., Inc. is a wholly owned subsidiary of Siebert Financial

Corp., a publicly traded company. No publicly traded corporation owns ten

percent or more of Siebert Financial Corp.

Oppenheimer & Co. Inc. is a subsidiary of Oppenheimer Holdings Inc.,

which is a publicly traded company. No publicly held corporation owns 10

percent or more of Oppenheimer Holdings Inc.

KeyBanc Capital Markets Inc. (formerly known as Pacific Crest Securities

LLC) is a wholly-owned subsidiary of KeyCorp, a publicly traded company. No

publicly held company owns 10% or more of KeyCorp’s stock.

Piper Jaffray & Co. is a wholly-owned subsidiary of Piper Jaffray

Companies, which is a publicly held company. Piper Jaffray Companies does not

have a parent corporation and no publicly held corporation owns 10% or more of

Piper Jaffray Companies’ stock.

Raymond James & Associates, Inc. is a wholly owned subsidiary of

Raymond James Financial, Inc., a publicly held company. No publicly held

company owns 10% or more of the stock of Raymond James Financial, Inc.



viii

Samuel A. Ramirez & Company, Inc. is a wholly owned subsidiary of SAR

Holdings, Inc., a closely held corporation. No public company owns ten percent or

more of Samuel A. Ramirez & Company, Inc.

Stifel, Nicolaus & Company, Incorporated is a wholly-owned subsidiary of

Stifel Financial Corp., a publicly traded corporation listed on the New York Stock

Exchange. There are no publicly held corporations that own 10% percent or more

of Stifel Financial Corp.’s common stock.

The Williams Capital Group, L.P. is a limited partnership of which the

general partner is The Williams Capital Group, Inc. No publicly held company

owns ten percent or more of The Williams Capital Group, L.P.

William Blair & Company, L.L.C. is wholly owned by WBC Holdings, L.P.

WBC Holdings, L.P. has no parent company, and no publicly held corporation

owns ten percent or more of WBC Holdings, L.P.

/s/ James P. Rouhandeh

James P. RouhandehDAVIS POLK & WARDWELL LLP450 Lexington Avenue

New York, NY 10001Telephone: (212) 450-4000Facsimile: (212) 701-5800

Counsel for Underwriter Defendants



ix

TABLE OF CONTENTS

Page

INTRODUCTION ..................................................................................................... 1

BACKGROUND ....................................................................................................... 3

QUESTIONS PRESENTED ...................................................................................... 8

REASONS FOR GRANTING THE PETITION ....................................................... 8

I. There Is A Compelling Need For Immediate Review Of TheDistrict Court’s Certification Of Classes “Widely” PopulatedBy Investors With Varying Degrees Of Knowledge OfAllegedly Omitted Information. ............................................................ 9

II. There Is A Compelling Need For Immediate Review Of TheDistrict Court’s Ruling That Knowledge And ConflictingArguments About Loss Causation And Damages Can BeManaged At A Later Stage. ................................................................. 17

CONCLUSION ........................................................................................................ 20



x

TABLE OF AUTHORITIES

Page(s)

Cases

Akerman v. Oryx Commc’ns., Inc.,810 F.2d 336 (2d Cir. 1987) ............................................................................... 18

Brecher v. Republic of Argentina,806 F.3d 22 (2d Cir. 2015) ................................................................................. 17

Comcast Corp. v. Behrend ,133 S. Ct. 1426 (2013) ........................................................................................ 17

In re DJ Orthopedics, Inc.,2003 U.S. Dist. LEXIS 21534 (S.D. Cal. Nov. 16, 2003) .................................. 13

In re Facebook, Inc., Initial Pub. Offering Derivative Litig.,797 F.3d 148 (2d Cir. 2015) ......................................................................... 3, 4, 5

In re Facebook, Inc. IPO Sec. & Derivative Litig.,986 F. Supp. 2d 487 (S.D.N.Y. 2013) .................................................................. 6

Fort Wort h Emps.’ Ret. Fund v. J.P. Morgan Chase & Co.,301 F.R.D. 116 (S.D.N.Y. 2014) .................................................................. 18, 20

Hevesi v. Citigroup Inc.,366 F.3d 70 (2d Cir. 2004) ............................................................................... 8, 9

In re IPO Sec. Litig.,471 F.3d 24 (2d Cir. 2006), decision clarified on denial of reh’g ,483 F.3d 70 (2d Cir. 2007) .......................................................................... passim

In re Literary Works in Elec. Databases Copyright Litig.,654 F.3d 242 (2d Cir. 2011) ............................................................................... 19

Mazzei v. Money Store,288 F.R.D. 45 (S.D.N.Y. 2012) .......................................................................... 16

McLaughlin v. Am. Tobacco Co.,522 F.3d 215 (2d Cir. 2008) ................................................................... 11, 12, 20



xi

Moore v. PaineWebber, Inc.,306 F.3d 1247 (2d Cir. 2002) ......................................................................... 3, 13

Myers v. Hertz Corp.,624 F.3d 537 (2d Cir. 2010) ......................................................................... 11, 14

N.J. Carpenters Health Fund v. Rali Series 2006-QO1 Trust ,477 F. App’x 809 (2d Cir. 2012) ........................................................................ 16

N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC ,709 F.3d 109 (2d Cir. 2013) ............................................................................... 12

In re Omnicom Grp., Inc. Sec. Litig ,597 F.3d 501 (2d Cir. 2010) ............................................................................... 19

Police & Fire Ret. Sys. Of City of Detroit v. IndyMac MBS, Inc.,721 F.3d 95 (2d Cir. 2013) ................................................................................. 12

Schuler v. NIVS Intellimedia Tech. Grp., Inc.,2013 WL 944777 (S.D.N.Y. Mar. 12, 2013) ...................................................... 18

Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co.,559 U.S. 393 (2010) ............................................................................................ 12

Sicav v. James Jun Wang ,2015 WL 268855 (S.D.N.Y. Jan. 21, 2015) ....................................................... 20

In re Sumitomo Copper Litig.,262 F.3d 134 (2d Cir. 2001) ............................................................................. 8, 9

In re Vivendi Universal, S.A.,242 F.R.D. 76 (S.D.N.Y. 2007) .......................................................................... 12

In re Vivendi Universal, S.A. Sec. Litig.,284 F.R.D. 144 (S.D.N.Y. 2012) ........................................................................ 12

W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP ,549 F.3d 100 (2d Cir. 2008) ............................................................................... 17

Wal-Mart Stores, Inc. v. Dukes,564 U.S. 338, 131 S. Ct. 2541 (2011)....................................................... 2, 10, 14



xii

Statutes

15 U.S.C. § 77k(e) ................................................................................................... 18

15 U.S.C. § 77l(a)(2) ................................................................................................ 14

15 U.S.C. § 77l(b) .................................................................................................... 18

Rules

Fed. R. Civ. P. 23 .............................................................................................. passim

Fed. R. Civ. P. 23(f) ................................................................................................... 3



1

INTRODUCTION

The district court certified two investor subclasses to litigate plaintiffs’

claims under the Securities Act of 1933 that Facebook’s Registration Statement

allegedly omitted information about revised revenue projections and the impact of

increased mobile device usage on Facebook’s revenues. As Defendants

demonstrated through extensive class certification discovery, however,

innumerable investors actually knew about the allegedly undisclosed information

prior to the IPO. The district court recognized that such knowledge precludes

liability for the Securities Act claims at issue, Op. 26, 1 and that determining the

knowledge of each investor in the plaintiff class “is a subjective inquiry for each

and every investor,” Op. 31, that would likely “overwhelm[] the common

adjudication” of other issues in this case if tried together. Op. 48. Accordingly,

class certification plainly is inappropriate given the well settled law of this Court.

But the district court ignored that law, erroneously proposing that “individual

actual knowledge can be adequately managed post-trial through an individualized

phase involving separate jury trials if necessary.” Id. And the court failed to

provide any class-wide or other efficient mechanism for resolving other central

issues, including conflicting arguments about loss causation. The district court’s

1 The district court’s order (“Op.”) is attached as Tab A. Defendants submitted inthe district court a paginated appendix (“A-#”). All emphases are added exceptas otherwise noted.



2

approach cannot be squared with the cornerstone of the class action device, which

is appropriate only where litigating the lead plaintiffs’ claims would fairly resolve

defendants’ liability to other class member s.

The district court’s certification ruling so turns on its head well-settled class

action law that interlocutory review is warranted. The district court incorrectly

held that subjective knowledge is a common issue when it is so widespread that it

applies to “a very great number of potential claimants.” Op. 31. But an issue is

common only when common proof will resolve the issue for all plaintiffs in one

stroke. The district court’s acknowledgment that “a very large number of plaintiffs

and potential class members had varying degrees of knowledge” about t he

information at issue, O p. 31, means that class members’ subjective knowledge

cannot be resolved by common proof. The suggestion that class members’

knowledge might be inferred on a class-wide basis flouts due process — both the

rights of each absent class member to argue that it lacked actual knowledge and the

rights of Defendants to present evidence that absent class members had knowledge

that defeats their claims. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 131 S.

Ct. 2541, 2561 (2011) (“[T]he Rules Enabling Act forbids interpreting Rule 23 to

‘abridge, enlarge or modify any substantive right.’”).

The district court’s novel ruling is squarely at odds with this Court’s

precedent that predominance cannot be satisfied where, as here, knowledge and



3

other central disputed issues would be left to a series of individual trials after a

class verdict. See, e.g., In re IPO Sec. Litig., 471 F.3d 24, 43-44 (2d Cir. 2006),

decision clarified on denial of reh’g , 483 F.3d 70 (2d Cir. 2007) (class certification

is improper where actual knowledge is widespread and thus a key individual

issue); Moore v. PaineWebber, Inc., 306 F.3d 1247, 1253 (2d Cir. 2002) (class

certification is improper where misrepresentation is not uniform and thus a key

individual issue). Here, the district court recognized the importance of individual

knowledge by excluding 20 investors (including one of the lead plaintiffs’

investment advisors) who were shown to have varying degrees of knowledge. Op.

48. Defendants are entitled to discovery and an opportunity to prove disabling

knowledge and other disputed individualized defenses as to each remaining class

member as well. This Court should grant review under Fed. R. Civ. P. 23(f).

BACKGROUND

This case arises out of Facebook’s IPO on May 18, 2012, which this Court

has recognized “was one of the largest in history.” In re Facebook, Inc., Initial

Pub. Offering Derivative Litig. (“ Derivative Decision”), 797 F.3d 148, 152 (2d Cir.

2015). On the first day of trading, a massive trading debacle on NASDAQ spurred

a wave of selling. Most of the press that followed focused on the NASDAQ

problems, but some press accounts also reported that several weeks into the second

quarter, Facebook and its underwriters had revised revenue projections. While still



4

predicting revenue growth, Facebook forecast that for the second quarter it could

come in at the lower end of the 1.1 to 1.2 billion dollar range it had previously

given underwriters, and for the full year it could be 3 to 3.5 percent off its original

5 billion dollar projection.2 Some press accounts also reported that the

underwriters revised their estimates of Facebook’s projected revenue accordingly.

Facebook’s stock declined below the IPO price, and by the end of the third

trading day, the first of dozens of lawsuits were filed blaming the drop on different

parties. Derivative suits against Face book’s officers and directors were dismissed,

and this Court affirmed that dismissal on July 24, 2015. Id . Cases against

NASDAQ were settled for $26.5 million. Defendants in this action filed a notice

of appeal on December 9, 2015, challenging how the court failed to ensure the

offset arising from the settlement to which the non-NASDAQ defendants would be

entitled. These recent appeals are pending before this Court as docketed Nos. 15-

3983, -3986, -3989, and -3990.

This petition involves the claims against Facebook and the underwriters

brought under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. See

Complaint (attached at Tab B). The Complaint alleges that Facebook and the

2 The press had widely reported the revisions, albeit without the specificnumbers, prior to the IPO. A-1244-1301. Incidentally, the revised projections

proved too conservative: Facebook reported actual revenue of $1.184 billionfor the second quarter and over 5 billion dollars for 2012. Derivative Decision,797 F.3d at 152 n.3.



5

underwriters did not disclose in the Registration Statement — but the underwriters

selectively disclosed to some institutional investors — that they had revised their

estimates of Facebook’s projected revenue. Compl. ¶¶ 178-80; Op. 9-10. Notably,

the Registration Statement did disclose that it is “difficult to forecast our future

results,” that Facebook did “not currently directly generate any meaningful

revenue” from mobile usage, and that its “revenue would be negatively affected” if

it remained “unable to successfully implement monetization strategies for []

mobile users.” A-1026, A-1030, A-1063 (Final S-1); see also Derivative Decision,

797 F.3d at 152-53. Facebook also filed a Free Writing Prospectus just nine days

before the IPO highlighting that “increased usage of Facebook on mobile devices”

had continued in the second quarter. A-1006; see also Oral Arg. Tr. 35-36, In re

Facebook, Inc., Initial Pub. Offering Derivative Litig., Nos. 14-1445, 14-1309, 14-

1784, 14-632, 14-1788 (2d Cir. Apr. 27, 2015) (“JUDGE JACOBS: Looking at the

disclosure … it basically says that something is happening … there is an increase

in the number of active daily users that’s increasing more rapidly than increasing

the number of ads. That’s not good…. Wouldn’t somebody assume that if you have

less advertising … you’re getting less revenue. This is not being written for

idiots.”) (excerpt attached as Tab C).

The court below denied a motion to dismiss, and plaintiffs moved to certify

a class of all investors or alternatively two subclasses of institutional and retail



6

investors. Plaintiffs argued in class certification briefing that their liability theory

turned on the fact that Facebook failed to disclose that it had revised its

projections, and that because “[n]o class members” supposedly knew about

Facebook’s revised projections, individualized knowledge inquiries did not

preclude certification. Pls.’ Class Cert. Mem. at 5.3

In opposition, Defendants submitted what the district court admitted was “an

impressive amount” of individualized evidence (developed through thousands of

hours of discovery) showing that knowledge among individual class members,

including lead plaintiff s’ investment advisors, was rampant: many investors had

learned from a variety of sources that either Facebook or underwriters had revised

revenue projections and that increasing mobile usage was reportedly already

having an impact on second quarter revenues.4 Without explanation, plaintiffs then

3 In its opinion denying the motion to dismiss, the district court had agreed withthe consensus case law holding that a company has no duty to disclose internalforecasts or changes to internal forecasts, but held that plaintiffs could proceedwith a claim “that the loss of revenues caused by the increasing mobile usagewas a trend known by Facebook that the Company had a duty to disclose.” See

In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487, 507-08(S.D.N.Y. 2013). The district court’s class certification order, however,allowed plaintiffs to proceed with a class action based on a “post-motion todismiss position” (Op. 43) that flip flopped back to arguing that Facebookshould have disclosed that it “revise[d] its own revenue forecast.” Op. 10.

4 Dozens of declarations, multiple depositions, and hundreds of documentsshowed that before the IPO: Facebook disclosed the allegedly omittedinformation to at least 19 underwriter analysts; underwriters’ representativesshared information about revised revenue estimates with hundreds of



7

conceded that, based on their review, 20 of the investors for whom Defendants had

submitted evidence of knowledge — who collectively purchased over 16% of the

IPO allocation — should be excluded from the class. Op. 5-6.

In an order dated December 11, 2015, the district court granted certification

under Rule 23(b)(3) of two “subclasses”— institutional investors and retail

investors — and excluded the 20 investors plaintiffs had identified. Op. 6, 20. The

court accepted that knowledge required “a subjective inquiry for each and every

investor,” Op. 31, and it found that knowledge was widespread among institutional

investors based on extensive individualized evidence presented by Defendants. Id.

However, the court then found that because this case “involve[s] a very great

number of potential claimants,” and because knowledge is “so widespread” among

institutional investors, knowledge can somehow be treated as a common question.

Op. 31-37. The court found the opposite for the retail class: because Defendants

presented “much less evidence of actual knowledge” for retail investors, “it was

not enough to defeat predominance for the retail subclass.” Op. 37, 40.

The court also rejected Defendants’ remaining arguments, including that

institutional investors; scores of those investors, including those who purchasedfor lead plaintiffs and individual investors, received the omitted information;individuals who worked for institutional investors passed the information tocolleagues, family, and friends; the media reported on the revisions and themobile revenue impact; and investors read the media reports. A-1-107, A-201-24, A-1529-70 (testimony); A-358-990, A-1685-1850 (documents); A-1244-1301 (media reports).



8

lead plaintiffs were not typical because they were each subject to an individual

knowledge defense, and that loss causation and damages, exacerbated by intra-

class conflicts, cannot be resolved on a class-wide basis.

QUESTIONS PRESENTED

1. Did the District Court erroneously hold, in conflict with Rule 23 and

this Court’s precedents, including In re IPO Securities Litigation, 471 F.3d 24, 43-

44 (2d Cir. 2006), that a disputed individual issue such as varying, actual

subjective knowledge should be treated as a “common” issue that does not defeat

predominance when substantial individualized evidence indicates that it is likely to

be an issue for a great number of class members?

2. Did the District Court erroneously hold that questions of individual

knowledge, loss causation and damages, and intra-class conflicts can be managed

at some later stage, thereby requiring a series of additional jury trials on disputed

issues that are central to this action and that are not capable of class treatment?

REASONS FOR GRANTING THE PETITION

This Court has “‘unfettered discretion’ to grant or deny permission to appeal

based on ‘any consideration that [the Court] finds persuasive.’” Hevesi v.

Citigroup Inc., 366 F.3d 70, 76 (2d Cir. 2004) (quoting Rule 23 Comm. Note, 1998

Amend.). The Court has declined to adopt any hard-and-fast rules, In re Sumitomo

Copper Litig., 262 F.3d 134, 139 (2d Cir. 2001), but often looks to whether either



9

“the certification order will effectively terminate the litigation and there has been a

substantial showing that the district court’s decision is questionable” or “the

certification order implicates a legal question about which there is a compelling

need for immediate resolution.” “[I]nterlocutory review is particularly appropriate

when it promises to spare the parties and the district court the expense and burden

of litigating the matter to final judgment only to have it inevitably reversed by this

Court on appeal after final judgment.” Id. (quotation omitted).

At the very least, the district court’s order implicates legal questions about

which there is a compelling need for immediate resolution. According to that

order, individual, varying subjective issues may be “inferred” and treated as a

“common” issue whenever they may aff ect a large number of class members, and

predominance is satisfied by leaving for “a later stage” numerous issues that will

require separate, individual trials after a class trial. These are issues “of

fundamental importance to the development of the law of class actions….”

Sumitomo, 262 F.3d at 140. Interlocutory review is especially appropriate because

the certification order rests on such doubtful footing and will inevitably alter

settlement incentives. See Hevesi, 366 F.3d at 80.

I. There Is A Compelling Need For Immediate Review Of The District

Court’s Certification Of Classes “Widely” Populated By Investors With

Varying Degrees Of Knowledge Of Allegedly Omitted Information.

The district court erred in certifying two subclasses of investors whose



10

“varying degrees of knowledge” of the alleged omission admittedly requires

subjective inquiries for “each and every” investor. Op. 31. In re IPO reversed

certification of an investor class because “widespread knowledge” of the alleged

omissions and misrepresentations “would precipitate individual inquiries as to the

knowledge of each member of the class,” and defeated predominance. 471 F.3d at

43-44. Her e, the district court recognized that “varying” knowledge is also

“widespread” among these “plaintiffs and potential class members.” Op. 31, 35.

Yet the district court “decline[d] to follow” In re IPO, instead holding that

knowledge is “so widespread it presents yet another common question”— namely,

whether all investors should be “charged with actual knowledge”— even though

knowledge is admittedly a “subjective inquiry for each and every investor.” O p.

31, 35, 40.

The district court erred in holding that the prevalence of subjective

individual issues falling under one label — here, knowledge —creates “yet another

common question.” Op. 35. A question is not “common” because it must be asked

of each individual class member. The rule is the exact opposite. Under Wal-Mart

Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550-51 (2011), “[c]ommonality” requires a

question “of such a nature that it is capable of classwide resolution— which means

that determination of its truth or falsity will resolve an issue that is central to the

validity of each one of the claims in one stroke .” Where, as the district court



11

acknowledged, “a large number of plaintiffs and potential class members had

varying degrees of knowledge,” Op. 31, actual subjective knowledge cannot be

determined “in one stroke.” The fact that one investor has knowledge would not

preclude another investor from arguing that i t lacks knowledge, just as the fact that

one investor lacked knowledge would not preclude a defendant from defending

against another plaintiff by arguing knowledge.

Instead of rejecting class certification because of the prevalence of

individual evidence, the district court converted the issue of actual knowledge to a

common one because the information, though varied, was disseminated widely.

That alone was error. Allowing lead plaintiffs to litigate claims on behalf of

thousands of class members whose varying claims and defenses will not stand or

fall with the lead plaintiffs’ is the antithesis of what R ule 23 allows. See Myers v.

Hertz Corp., 624 F.3d 537, 550 (2d Cir. 2010) (certification denied where evidence

showed “some variances” on central issues); McLaughlin v. Am. Tobacco Co., 522

F.3d 215, 226 (2d Cir. 2008) (reversing certification where there were “differences

in plaintiffs’ knowledge” and “varying degrees” of reliance on misrepresentations).

The district court then went on to adopt Plaintiffs’ suggestion that

Defendants could make a class-wide knowledge argument on summary judgment

that “a reasonable investor’s actual knowledge of the Facebook revenue cuts can

be inferred from the broad spread of this information.” Op. 20; see also id. at 35.



12

But there is no such thing as a presumption of actual knowledge.5 As this Court

has made clear, the actual knowledge standard is not what a reasonable investor

“should have known,” but what each investor actually knew. N.J. Carpenters

Health Fund v. Royal Bank of Scotland Grp., PLC , 709 F.3d 109, 127 n.12 (2d Cir.

2013); see McLaughlin, 522 F.3d at 233-34 & n.10 (rejecting “presumption of

unawareness” and finding predominance not satisfied where issues, including

“actual notice,” “would require a more individualized inquiry”). And R ule 23

cannot be used to create or enlarge substantive rights, such as an element of a

claim or defense. See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co. ,

559 U.S. 393, 408 (2010) (plurality) (“A class action … merely enables a federal

court to adjudicate claims of multiple parties at once[; …] it leaves the parties’

legal rights and duties intact and the rules of decision unchanged.”); Police & Fire

Ret. Sys. Of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 109 (2d Cir. 2013)

(“the Rules Enabling Act forbids interpreting Rule 23 to abridge, enlarge or modify

5 Unlike knowledge, there is a presumption of reliance in the securities fraudcontext, and the district court therefore erred in relying on In re Vivendi

Universal, S.A. Sec. Litig., 284 F.R.D. 144, 155 (S.D.N.Y. 2012). That caseinvolved a securities fraud class action in which the class invoked the fraud-on-the-market reliance presumption, and the defendant did not dispute

predominance or that reliance may be “largely resolved by class-wide proof.” In re Vivendi Universal, S.A., 242 F.R.D. 76, 90 (S.D.N.Y. 2007). Thedefendant “waived its individual reliance challenges for approximately 98

percent of damages claimants but preserved its individual challenges as tocertain large claimants.” Final Principal Br. for Vivendi at 28, In re VivendiUniversal, S.A. Sec. Litig., No. 15-180 (2d Cir. Aug. 19, 2015), Dkt. No. 141.



13

any substantive right[s]”) (quotation omitted).

Even the district court did not follow its new “class wide actual knowledge

defense.” It excluded some investors from the class because of their knowledge,

Op. 5-6, 39, created two subclasses because of knowledge differences, Op. 18-20,

and moved some class members from one subclass to the other without

explanation. Op. 52-53. Ultimately, the district court acknowledged that if its

newly-minted class-wide knowledge defense failed, knowledge would have to be

litigated in an “individualized phase involving separate jury trials if necessary.”

Op. 48. But this Court has made clear that class certification is not appropriate

where “the central disputed issues” must be litigated in “a series of mini -trials.”

Moore v. PaineWebber, Inc., 306 F.3d 1247, 1253 (2d. Cir. 2002); see also In re

IPO, 471 F.3d at 44.6

The district court erroneously refused to follow In re IPO on the ground that

6 The district court relied extensively on a California district court case, In re DJOrthopedics, Inc., 2003 U.S. Dist. LEXIS 21534 (S.D. Cal. Nov. 16, 2003), thatcertified two subclasses of stock purchasers, one for those who “received auniform disclosure of information,” id. at *24, and another for those who didnot, id. at *25. The case is inconsistent with In re IPO and in any eventinapposite because there admittedly was no uniform disclosure here; classmembers had “varying degrees of knowledge.” Op. 18, 31. In themisrepresentation context, such variations preclude class certification. See

Moore, 306 F.3d at 1253 (fraud actions “based on uniform misrepresentations”“are appropriate subjects for class certification,” but “[w]here there are materialvariations in the nature of the misrepresentations made to each member of the

proposed class, … class certification is improper”).



14

actual knowledge arises as a defense under the Securities Act. Op. 40. This makes

no sense, given that In re IPO addressed both fraud claims and the Securities Act

disclosure claims plaintiffs raise here. 471 F.3d at 28. The district court also gets

the law wrong. Absence of actual knowledge is an element of Section 12. See 15

U.S.C. § 77l(a)(2). Most important, even for Section 11, where actual knowledge

is a defense, this Court issued a clarifying order in In re IPO reaffirming that

widespread knowledge defeats predominance for Section 11 claims. In re IPO

Sec. Litig., 483 F.3d 70, 73 & n.1 (2d Cir. 2006).7

In re IPO is fully consistent

with this Court’s ruling that district courts may not “give[] the ‘defense’ less

weight in determining whether overall class certification would serve the goals of

the predominance requirement.” Myers, 624 F.3d at 551. Indeed, Wal-Mart

prohibits class actions where a defendant “will not be entitled to litigate its

statutory defenses to individual claims.” 131 S. Ct. at 2561.

Nor do the district court’s exclusions and subclasses save its certification

order. Despite recognizing that Defendants put forth evidence that “investors at

numerous institutions,” including lead plaintiffs’ advisors, “gathered, inferred, or

were informed of some aspects of what was conveyed in the Herman Calls or

7 The district court relied on dicta in other district court cases mistakenlysuggesting In re IPO is limited to claims under the Securities Exchange Act of1934. Op. 41. This error provides yet another reason to grant review to correctthe development of class action law.



15

Syndicate Analyst Revisions,” Op. 18 n.6,8 the district court excluded only the 19

institutions, Op. 6, and one individual, id. at 38, that plaintiffs hand-selected. As

Tab D’s comparison between excluded and non-excluded investors confirms,

numerous non-excluded investors face individual knowledge issues at least as

serious as those facing excluded investors. It was error to certify a class that still

includes massive numbers of investors that face individual subjective knowledge

issues. See In re IPO, 471 F.3d at 43-44 (“exclusion[s]” do not save certification

where there still needs to be many “individual inquiries” for those that remain).

For example, with respect to lead plaintiffs’ investment advisors, the court

found that “the fact of actual knowledge defenses and the individualized inquiries

required to adjudicate them … more appropriately goes to predominance.” Op. 23-

24. But the district court then erroneously ruled those “individualized inquiries”

could be treated as a common issue and thus kept all but one of the lead plaintiffs’

advisors in the class. This has the law backwards. “The fact that each member of

8 In footnote 6 of its Order, the district court identified 26 institutional investorsthat Defendants highlighted at the class certification hearing. Those investorsare just the tip of the iceberg (although it required hundreds of hours ofintensive discovery to develop the record for even these investors). The recordincludes evidence that underwriters’ representatives told many other investors,including lead plaintiffs’ advisors, about the allegedly omitted information, A-1556, A-1565, A-667, as well as declarations and documents from otherinvestors that they knew varying degrees of information about the revisions andthe mobile impact on revenues, A-70-72, A-64, A-867, A-1782.7-1782.9, A-1810-14, A-1731-32. See also Tab D.



16

the class is potentially subject to his or her own ‘unique defense’— far from

resolving all issues in favor of certification — only highlights the thousands of

individualized inquiries the class requires.” Mazzei v. Money Store, 288 F.R.D. 45,

58-59 (S.D.N.Y. 2012). This “demonstrates why the class must fail … the

predominance requirement.” Id. at 59.

The district court’s ruling is all the more arbitrary in that it certified a retail

subclass on the ground that Defendants “presented much less evidence of actual

knowledge” of retail investors. Op. 37. To begin with, the district court

erroneously discounted some evidence because it “hardly suffices to meet the high

bar of the actual knowledge” standard. Op. 39. It is black -letter law that

defendants need not prove actual knowledge for individual class members at the

class certification stage. See N.J. Carpenters Health Fund v. Rali Series 2006-

QO1 Trust , 477 F. App’x 809, 812 (2d Cir. 2012). Rather, certification must be

denied where, as here, there is a demonstrable need for “individual inquiries as to

the knowledge of each member of the class.” In re IPO, 471 F.3d at 44.

The district court also mischaracterized the evidence of retail class

members’ actual knowledge. The district court assumed the evidence was relevant

only to the institutional subclass because it determined that “institutional” included

those “individuals who purchased their shares through institutional investors” “if

the investor made the purchase decision.” O p. 38. But that was incorrect and also



17

creates an additional layer of individual issues. First, an investment advisor has no

standing to bring suit on behalf of an individual purchaser and thus cannot be the

class member. See W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP , 549 F.3d

100, 111 (2d Cir. 2008). Second, the order gives no guidance for deciding the

critical question of whether “the investor made the purchase decision,” O p. 38,

absent individual inquiries. This failure alone warrants review, as it contradicts

Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), which held that it

must be “administratively feasible for the court to determine whether a particular

individual is a member.” Id. at 24 (quotation omitted).

II.

There Is A Compelling Need For Immediate Review Of The District

Court’s Ruling That Knowledge And Conflicting Arguments About

Loss Causation And Damages Can Be Managed At A Later Stage.

The district court compounded its error in crafting a novel “common” issue

out of “varying degrees of knowledge” when it held that other issues, including

conflicting arguments about loss causation and damages raised common issues or

could be left for separate trials at “a later stage.” Op. 46; see also id. at 26.

First , the court below refused to apply Comcast ’s requirements that, “at the

class certification stage”— not later —the proposed class “plaintiff’s damages case

must be consistent with its liability case” and “measure only those damages

consistent with [p]laintiff’s [liability] theory.” Comcast Corp. v. Behrend , 133 S.

Ct. 1426, 1433 (2013). The district court ruled Comcast did not apply because the



18

Securities Act damages follow a “statutory formula” other than actual injury. Op.

44. This ruling conflicts with Fort Worth Emps.’ Ret. Fund v. J.P. Morgan

Chase & Co., 301 F.R.D. 116, 142 (S.D.N.Y. 2014), which applied Comcast to

deny class certification for Securities Act damages. Although the Securities Act

provides an initial statutory formula for damages, the Act also subtracts any

damages for which loss causation is lacking. 15 U.S.C. § 77k(e), § 77l(b). As a

result, Securities Act damages equal the “price decline [that] actually resulted

from the misstatement.” Akerman v. Oryx Commc’ns., Inc., 810 F.2d 336, 343 (2d

Cir. 1987); see also Schuler v. NIVS Intellimedia Tech. Grp., Inc., 2013 WL

944777, at *9-10 n.8 (S.D.N.Y. Mar. 12, 2013) (Securities Act damages are zero

when plaintiff’s “losses may not be attributed to the misrepresented facts”).

Comcast forbids certification in cases like this because there is an

inconsistency between plaintiffs’ liability and actual damages theories. Plaintiffs

limited their liability theory to the alleged failure to disclose that Facebook revised

its projections after they were forced to concede that all institutional investors

knew about underwriters’ revised projections. Pls.’ Class Reply at 4; Pls.’ Class

Certification Mem. at 13-14, 23. Plaintiff s’ liability theory thus excluded

disclosures relating to underwriters’ revisions. See id. at 7, 23, 28. In contrast,

their actual damages theory has included the $3.03 decline in Facebook’s price on

May 22, 2012 –over 40% of the class’s alleged damages– that plaintiffs have



19

attributed to a May 22, 2012 media report of underwriters’ revised projections.

Compl. ¶ 184; Mot. to Dismiss Opp. at 18-21; Pls.’ Class Reply at 57-58.

Second , making that contradiction worse, both subclasses are represented by

the same counsel but have opposite positions on what caused the May 22 decline.

The institutional subclass must argue that the May 22 decline was not caused by

the May 22 media report of the underwriters’ revisions, as loss causation precludes

recovery when a plaintiff already knew information later reported in a

“journalistic” story. In re Omnicom Grp., Inc. Sec. Litig , 597 F.3d 501, 512 (2d

Cir. 2010). But the retail subclass, whom plaintiffs contend did not know of

underwriters’ revisions before May 22, will argue that the May 22 decline was

caused by the May 22 media report. In re Literary Works in Electronic Databases

Copyright Litigation, 654 F.3d 242 (2d Cir. 2011), held that a conflict requires

denial of certification where, as here, each subclass would be represented by the

same counsel, would seek compensation “in different ways,” but would be

“without independent counsel pressing [its own claims].” Id. at 251, 253.

Third , the district court also erred in concluding that the “common” question

concerning the damages offsets required by the $26.5 million settlement for

NASDAQ’s misconduct in the Facebook IPO outweighed individual issues. Op.



20

45.9 NASDAQ injured many class members in individual ways that are not

captured by the extent to which NASDAQ also caused Facebook’s stock price to

decline. NASDAQ prevented some class members from selling on May 18. See

A-147-48, A-978 -978.1. In addition, NASDAQ’s May 18 delays in sending trade

confirmations caused some class members to submit repeat orders and therefore to

buy extra Facebook shares that they otherwise never wanted. Determining how

many shares NASDAQ forced some class members to own after May 18, and the

resulting settlement offsets for those shares, requires countless individual

proceedings. See McLaughlin, 522 F.3d at 227 (reversing class certification where

“determining the portion of plaintiffs’ injury attributable to defendants’

wrongdoing would require an individualized inquiry”). It is no answer to say

individual damages “can be administratively managed” after a class-wide trial.

Op. 45. Courts deny certification where, as here, lead plaintiffs do not provide any

model showing, “concretely, how [individual] damages would be calculated” after

a class-wide trial without separate trials. Sicav v. James Jun Wang , 2015 WL

268855 at *6 (S.D.N.Y. Jan. 21, 2015); accord Fort Worth, 301 F.R.D. at 141.

CONCLUSION

For the foregoing reasons, the Court should grant this petition.

9 As noted a bove, at page 3, the district court’s treatment of the NASDAQsettlement offsets is already before this Court in recently-filed appeals.



21

December 28, 2015 Respectfully submitted,

/s/ Andrew B. Clubok

Susan E. EngelKIRKLAND & ELLIS LLP655 Fifteenth St. NWWashington, DC 20005Telephone: (202) 879-5000Facsimile: (202) 879-5200

Richard D. BernsteinElizabeth J. BowerWILLKIE FARR & GALLAGHER LLP1875 K Street, NWWashington, DC 20006Telephone: (202) 303-1000Facsimile: (202) 303-2000

Andrew B. Clubok

Brant W. Bishop, P.C. Nathaniel KritzerAdam B. SternKIRKLAND & ELLIS LLP601 Lexington Avenue


Tariq Mundiya

Todd G. CosenzaSameer AdvaniWILLKIE FARR & GALLAGHER LLP787 Seventh Avenue

New York, NY 10019-6099Telephone: (212) 728-8000Facsimile: (212) 728-8111

Counsel for Facebook, Inc., and Individual Facebook Defendants

James P. RouhandehCharles S. DugganAndrew DitchfieldDAVIS POLK & WARDWELL LLP450 Lexington Avenue


Counsel for Underwriter Defendants



22

CERTIFICATE OF SERVICE & ELECTRONIC MAIL FILING

15-____ In re Facebook, Inc. IPO Securities And Derivative Litigation

I hereby certify that I caused the foregoing Petition By Defendants For

Leave To Appeal Class Certification Order Pursuant To Fed. R. Civ. P. 23(f) to beserved on counsel for Plaintiffs via Electronic Mail pursuant to Local AppellateRule 25.1 with one (1) courtesy copy via Federal Express Overnight Delivery:

Max W. BergerSalvatore J. GrazianoJohn J. Rizio-HamiltonBERNSTEIN LITOWITZ BERGER &GROSSMANN LLP1285 Avenue of the Americas

New York, NY 10019Tel: (212) 554-1400

Co-Lead Counsel For Lead Plaintiffs

and the Proposed Class

Thomas A. DubbsJames W. JohnsonThomas G. Hoffman, Jr.LABATON SUCHAROW LLP140 Broadway

New York, NY 10005Tel: (212) 907-0700

Co-Lead Counsel for Lead Plaintiffs,

Proposed Class Representatives Sharon

Morley, and the Proposed Class

Steven E. Fineman Nicholas Diamand

LIEFF CABRASER HEIMANN &BERNSTEIN LLP250 Hudston St., 8th Floor

New York, NY 10013Tel: (212) 355-9500

Additional Counsel for For Additional

Named Plaintiffs and Proposed Class Representatives Jose G. Galvan and

Mary Jane Lule Galvan

Frank R. Schirripa

HACH ROSE SCHIRRIPA &CHEVERIE LLP185 Madison Ave.

New York, NY 10016Tel: (212) 213-8311

Additional Counsel for Proposed Class

Representatives Eric Rand, and Pauland Lynn Melton



23

I certify that an electronic copy was sent to the Court via Electronic Mail [email protected]. Four (4) hard copies of the foregoing Petition for Permission to Appeal Pursuant to Federal Rule of Civil Procedure 23(f) will bedelivered to the Clerk’s Office by hand delivery upon the Court’s re-opening at:

Clerk of CourtUnited States Court of Appeals, Second Circuit

United States Courthouse500 Pearl Street, 3rd floor

New York, New York 10007(212) 857-8500

on this 28th day of December 2015./s/ Alessandra Kane

Alessandra KaneRecord Press, Inc.



A



UNITED STATES DISTRICT

COURT

SOUTHERN

DISTRICT

OF NEW YORK

--------------------------- ------------x

IN RE

FACEBOOK

INC.

IPO

SECURITIES

AND

DERIVATIVE

LITIGATION

INION

MDL No. 12-2389

----------x

A P P E A R A N C E

S:

for

Lead Pl a i n t i f f s

and

ed Class

LABATON SUCHAROW

LLP

140 Broadway

New York NY 10005

By: Thomas A.

Dubbs

Esq.

James

W.

Johnson Esq.

Thomas

G.

Hoffman J r .

Esq.

UNDER SEAL

Attorneys fo r

Lead Pl a i n t i f f s Proposed

Class

Represen ta t ive

Morley and

the

Proposed

Class

BERNSTEIN LITOWITZ BERGER GROSSMAN LLP

1251 Avenue of the Americas 44th Floor

New York NY

10019

By: Max

W.

Berger Esq.

Salva to re J . Graziano

Esq.

John

Rizio-Hamil ton Esq.

Addi t ional

Named

Pl a i n t i f f

and

Proposed

Class

Represen ta t ives

Mr. Mrs. Galvan

LIEFF

CABRASER HEIMANN BERNSTEIN LLP

250 Hudson St ree t S t h

Floor

New York NY 10013

By: Steven E. Fineman

Esq.

Nicholas

Diamand Esq.



At torneys fo r Proposed Class Represen ta t ives

Rand and

Mr.

Mrs. Melton

HACH ROSE SCHIRRIPA LLP

185

Madison

Ave.

New

York NY

10016

By: Frank R. Sch i r r i pa

At torneys fo r

Defendant Facebook

KIRKLAND ELLIS LLP

655 Fi f t een th St . W

Washington

DC

20005

By: Susan

E. Engel

Esq.

KIRKLAND ELLIS LLP

601

Lexington Avenue

New

York

NY 10022

By: Andrew

B.

Clubok Esq.

Brant

W

Bishop Esq.

Nathan ie l Kr i t ze r Esq.

Adam

B.

Ste rn Esq.

WILLKIE FARR GALLAGHER LLP

1875

K

S t r e e t W

Washington

DC 20006

Richard

D.

Berns t e in Esq.

El izabe th

J .

Bower Esq.

WILKIE FARR GALLAGHER LLP

787 Seventh Avenue

New York NY 10019-6099

By: Tar iq

Mundiya Esq.

Todd G.

Cosenza

Esq.

Sameer

Advani Esq.

2



Sweet D. J

Cour t -appo in ted Lead

Pl a i n t i f f s

North Caro l ina Department

of Sta te

Treasurer

on behal f

o f

the North Caro l ina Ret i rement

Systems ( North Caro l ina

DST ), Arkansas Teacher Retirement

Systems ( Arkansas Teacher ) ,

Fresno

County

Employees'

Ret i rement Associat ion

( Fresno ) ,

Ind iv idua l Named P l a i n t i f

Jose G. Galvan and Mary Jane Lule

Galvan

( the Galvans ) , and

add i t iona l proposed

i nd iv idua l

c las s rep re sen ta t ive s c Rand

( Rand ), Paul

and Lynn Melton

( the

Meltons ) ,

and

Sharon

Morley ( Morley ) ( co l lec t ive ly ,

Pl a i n t i f f s ) , have moved

pursuan t

to

Federal

Rule

of

Civ i l

Procedure 23 (a) , (b) (3),

(c) (5), and (g) seeking c e r t i f i c a t i o n

of

a Class of

i nves to rs in

the

i n i t i a l publ ic of

r ing ( the IPO ) of Facebook, Inc .

( Facebook

or the

Company ),

fo r

appointment

as

Class

Represen ta t ives , and

appointment

of Berns te in

Li towi tz

Berger

Grossman

LLP and Labaton Sucharow LLP as Class Counsel . For the

reasons se t

fo r th

below,

the motions are granted .

I Prior Proceedings

The procedura l h i s to r y and

f ac tua l background of t h i s

l i t i g a t i o n has been d e t a i l ed

extens ive ly

various

opin ions

by

t h i s Court . See, ~

In

re

Facebook, Inc . , IPO Sec.

Deriv.

3



~ ~ ' ' - ' 986 F.Supp.2d

487,

492-93 (S.D.N.Y.

2013)

motion to

c e r t i f y appeal

denied

sub nom. In re

Facebook, Inc . ,

IPO

Sec. &

Deriva t ive

Li t i g . ,

986

F. Supp.

2d 524

(S.D.N.Y. 2014) ( MTD

Opinionn) ;

see

a l so In

re Facebook,

Inc . , IPO

Sec.

&

D er iv a t iv e

t i g . , 288

F.R.D. 26,

31-34 (S.D.N.Y. 2012) ( Consol idat ion

Opin ion ) .

Fami l i a r i t y with the genera l

background

of t h i s case

as p rov ided

in the Cour t ' s previous opinions i s

assumed.

The

i n s t an t

ffiotion, f i l e d

December

23, 2014, concerns the

Consol idated S ecu r i t i e s Act ion. Inves to rs a l l ege

t h a t

Facebook

and

c e r t a i n o f f i c e r s v io la ted

Sect ions 11,

12(a)

(2) , and

15 of

the

S ecu r i t i e s Act

in neg l igen t misstatements

o r

omissions

surrounding the Company's May

18, 2012

IPO. See MT

Opin ion§

I I . P l a i n t i f f s seek c e r t i f i c a t i o n to proceed as a c las s

pursuant

to

Federal

Ru

of

Civ i l

Procedure

23

def ined

as

fo l lows:

All persons and e n t i t i e s who purchased or o therwise

acqu i red the Class A common

s tock

o f

Facebook, Inc .

( Facebook

or the

Company )

in

o r

t r a ceab le

to

Facebook 's

i n i t i a l publ ic o f f e r i n g ( IPO ) , which occurred on

o r

about

May

17,

2012

and were damaged thereby .

Pl s . '

Mot. a t 5.

1

In

the

a l t e rn a t i v e , P l a i n t i f reques t

1

This

p a r t i c u l a r motion has an

ex tens ive

record . In the

i n t e r e s t s of space and ease of re fe rence ,

fu l l

t a t ions

and

t he i r

corresponding

shor t form are

co l l e c t ed

here

and

wi l l

appear

h e r e in a f t e r . P l a i n t i f f ' s Memorandum of Law in Suppor t of

Motion fo r Class C e r t i fi c a t i o n ( P l s .' Mot. ) ;

Declara t ion

of

Salva to re J . Graziano in Support of

P l a i n t i f f ' s Motion fo r

Class



c l a s s i

ca t ion of two subclasses , one for r e t a i l i nves to r s

and

one

for i n s t i t u t i o n a l i nves to r s ,

as fo l lows:

(1)

The

I n s t i t u t i ona l

Inves tor Subclass ,

cons i s t ing the

i n s t i t u t iona l

i nves to r s t ha t purchased or o therwise

acquired Facebook Class A common

s tock

in or t r aceab le

to the

Company's IPO

a l l o c a t i o n s

as

l i s t e d

in Exhibi t

42.

2

The proposed Class Representa t ives

for t h i s

Subclass

are

North

Carol ina DST Arkansas

Teacher ,

and

Fresno.

(2)

The Reta i l

Inves tor

Subclass , cons i s t ing of a l l

r e t a i l

i nves to r s who purchased

or o therwise

acqui red

Facebook

Class

A common s tock in or t r aceab le

to

the Company's

IPO, and were damaged the reby. The

proposed

Class

Representa t ives

for

t h i s Subclass are the Galvans,

Rand,

the Meltons, and Morley.

Pls . '

Mot. a t

6.

Excluded from the

c lass / subc lasses

are Defendants , present

or former execut ive of f i ce r s of Facebook and i r immediate

fami ly

members. Pls . ' Mot. a t

5n.3 .

In rep ly

and ora l

argument,

P l a i n t i f f s

have

of fe red severa l exc lus ions from the

Class

on the

bas i s t ha t Defendants ' a f f i rma t ive defense of actua l knowledge

C e r t i f i c a t i on ( Graziano

Deel. 1 ) ;

Defendant 's

Memorandum of

Law in Opposi t ion to Pl a i n t i f f ' s

Motion

for

Class C e r t i f i c a t i on

( Def s . ' s Opp. }; Decla ra t ion of Adam B. Stern

in

Support of

Defendant 's Opposi t ion to Pl a i n t i f f ' s Motion ( Stern Deel . )

and

Appendix ( A- };

Pl a i n t i f f ' s Reply Memorandum

of

Law in Fur ther

Suppor t of Motion for Class C e r t i f i c a t i on

( P l s . '

Reply };

Decla ra t ion of Sa lva tore J . Graziano Fur ther Support

of

P l a i n t i f f ' s

Motion for

Class

C e r t i f i c a t i on

( Graziano Deel.

2 ) ;

Defendant 's

Sur-Reply Memorandum of Law

in

Opposi t ion to

Pl a i n t i f f ' s Motion

for

Class C e r t i f i c a t i on ( Defs . ' Sur-Reply ) ;

October 7,

2015

Class C e r t i f i c a t i on Hear ing

Transcr ip t ( Tr . ) ;


October

7,

2015

Class C e r t i f i c a t i on Hear ing

Exhibi t

( P l s . ' Ex. } ;

Defendant 's

October 7, 2015

ass

C e r t i f i c a t i on

Hear ing Exhibi t ( Defs . ' Ex . ) .

2

Graziano

Deel.

1,

Ex.

42.

5



i s

e i the r

es t ab l i shed o r

c lose

enough t ha t t i s not worth

rebu t t ing . Tr.

21:19-22:6 . Thei r f ina l comprehensive l st of

exclus ions

i s as fo l lows: American Century

Investment

Management,

ue

Ridge, Capi ta l Research

and

Management Company,

Chil ton Investment

Company, Clovis

Capi ta l

Management, Columbia

Management Investment

Advisors,

Fide l i ty Management

and Research

Company, Jennison

Associa tes ,

Kingdon

Capi ta l

Management,

Loews,

Maple Lane

Capi ta l , Schroder Investment Management North

America, Soros Fund Management, Surveyor

Capi ta l ,

T.

Rowe Pr ice

Dis t r ibu t ion Group, Teachers Insurance Annuity

Associa t ion

o f

America,

Turner

Inves tments , Weiss Mul t i -S t ra tegy

Advisers , and

Well ington Management Company ( co l lec t ive ly , the Exclus ions ) .

Discovery has

been ongoing during

submission of the motion

for

c l a s s

c e r t i f i c a t i o n .

Discovery

commenced

on

February

7,

2014. St ip . and P r e t r i a l

Scheduling Order

Feb.

5, 2014) , ECF

No. 209. Product ion

of

documents

re l evan t t o

c l a s s c e r t i f i c a t i o n

necess i t a ted extens ion of d i scovery dead l ines , and by

s t i p u l a t i o n and Order ,

the deadl ines

were

modif ied on

August 18,

2014. St ip . and

Pre t r i a l Scheduling Order

Aug.

18, 2014) , ECF

No.

249.

Deadlines

were again extended by Orders on October 28,

2014

and

September 10, 2015. St ip . and Modif ied

Pre t r i a l

Schedul ing Order

Oct. 28, 2014) ,

ECF

No. 253; St ip . and

Modif ied Pre t r i a l Schedul ing Order Sept .

10,

2015) ,

ECF

No.



346. Pursuant to the l a t e s t

Modif ied P r e t r i a l

Schedul ing

Order ,

f ac t

discovery i s scheduled to c lose

December

4, 2015,

and

exper t d i scovery i s scheduled to c lose

on

Ju ly 3,

2016.

Oral argument was

he ld

and the

mot ion was

deemed

f u l l y

submi t t ed on October 7, 2015.

I .

The

Relevant acts

Given the

ex tens ive

fac tua l background

d e t a i l ed

in

t h i s

Cour t ' s o ther dec i s ions , the fol lowing

fac t s

prov ide only a

t r u n ca t ed

r e t e l l i n g

o f

undi spu ted even t s

fo r purposes

of

approaching the i n s t an t motion.3

On

February

1, 2012, Facebook

publ i c ly

f i l e d

i t s i n i t i a l

r e g i s t r a t i o n

s t a t ement with

the

SEC

( Reg i s t ra t ion

Statementu)

fo r ts upcoming i n i t i a l

publ ic of fe r ing .

The Reg i s t r a t i o n

Statement r e fe ren ced Facebook s h i s t o r i c a l performance data and

ts

pr imary revenue

source ,

adver t i sements . I t a l s o made mention

The fac t s t ha t fo l low are drawn from f i l i n g s in t h i s case and

a re not in d i spu te except as noted. For a d e t a i l ed and

c i t e d

r e c i t a t i o n of the fac t s in

the

se c u r i t i e s l i t i g a t i o n por t ion

of

t h i s

case ,

see

MT Opinion

a t 493-505; Consol ida t ion Opinion a t

31-33.

For an overview

of the

i s sues

with

Nasdaq s t echn ica l

sys tems

i s s u es

t r ad i n g

Facebook

s tock dur ing t h e r e l ev an t t ime

per iod , see Conso l ida ted

Opinion

a t 33-34.

7



of the o p p o r t u n i t i e s fo r growth in the mobi le

market ,

the

r i s k s

as s o c i a t ed with a t t empt ing to monet ize t h a t market

by

d i sp l ay in g

ads

on mobi

devices (which

Facebook

had

not

yet done) , and the

produc t d ec i s io n s involved with ba lanc ing

the

revenue needs

fo r adver t i sement and

the

u se r exper ience .

On

March

7, 2012,

Facebook

responded

to

an SEC comment l e t t e r by r ev i s i n g s

Reg i s t r a t i o n Sta tement to inc lude

more i n format ion c l a r i f y i n g

the t r en d of increas ing

mobi le

usage

and completed

irst

q u a r t e r

f i n an c i a l r e s u l t s .

Facebook prov ided

t h ese f i n an c i a l r e s u l t s and i n t e r n a l

p ro j ec t ed

revenue gu idance to

t h e inves tment

banks underwr i t ing

t h e IPO,

which

t h e u n d e rw r i t e r an a l y s t s

( the Syndica te

Ana lys t s ) used to genera te t h e i r

own es t ima tes

and p red i c t i o n s

of

Facebook s r evenues

and

f i n a n c i a l

performance

fo r

use

in

marke t ing

the

IPO. Facebook and

i t s

underwri te rs

s igned unique

Non-Disc losure Agreements c o n t ro l l i n g t h e f low of in format ion

Facebook provided.4

On May 7,

2012,

Facebook

he l d its f i r s t

l i ve roadshow

See Graziano Deel . , Ex. (Morgan Stan ley

Non-Disc losure

Agreement ) ;

see a l s o P l s . ' Mot. 13

(co l l ec t ing

c i t a t i o n s ) . The

p a r t i e s d i sag ree

over

t h e e f f e c t

of

the

Non-Disclosure

Agreements . See

. , Pl s . ' Mot.

a t

5,

7, 13; Defs . '

Opp.

a t

14n .9 .

8



pre sen ta t ion . Between t h i s f i r s t pre sen ta t ion

and

the

fol lowing

day, Facebook cu t

i t s

i n t e rna l

pro jec t ed

revenue

f igures

fo r the

second qua r t e r o f

2012.

On May 9,

Facebook

f i l e d a Free

Wri t ing

Prospectus ( the FWP ) and an Amended

Regi s t ra t ion

Statement

warning fu r the r about the poss ib l e negat ive revenue impl ica t ions

fo r increased user t r a ns i t i on to

mobi le . Beginning

almost

immedia te ly t h e re a f t e r , Facebook 's Treasurer Cipora Herman

( Herman ) made

nineteen c a l l s to

Syndicate Analys ts ( the

Herman Cal ls

or the

Cal l s ) follo 'wing a

sc r i p t

descr ib ing

mobi le ' s downward p res s u re on revenue, and

not i fy ing

them tha t

Facebook had

rev i sed i t s

own Q

pro jec t ions downward.

The

Syndicate Analys t s rev i sed t h e i r own models and

es t imates

down.

At

l e a s t some Syndicate

Analys ts then

reached out to

others ,

and

a t

l e a s t some

of

the

pro jec t ion in fo rmat ion

f lowed beyond

the 19

Herman

ca l led .

Though

the

pa r t i e s

agree

on

the

fac t t h a t

leakage

occurred , they dispu te

nea r ly everything e l se , including

the

scope o f

what

was re layed ,

to

whom, and

to what e f fec t ( s ) .

Facebook

managed

to hold on

to

ts

pre fe r red

pr ic ing a t $38

per share . The

IPO went

forward on May 17, 2012 se l l i n g

in

excess

o f 421

mil l ion shares , one of the l a rges t i n i t i a l publ ic

of fe r ings in

h i s to r y .

On May 18, 2012, the s tock

began

publ i c ly

t rad ing . Pr ices

i n i t i a l l y exceeded

pro jec t ions ,

opening

a t

$42.05,

but

the

surge

did

not l a s t . The

s tock dipped

and

c losed

9



t ha t day a t

38.23.

On the fo l lowing two

t r ad ing days,

Facebook

s tock

cont inued

to

tumble,

c los ing

a t

34.03 on May

21,

and 31

on May

22.

As

the s tock p r i ce f e l l , i n t e r e s t in the cause

increased ,

and the

in format ion

conveyed

in the

Herman

l s

l eaked fu r the r outward

from

the o r ig in a l 19 r ec ip i en t s .

Facebook 's s tock p r i ce

did

not recover u n t i l more than

a

year

l a t e r ,

on

Ju ly

31, 2013.

P l a i n t i f f s a l l ege

the

FWP

and Amended

Regi s t ra t ion

Statement

co n s t i t u t e

mat e r i a l misstatements o r omiss ions

by

f a i l i n g

t o d i sc lose what

Facebook

knew

a t

the t ime

with

ce r t a in ty : the

prev ious ly

disc losed

p o s s i b i l i t y t h a t mobile

might

negat ive ly a f f e c t revenue

had

come

to f ru i t i o n caus ing

Facebook

to i n t e rn a l l y

se i t s own

revenue fo recas t ,

and

t h i s

downward

t rend

was

not

of f

se t

by

produc t

Opinion

a t

506-522.

II Appl icable Standard

s ions .

See

MT

To obta in c e r t i f i c a t i o n , a proposed c l a s s must meet

Federa l

Rule of Civ i l Procedure

2 3 ( a ) s p r e r eq u i s i t e s

o f numerosi ty ,

c o m . ~ o n a l i t y

t y p i c a l i t y ,

and adequacy of rep re sen ta t ion . Fed. R.

Civ.

P.

23(a) ; Amgen Inc . v.

Connect icut

Ret. Plans Trus t

Funds, 133 S.

Ct.

1184, 1191, 185 L.

. 2d

308

(2013}.

10



In

addi t

, the

proposed

c lass must

sa t i s fy

one

of

three

requirements l i s t e d in

Rule

23(b) . Fed. R. Civ. P. 23(b) ;

Amgen,

133

S. Ct. a t 1191. Pl a i n t i f f s have moved under

Rule

23{b)

(3) , which

requi res t ha t the

cour t f inds t ha t

the

quest ions of law or f ac t common to c las s

members predominate

over any

quest ions af fec t ing only

indiv idua l members,

and t ha t a

c lass ac t ion

i s

supe r io r to othe r ava i lab le

methods

for

i r l y

and e f f i c i e n t l y ad jud ica t ing

the

cont roversy .

. R.

Civ. P.

23(b)(3) .

The Second Circu i t

has descr ibed the s tandard

of

proof

governing

c lass

ce r t i f i ca t i on :

(1)

a d i s t r i c t judge may

c e r t i f y

a c lass only a f t e r making

erminat ions

t h a t

each

of

the

Rule

23

requirements

has

been met;

{2

such

determinat ions

can

be

made

only

i f

the

judge resolves fac tua l d i sputes re levant to each

Rule 23

requirement and

f inds t ha t whatever under lying

re levant to

a

pa r t i c u l a r

Rule

23 requirement have

es tab l i shed

and i s

persuaded to

ru le ,

ba on

the

re l evan t

s and the appl icable l ega l

standard,

t ha t the

requi rement i s met;

(3) the obl ion

to m such

dete na t ions i s not lessened by over lap

between

a

Rule

23

requi rement

and

a mer s i s sue , even a

meri t s

i s sue t ha t i s

i den t i ca l with a Rule 23 requirement ; (4) in making

such

dete rmina t ions ,

a d i s t r i c t

judge should not assess

any

c t

of

the

meri t s unrela t

Rule

23

requirement

~ ~ ~ - - - - - - - - - - ~ ~ ~ ~ ~ ~ ~ ~ _ , , , , _ ~ ~ ~ ~ ~ - -

471 F.3d

24, 41 {2d

r .

2006) ( In re IPO I ) s ion

c l

on

den

l of

reh '

sub nom.

In

re I n i t i a l

Pub.

Offer ing

Sec. Li t i g . , 483 F.3d

70

(2d

Cir . 2007) ( In re IPO

I I ) .

' [T]he s tandard o f proof

11



appl icable

to evidence prof fe red to meet the requirements of

Rule 23

[ i s ] a preponderance of the evidence . ' In

re

Flag

Telecom Holdings, Ltd. Sec. L i t i g . , 574 F.3d 29, 35 (2d

Cir .

2009) (quot ing Teamsters

Local

445 Fre igh t

Div.

Pension Fund v.

Bombardier Inc . ,

546 F.3d

196, 202 (2d

Cir .

2008)) .

In determining whether c las s

ce r t i f i ca t i on

i s appropr ia te

in

a s e c u r i t i e s ac t ion , the Second Circu i t has d i rec ted d i s t r i c t

cour t s

to

apply Rule 23 according to a l i be r a l

r a th e r than

a

r e s t c t ive i n t e rp r e t a t i on . Bi l lhofe r v. Flamel Techs . , S.A. ,

281 F.R.D. 150,

155

(S.D.N.Y. 2012) ( c i t ing lt v. Parker

Par s le

Pet ro l

Co. ,

147

F.R.D.

51, 54

(S.D.N.Y. 1993) ; Green

v. Wolf

Corp. ,

406

F.2d

291, 298, 301 (2d Cir .1968) ,

ce r t .

den ied ,

395

U.S. 977, 89 S. Ct. 2131, 23 L.Ed.2d 766 {1969)}.

[ I ] f

t he re

i s

to

be

an

e r r o r

made,

l e t

t

be

in

favor

and

not

aga ins t

the maintenance of the c las s ac t ion , for t i s

always

subjec t to

modi f i ca t ion should l a t e r developments during

the

course

of the t r i a l so

r eq u i r e .

Green, 406 F.2d

a t 298 ( c i t ing

Espl in v.

Hirshi ,

402 F.2d 94 (10th Cir .

1968)) .

12



III The Proposed Subc1asses Sat i s fy Ru1e 23 a)

a . Numerosity

For c l a s s c e r t i f i c a t i o n

to be appropr ia te , the

proposed

c l a s s

must

be

so numerous

t ha t

jo inder of a l l of i t s ind iv idual

members would be

imprac t i cab l e .

Bi l lho fe r , 281 F.R.D. a t 156;

See

a l so

Fed.R.Civ .P.

23(a) ( l ) ;

In re NYS

L i t ig . ,

260 F.R.D.

55, 69 70

(S.D.N.Y.2009).

Jo inder need not

be

imposs ib le , but only d i f f i c u l t

or

inconvenient enough to make

c lass

t r ea tment appropr i a t e .

Cent. St a t e s Se. Sw. Areas Heal th

Welfare Fund

v. Merck-Medco Managed Care, LLC, 504

F.3d

229,

244-45

(2d

Cir .

2007);

see a l so _ I _ n ~ r _ e ~ N _ A _ S ~ ~ _ M _ a ~ r _ k _ e _ t _ _ M _ a _ k _ e _ r _ s

A n t i t r u s t

L i t ig . , 169 F.R.D. 493,

508

(S.D.N.Y. 1996) . A c la ss

of more than 40 commands a presumption

of s u f f i c i en t numerosi ty .

Bi l lho fe r , 281 F.R.D. a t 156;

NYS

Spe c i a l i s t s , 260 F.R.D. a t

70

( c i t ing

Consol. Rail

Corp. v.

Town of

Hyde

Park,

47

F.3d 473,

483

(2d Cir .

1995)) ; see a l so

In

re Sadia , S.A. Sec. L i t i g . , 269

F.R.D.

298, 304 (S.D.N.Y. 2010) .

In

s ecu r i t i e s f raud

c lass

ac t ions

r e l a t i ng

t o pub l i c ly

owned and na t iona l ly l i s t e d

corpora t ions ,

t he

numerosi ty

requi rement may be s a t i s f i e d

by

a showing t ha t a l a rge number of

shares

were

outs tanding

and t r aded dur ing

the re levant

per iod .

13



In

re Vivendi Universa l , S.A. , 242

F.R.D.

76,

84

(S.D.N.Y. 2007)

( Vivendi I ) (quoting

Teachers '

Ret.

Sys.

o f La.

v.

CLN Ltd . ,

No. 01 Civ. 11814(LAP}, 2004

WL

2997957, a t

*3

(S.D.N.Y. Dec.

27,

2004)) ; see

a l so

In

re Globa ls ta r Sec. Li t i g . , No. 01 Civ.

1748(PKC), 2004

WL

2754674, a t *3*4 (S.D.N.Y. Dec.1, 2004); In

re Deutsche

Telekom

Ag Sec.

Li t i g . ,

229 F.Supp.2d 277 (S.D.N.Y.

2002}. 421,233,615 shares were so ld in

the

Facebook IPO.

Graziano Deel .

1,

Ex. 40. Whether in

one

c las s

or

two,

t h i s

case involves

a

grea t

deal

more

than

40

p l a i n t i f f s , making

jo inder impract icable

and es t ab l i s h in g

numerosi ty .

b ommonality

Rule 23(a) (2) demands

the

exis tence o f

common

quest ions

of

law or fac t between members of the

c l a s s .

Bi l lhofe r , 281 F.R.D.

a t 156. Common

quest ions

must

a l so genera te

common

nswers

ap t

to dr ive the re so lu t ion of the l i t i g a t i o n . Wal-Mart Stores ,

Inc. v. Dukes,

131

S. Ct. 2541,

2551,

180 L.

Ed.

2d

374

(2011)

(c i t a t ion omit ted} . However, commonali ty does

not

mandate

t ha t

a l l c l a s s members

make

i den t i ca l c la ims and arguments or t ha t

the

circumstances

of t he i r s e c u r i t i e s purchase be i de n t i c a l .

Id . ( c i t ing

Tr ie f

v. Dun

Brads t ree t

Corp. ,

144

F.R.D. 193,

198

(S.D.N.Y.1992) ( in te rna l

quota t ion marks omi t t ed ) ) ;

see

a l so

Port Auth.

Pol ice

Benevolent Ass 'n v. Port Auth . , 698 F.2d 150,

14



153-54

(2d Cir .1983)) . The commonality requi rement has

been

app l ied

permiss ively

by

cour ts

in

the

con tex t of

s e c ur i t i e s

fraud

l i t i ga t i on ,

and

minor

var ia t ions

in the

c las s

members'

pos i t ions wil l not su f f i ce to

defea t

c e r t i f i c a t i o n . Die t r i v.

Bauer,

192 F.R.D. 119, 124 (S.D.N.Y.2000)

(c i t a t ions omit ted) ;

see

a l so

Vivendi I , 242 F.R.D.

a t

84 ( s ta t ing commonality i s

app l ied permiss ive ly in

s e c ur i t i e s

f raud l i t i ga t i on

11

) ( c i t ing

In

re Nortel Networks

Corp. Sec. Li t i g . ,

No. 01

Civ. 1855(RMB),

2003 W 22077464, a t

*3

(S.D.N.Y.

Sept .

8, 2003); In re Fron t i e r

Ins . Grp. , Inc . Sec. Li t ig . ,

172 F.R.D. 31,

40 (E.D.N.Y.

1997)) .

Common quest ions

of

law

and f ac t

are

presen t where

the

a l l eged

fraud invo lves mater ia l mis represen ta t ions and omissions

in documents c i r cu l a t ed

to the inv es t ing pub l ic ,

press

re l ea se s

and s ta tements

provided

to the

investment

community

and

the

media, and

i nves to r

conference c a l l s . Bi l lhofe r , 281 F.R.D.

a t

156; see

a l so e

Darquea v. Jarden Corp . , No. 06

Civ.

722,

2008 W 622811,

a t

*2 (S.D.N.Y. Mar.

6,

2008) ( The

a l leged

misrepresen ta t ion l ead ing to

a r t i f i c i a l l y i n f l a t e d

s tock pr ices

r e l a t e to

a l l

the i nves to rs

and the

exis tence and mater i a l i ty

of

such miss ta tements or

omissions present

important

common

i s sues . ) ; In re Fron t i e r ,

172 F.R.D.

a t 40 (E.D.N.Y. 1997)

(d i sseminat ing s ta tements t ha t omi t ted

o r

misrepresen ted

mate r i a l f ac t s deemed common ques t ions) .

15



The

ex i s tence o f l a rge common quest ions with common

answers

in t h i s

mat te r

cannot be disputed .

P l a i n t i f f s '

pr imary c la im i s

t h a t the FWP

and Amended

Regi s t ra t ion Statement con ta in mater ia l

misrepresen ta t ions o r omiss ions .

Pl s . ' Mot.

a t

18.

Notwi thstanding

any

unique

f ac t s

as to

any

a i n t i f f ,

the

success

or f a i l u re

of any and

a l l i nves to r c la ims necessa r i ly

turns

on

severa l dete rmina t ive

l i a b i l i t y

quest ions the

Cour t has

sus ta ined

in

i t s Opinion on Defendants '

motion

to d ismiss :

(1)

Was

Defendants '

duty under I tem

303

t r iggered

before

the

Regi s t ra t ion Sta tement became e f fec t ive

because

Facebook

was

aware

of

the

mater ia l negat ive

impact on

Facebook's

revenues

the

Company

had

su f fe red

as

a r e su l t o f

inc reas ing

mobile usage and

the

Company's

product

dec i s ions t en

days

before the IPO?

MT

Opinion a t

513. (2)

Did

the

r i s k

warnings in

the

IPO Prospectus

misleadingly

represent t h a t

Facebook 's

revenue

cu t

was

merely

poss ib l e

when

in fac t the

t rend

had a l ready

mater ia l ized?

Id . a t

516. (3)

Did

Rule 408 of

SEC

Regulat ion

C requi re Facebook to

d i sc lose

the known

f inanc ia l e f f e c t s r e l a t e d

to

increas ing

mobile

usage

and ce r t a in product dec i s ions? Id . a t 522. The

evidence necessary

to

answer these

ques t ions

wil l be the same as

to every

Pl a i n t i f f ,

and

the answer for any one

must

necessa r i ly

apply

to a l l othe rs . The necess i ty

of

answering these cen t ra l

quest ions for

p o t e n t i a l l y

thousands o f p l a i n t i f f s

s u f f i c e s

to

meet

the

low hurdleu and

permiss ib le app l i ca t ion o f

16



commonality.

See

In re Marsh McLennan Cos., Inc . Sec. Li t i g . ,

No. 04 CIV.

8144

(CM),

2009 W

5178546,

a t *9

(S.D.N.Y.

Dec.

23,

2009) (c i t a t ions omi t t ed) ;

see

a l so Bi l lhofe r , 281 F.R.D.

a t

156

(expla ining

misrepresenta t ions

and omissions

a l leged in publ ic

f i l i ngs are of the

so r t

t ha t cour t s

rou t ine ly hold

to s a t i s f y

the common quest ion requirement (c i t a t ions and i n t e rna l

quota t ion marks omi t t ed ) ) ; Vivendi I , 242

F.R.D.

a t 84.

That Defendants in tend to b r ing subject ive , i nd iv idua l i zed

defenses by chal lenging

the ac tua l

knowledge of each

Pl a i n t i f f

5

may

defea t

commonality, but

t h i s i s

a weighty

quest ion

for the

predominance ana lys i s .

See

~ Korn v. Franchard Co 456

F.2d

1206,

1210

(2d

Cir . 1972) ( f inding commonality

p la in ly

s a t i s f i e d where the

a l leged misrepresenta t ions

re l a t ed to a l l

inves tors , rese rving the

more

d i f f i c u l t

problem

o f

whether

re l i ance posed a common i ssue for the

12(b)

(3) predominance

ana lys i s ) . Where

Pl a i n t i f f s

have i d e n t i f i e d a

unifying thread

among the members' cla ims t h a t warrants c las s t r ea tmen t , as

Pl a i n t i f f s

have

here ,

(n ]o t every

i s sue

must

be i den t i ca l as to

each

c lass

member. Vivendi I ,

242

F.R.D.

a t

84 (quoting

Cut le r

v.

Pera l e s , 128 F.R.D. 39, 44 (S.D.N.Y.1989) ( in te rna l quota t ion

5

S e e ~

Defs . '

Opp. a t 11 ( [F]or each p l a i n t i f f ' s Sect ion 11

cla im, Defendants are

en t i t l ed

to

prove

t ha t a t the t ime of

acqu is i t ion

the purchaser knew of

such

unt ru th or omiss ion.

(c i t a t ions

and i n t e rn a l quota t ion marks

omit ted)) .

17



marks and

t a t i o n

o mi t t ed ) . The

ind iv idua l

ques t ions here do

not negate t h e

p l a i n ex i s t en ce

of

the

common l i a b i l i t y ques t ions

t h a t

must

genera te common answers

ap p l i cab l e

to every

s ing le

cla im in

t h i s mat te r .

However, commonal i ty

es t ab l i shed ,

t h e re remains an

ad mi n i s t r a t i v e ques t ion

of whether t h e

c l a s s c e r t i f i c a t i o n

an a l y s i s should

be ap p l i ed

to one c l a s s o r two

in l i g h t

Defendants ' i n d i v i d u a l i zed

arguments . Rule 23

gives

th e

d i s t r i c t

co u r t

f l e x i b i l i t y to c e r t i f y su b c la s ses as t h e case

p ro g res ses and as t h e n a tu re of the proof to be developed

a t

t r i a l becomes

c l e a r .

Mar iso l

A.

v. G i u l i an i , 126 F.3d 372,

379

(2d Ci r .

1997) ;

Vivendi

I ,

242 F.R.D.

a t

109

( The

Court has

the

a u t h o r i t y

under Ru

23

c) 4)

B

of t h e Federa l Rules of Civ i l

Procedure

to

div ide

a

c l a s s i n t o s u b c l a s s e s . ) .

Defendants have

marshaled an impress ive

amount of

ev idence

showing

t h a t

vary ing asp ec t s and amounts

of

t h e co n ten t

of

the

Herman

Cal l s

and the Syndica te Analys t s '

pro jec t ions

spread

to

other i n s t i t u t i o n a l i nves to rs . See

Defs . ' Opp.

a t

22-26 .

6

Emails

6 As a s ingu la r

example, Natasha Kuhlkin of Jenn i son

Associa tes

emai led 65 i n d i v i d u a l s

t o re l ay

some of the con ten t of the

Herman

Cal l s .

Defs . '

Ex.

A-547.

Defendants

have

put

fo r th

ev idence t h a t i n v es t o r s a t numerous

i n s t i t u t i o n s

gathered ,

i n fe r red ,

or

were

informed of some

aspec t s

of what was conveyed

18



from

Morgan Stan ley and

JP

Morgan

show

teams

of

employees

execu t ing

an e f f o r t to

touch

base

wi th dozens of

investment

i n s t i t u t i o n s regard ing the changed

circumstances

a f t e r

the

Herman

Cal l s . A-867-891. This evidence appl ies widely to

i n s t i t u t i o n a l i nves to rs . Re ta i l i nves to rs

had

an a l toge ther

d i f f e r e n t

exper ience from i n s t i t u t i o n a l i nves to rs :

they

were not

neces sa r i ly wel l connected in the investment world , they were

not sub jec t s of

the

unde rwr i t e r s d i r e c t market ing e f fo r t s to

the same degree or in the same ways,

and

most s i g n i f i c a n t l y ,

the re was no corresponding sys temat ic e f f o r t to reach out

to

r e t a i l

i nves to rs a f t e r

the Herman

c a l l s .

7

P l s .

Reply a t

24-32.

in the Herman Cal l s

o r

Syndica te Analyst

Revis ions ,

inc luding:

American

Century

Inves tment Management A-14), Alyeska

Investment

Group A-1561), Capi ta l Research Global Inves to r s

A-

6-7) , Capi ta l

World

Inves to r s

A-17),

Chi l ton Investment Company

A-61),

Clovis

Capi ta l

Management

L.P.

A-1539), Columbia

Management Inves tment

Advisers

A-1552), Cr i te r ion

Capi ta l

Management, LLC A-50; A-59) , Federa ted Kaufmann A-46.2) ,

Fi d e l i t y

A-16), Gilder Gagnon Howe Co., LLC A-70; A-72),

Jennison Associa tes

A-204;

A-206), Lone Pine Capi ta l LLC A-

64}, Maple Lane Capi ta l

A-1568),

Oppenheimer

and

Nueberger

Berman A-1723),

Schroder

Inves tment Management A-98) ,

All iance

Berns te in

A-1685),

Teachers

Advisors , Inc.

A-79),

TPG-Axon

Management A-95), Polygon

Investments A-1772-3),

U S

Global

Asset

Management A-86), Waddell

Reed

Inves tment Management

A-91) ,

Weiss

Mul t i -S t r a tegy

Advisors

LLC A-1541),

Well ington

Management

Company

A-89),

Winslow Capi ta l Management,

LLC

A-

1556;

A-972).

7

Defendants do a l l ege i s o l a t ed ins tances of t h i s informat ion

reach ing

r e t a i l

i nves to rs . See Defs . Opp a t 49

53; see a l s o §

IV.a) . For

example,

one

ind iv idua l t h a t

lea rned

some of the

re levant

in fo rmat ion

through

h i s f a the r , and ano ther

through

her

research and ana lys i s as a consumer news

w r i t e r .

See Defs . Opp.

a t

-3 ; § IV.a) . Defendants a l l ege t h a t

the

most

widespread

19



Spec i f i c

mer i t s determinat ion

as

to what exac t in fo rmat ion

spread, when, and to whom need not

be

reached to know t h a t the

answers to

these

ques t ions have s i g n i f i c a n t

admin i s t ra t ive

impact

on the case . The record has es t ab l i shed

t h a t

unique

world of f ac t s

app l i e s t o

i n s t i t u t i o n a l

i nves to rs

but not

r e t a i l

i nves to rs .

t

t he re fo re

r a i s e s

addi t iona l conunon quest ions with

conunon answers,

such

as whether reasonab le i n v e s t o r s ac tua l

knowledge

of the Facebook

revenue

cu t s can be

i n f e r red from

the

broad

spread o f t h i s in fo rmat ion . These

quest ions

and

t h e i r

answers

are

sub jec t

to genera l i zed

evidence ,

but

w i l l

a l so

r eq u i r e

di s t ingu i sh ing

between r e t a i l and i n s t i t u t i o n a l

i n v e s t o r s . To avoid

confus ing the

i s sues

and

t o admin i s t ra t ive ly

manage t h i s excep t iona l ly l a rge

case ,

i f

any c l a s s i s to

proceed,

two

subc lasses a re

necessary .

c

Typica l i ty

Rule

2 3 ( a ) s

t y p i c a l i t y requi rement

~ i s s a t i s f i e d

when

each

c l a s s member s

c

im a r i s e s

from

the same

course

of

events ,

d i f fus ion of t h i s in fo rmat ion to r e t a i l

i nves to rs

was

through

e i t h e r media

sources , o r by imputat ion to the indiv idua ls who

inves ted through i n s t i t u t i o n s . Defs .

Opp.

a t

49-54. Facts

regard ing

the

former

i s sue

apply to both subc lasses , and the

l a t t e r

i s sue

i s addressed i n f r a in sec t ion IV.a) . Defendants do

not

p o s i t

tha t r e t a i l i nves to rs were sys t ema t i ca l ly connected

to

o r

d i r e c t ly

informed by the d i f fu s i o n of

the

in fo rmat ion between

i n s t i t u t i o n a l i nves to rs .

20



and each c las s member makes s imi la r

l ega l arguments to

prove the

defendant ' s l i a b i l i t y . ' Cent.

Sta tes , 504 F.3d

a t 245 (quoting

Robinson v.

Metro-N.

Commuter R.R. Co., 267 F.3d 147,

155

(2d

Cir .2001)) .

Typica l i t y

may be

found

to f a i l in cases where the

named p l a i n t i f f was not

harmed

by the conduct

a l leged to have

i n ju red the

c l a s s . Newman

v. R N Telecom Servs . ,

Inc . ,

238

F.R.D.

57, 64

(S.D.N.Y.2006).

As

discussed,

a l l P l a i n t i f f s put

fo r th the

same cla ims

based on

the same

miss ta tements

and

omissions in

the same

documents.

See

supra

§ I I I . b ) ;

see a l so P l s . ' Mot. a t 19. All

P l a i n t i f f s '

i n j u r i e s stem

from

those

mate r i a l

miss ta tements o r

omiss ions . Thus, the

c la ims

asse r ted by a l l

p l a i n t i f f s are

typ ica l

of one

another . The d iv i s ion

of

subc lasses cures any

concern ,

v a l id or no t ,

t h a t

a

r e t a i l

i n v e s t o r ' s

c la im

i s

con tex tua l ly

not t y p i ca l of a high ly experienced repea t -p l aye r

i n s t i t u t i o n a l i n v e s t o r ' s cla im.

Defendants

argue

t h a t

P l a i n t i f f s

have

of fe red

only

asse r t ions o f t yp i c a l i t y without poin t ing to any evidence

Defs . '

Opp a t 66-8. The

t yp i c a l i t y ana lys i s asks whether t he

cla ims and

defenses

of the rep re sen ta t ive p a r t i e s are typ ica l o f

the

cla ims

or defenses of

the c l a s s .

Fed. R.

Civ.

P.

23(a)

3 ) .

P l a i n t i f f s ' papers adequate ly p rov ide evidence o f t y p i c a l i t y by

21



poin t ing to the

i den t i ca l

c la ims o f a l l P l a i n t i f f s in both

proposed subc lasses . Pl s . ' Mot. a t 19. This i s a l l the

Rule

requ i re s . See

NYS

S p e c i a l i s t s , 260

F.R.D.

a t

72

( As

long

as

p l a i n t i f f s

a s se r t ,

as

they

do here ,

t h a t defendants

committed

the same wrongful ac t s

in

the same

manner,

aga ins t

a l l members

of

the c lass ,

they

e s t a b l i sh

[ the) necessary t y p i c a l i t y .

( c i t ing

In

re

Towers

Fin . Corp. , Noteholders L i t i g . , 177 F.R.D.

167, 170

(S.D.N.Y. 1997)

( in te rna l

quota t ion marks

and

c i t a t i o n

omi t t ed) ; Robidoux v. Celan i , 987 F.2d 931, 936-37

(2d

Cir .1993)

( When t i s a l leged

t h a t

the same unlawful conduct was

d i rec ted

a t or af fec ted both

the

named p l a i n t i f f and

the

c las s

sought to

be represented , the t yp i c a l i t y requi rement i s usua l ly met

i r r e s p ec t i v e

of

minor v a r i a t i o n s

in the fac t

p a t t e r n s underly ing

indiv idua l c la im s . ) )

.

Defendants ' ·arguments

about

l ack

o f

c las s

s tand ing

are unava i l ing fo r the same

reason:

p l a i n t i f f s

here a l l a l lege they su f fe red the same in ju ry as

a

r e su l t of the

same

conduct ,

and

t ha t conduct impl ica tes the

same s e t of

concerns

as the

a l l eged ly i l l ega l

conduct t ha t

caused

in ju ry - the

misleading FWP

and

Amended Regi s t ra t ion Statement . See NECA-IBEW

Heal th Welfare

Fund

v. Goldman Sachs Co.,

693

F.3d 145, 162

(2d Cir . 2012) .

Defendants a l so

argue

t ha t ~ s ] o m e

p l a i n t i f f s ,

including

a l l o f the

Lead

P l a i n t i f f s ,

are subjec t to

a

knowledge defense

22



based

on ind iv idua l communicat ions t ha t renders t h e i r cla ims

a typ ica l of othe r

c las s members. Defs .

Opp. a t

65

(c i t a t ions

and in te rna l

quota t ion

marks

omi t t ed) . For each

p l a i n t i f f

Defendants

provide evidence

to

prove

ac tua l

knowledge,

P l a i n t i f f s poin t to o ther evidence to rebut the c la ims . P l s

Reply a t 66-69.

Defendants,

of course , rebu t much o f th t

evidence

and

argument in t h e i r Sur-Reply. Defs . Sur-Reply 45

46.

This i s the

song

t ha t never

ends . What i s c l e a r i s t h a t

Defendants in tend to vigorously

pursue

an ac tua l knowledge

defense as

to

every

Pl a i n t i f f poss ib l e

(as i s t he i r

r i gh t ) ,

not

tha t the proposed P l a i n t i f f s are

any

more a typ ica l

in

r e l a t i o n

to the

c las s than any

othe r .

I t i s t he re fo re the p a r t i c u l a r

circumstances , not the

f ac t ,

of the

ac tua l

knowledge

defenses

t ha t sugges t s any a t y p i c a l i t y ,

an

obvious

t ru i sm

with any

sub jec t ive

defense

such

as

ac tua l

knowledge.

Typica l i t y

i s

quest ion

of the re l a t ion o f each cla im to the o ther s . To f ind

t ha t the i nd iv idua l i zed

c i rcumstances

of

an

ac tua l knowledge

defense prec lude

t yp i c a l i t y

here would

al low

Defendants to

unhinge the c lass


ana lys i s

a t

th i s

point

not

because P l a i n t i f f s

cla ims

are

d i s s imi l a r

when

compared, but

s imply because the

defense may apply .

Because Defendants in tend

to argue ac tua l

knowledge widely , the

fac t

o f

ac tua l

knowledge

defenses and the

i nd iv idua l i zed

inqu i r i es requ i red

to adjudica te

them, whether aga ins t the cla ims o f the

proposed

rep re sen ta t ive s

23



or other

po ten t i a l c l a s s members, more

appropr i a t e ly

goes

to

predominance r a the r than

t yp i c a l i t y .

See i n f r a § IV.a) .

Fur ther , as descr ibed below, subc lasses

and


procedures

wil l

e f f e c t i v e l y

manage the

minor v a r i a t i o n s t h a t

may

be

appl icable

to the

proposed

r ep resen ta t ives . See id .

At

the

t yp i c a l i t y s tage ,

as se t

fo r th

above, P l a i n t i f f s have

s a t i s f i e d

Rule

2 3 ' s requirement . They need not demonst ra te they wi l l

succeed on

the

meri t s (by

disprov ing

Defendants a f f i rma t ive

defenses (s )

o r otherwise) .

d Adequacy

Rule

23(a)

(4)

requi res

t ha t

t he rep re sen ta t ive pa r t i e s

wil l

f a i r l y

and adequate ly pro tec t the

i n t e r e s t s

of the c l a s s .

Fed.R.Civ .P.

23(a)

(4) .

~ d e q u a c y

e n t a i l s

inqu i ry

as

to

whether :

1) p l a i n t i f f ' s

i n t e r e s t s

are

an tagon i s t i c to the i n t e r e s t

of

other

members of

the

c las s and 2) p l a i n t i f f ' s

a t torneys

are

qua l i f i ed , experienced and ab le

to

conduct the l i t i g a t i o n .

In

re

Flag Telecom, 574 F.3d

a t

35 ( c i t ing Ba

v.

Donaldson

222

F.3d

52, 6

(2d

Cir .2000)) ( in te rna l

quota t ion

marks

omi t t ed) .

The

f i r s t prong

o f

t h i s ana lys i s serves

to

uncover

c o n f l i c t s of

i n t e r e s t

between named p a r t i e s and

the

c las s

they seek to

represent

and ensure t h a t

the proposed c las s rep re sen ta t ive

possesses

the

same i n t e r e s t and suffe r[ed] the same in ju ry

as

24



the

c l a s s members. Amchem

Prods . ,

Inc . v.

Windsor,

521 U.S.

591, 625-26, 117 S. Ct. 2231, 138 L.Ed.2d

689

(1997) . To

defea t

c e r t i f i c a t i o n , a

c o n f l i c t

between named p a r t i e s and

the

c las s

they seek

to represent

must be fundamenta l . In re

Visa

Check/MasterMoney A n t i t r u s t

Li t i g . ,

280 F.3d 124,

145 (2d

Cir .

2001,

abrogated

in p a r t on other grounds

by

In re IPO I , 471

F.3d 24).

North Caro l ina DST Arkansas Teacher , and Fresno would

represen t the i n s t i t u t i ona l i nves to r

c l a s s ,

while the Galvans,

Eric Rand, the

Meltons , and Sharon Morley

would represen t

the

r e t a i l

i nves to rs .

As

discussed

above, a l l

members

of

the

proposed c las s a l l ege c la ims

a r i s ing from the

same

wrongful

conduct t ha t

are

based on the same l ega l t heor i e s as


cla ims

and

the re fo re

none

of


i n t e r e s t s

are

an tagon is t i c to those o f the proposed c l a s s . Bi l lho

281

F.R.D. a t 157. Any c o n f l i c t

t h a t

may e x i s t i s

not fundamental .

Defendants submit t ha t P l a i n t i f f s ' i n t e r e s t s are

an tagon is t i c

because

some purchased

shares before

May

18

media

repor t s

about

Facebook's

rev i sed revenue pro jec t ions , and some

a f t e r . Defs . '

Opp

a t 66-67.

Much of

the di f fe rences are

a l l e v i a t e d by sepa ra t ing the


i nves to rs

and

the

r e t a i l inves to r s . Regardless ,

these

arguments

go to

25



con t rad ic t ions regard ing l os s causa t ion and

knowledge.

Knowledge

i s

an a f f i rma t ive defense and as t h i s Court has a l ready s ta ted ,

los s

causa t ion i s

not an element o f

a

cla im under

e i the r

Sect ion

11 o r

12. MT Opinion a t 522-23 ( co l lec t ing c i t a t i ons ) .

Though t h i s does not make knowledge and loss causa t ion

i r re l evan t

to

the

e n t i r e

c l a s s

c e r t i f i c a t i o n

inqu i ry , see i n f r a

§ I V . a ) , t

does

mean

t h a t

the

purpor ted c o n f l i c t

i s specula t ive

as to adequacy a t t h i s s tage and thus not grounds to

defea t

rs

Heal th v. DLJ

Capi ta l ,

Inc . ,

No. 08

CIV.

5653 PAC,

2011

WL

3874821,

a t 4

S.D.N.Y. Aug.

16,

2011) amended in par t , No. 08 CIV. 5653 PAC,

2014 WL

1013835

S.D.N.Y. Mar. 17, 2014)

( f inding specula t ive

c o n f l i c t did not de fea t t yp i c a l i t y , and thus , c las s

c e r t i f i c a t i o n ) .

In the

event

an

ac tua l

c o n f l i c t a r i s e s ,

whether

a t

the

damages

phase

o f t h i s

case

o r

otherwise ,

the

p a r t i e s

are

f ree to a l e r t

the

Court

and the i s sue w i l l be reso lved

a t t ha t

t ime.

With regard

to

the second prong of the adequacy ana lys i s ,

Counsel

i s highly

q u a l i f i ed and

has

prosecu ted

t h i s ac t ion

vigorously ,

t he i r e f fo r t s r esu l t ing

in

surv iv ing

a

motion

to

dismiss aga ins t

some of the

f ines t f i rms in the na t ion .

See

Graziano Deel. 1, Exs. 43-44 f i rm

resumes); MT

Opinion.

26



Counsel

are more than s u f f i c i e n t ly

q u a l i f i ed and

experienced to

conduct t h i s l i t i g a t i o n .

8

Defendants

argue

t h a t P l a i n t i f f s have not shown su f f i c i e n t

knowledge of involvement in the

case

to

meet

the requi rements of

adequacy and t ha t ce r t a in

proposed

rep re sen ta t ive s are

i n s u f f i c i e n t ly aware of the case . Defs . ' Opp. a t 68. [C] l a s s

repre sen ta t ive s t a t u s may proper ly 9e denied where the c l a s s

rep re sen ta t ive s

have

so

littl

knowledge of and involvement in

the c lass

ac t ion t ha t

they

would

be

unable

or unwi l l ing

to

p r o t ec t the

i n t e r e s t s of

the c l a s s

aga ins t the poss ib ly

competing i n t e r e s t s of the a t t o r n ey s . Baffa v.

Donaldson

222

F.3d a t 61. Defendants c i t e

an

exc i sed por t ion

of

t h i s quote to

j u s t i f y

indiv idua l ized

a t t acks

on

myopic aspec t s of proposed

r ep resen ta t ives '

unders tandings

of

t h i s

case. Defs . '

Opp

a t

8

(point ing to Melton ' s knowledge before she jo ined the case in

December

2014 Mr. Galvan 's unders tanding of the

knowledge

i s sue , Mr. Melton ' s unawareness of a

document search) .

s Defendants

have

a l so submit ted t h a t counsel i s conf l i c ted in

represent ing

P l a i n t i f f s of both

subc lasses ,

whose

i n t e r e s t s '

c o n f l i c t

due to

the t iming o f t h e i r

a l l eged ly cor rec t ive ac tua l

knowledge. P l ' s Opp. a t 63-4. Counsel

i s

only conf l i c ted i f the

subc lasses

t r u ly

c o n f l i c t ; in

other

words t h i s

is

the same

specula t ive

argument t h a t

the two proposed subc lasses conf l i c t

because t he i r l os s -causa t ion arguments which

are

not a

p a r t

of

t h e i r cla im are necessa r i ly opposed.

27



Defendants l eave out

the

immediately preced ing sen tences in

Baffa: The Supreme Court in Surowitz

v.

Hil ton Hotel

383 U.S. 363

express ly

disapproved of a t tacks on the

adequacy of c las s r ep resen ta t ive

based

on

the

rep resen ta t ive ' s

ignorance .

Baffa ,

222 F.3d a t 61.

Even

i f

Defendants '

a t tacks were proper , [ c ] o u r t s r a r e ly

deny c las s c e r t i f i c a t i o n

on

the bas i s of

the

inadequacy of c l a s s

represen ta t ives , doing so only in f l ag ran t cases , where the

pu ta t ive c las s rep re sen ta t ive s

d i sp lay

an a larming unfami l ia r i ty

with

the

s u i t ,

display

an unwi l l ingness

to

l ea rn

about the

f ac t s

under ly ing t h e i r claims, o r are so lacking in

c r e d i b i l i t y

t ha t

they are l i k e l y to harm t h e i r case . In

re

Pf ize r Inc. Sec.

Li t i g . , 282

F.R.D. 38, 51 (S.D.N.Y. 2012) . Such circumstances

are

not

presen t here .

P l a i n t i f f s

pleaded

sp e c i f i c

reasons

and

ways

in

which

l ead

p l a i n t i f f s would remain involved

in

t h i s

l i t i g a t i o n . See

Pl s . '

Mot. a t 20-21. Resolving any doubt ,

depos i t ions

taken

in

mid-2015 and submit ted in Reply

demonst ra te

the adequacy

of

P l a i n t i f f s ' involvement in the case . See

Graziano Deel. 2, Ex. 92-7. P l a i n t i f f s need not demonst ra te a

deep unders tanding of t h i s l i t i g a t i o n to meet the adequacy

requirement .

See In re

Sadia ,

269

F.R.D.

a t 310.

The

awareness

and wil l ingness

the proposed

rep re sen ta t ive s have

demonst ra ted

are more

than

s u f f i c i e n t .

See

id .

28



Defendants a l so argue

t h a t

Rand, the Meltons, and Morley

were not

named

in the

Complaint , and

t he re fo re have not a l leged

any claims and did

not

a t t a ch PSLR c e r t i f i c a t i o n s

to

the

Complaint .

Defs . '

Opp. a t 66.

Defendants do not a rgue

any

of

these

indiv idua ls

are not p a r t of the c las s o r subc lasses

proposed. Rule

23 gives the Cour t the power to des igna te

c l a s s

rep re sen ta t ive s who a re

not l ead

p l a i n t i f f s , and Defendants do

not p r o t e s t

t ha t to do

so

would

cause d is loca t ion

o r

delay . See

In re Oxford Heal th Plans , Inc . , 191 F.R.D. 369, 380-81

(S.D.N.Y. 2000)

( f ind ing [ t )h e

Cour t be l ieves on r e f l e c t i o n

tha t

it probab ly has the power to des igna te a Class

Represen ta t ive under Rule 23

who i s not a Lead

P l a i n t i f f , s imply

because t he re

i s nothing

in the s t a t u t e which preven t s

it. ).

Accordingly , the concern

does

not

d e fea t a

f ind ing of adequacy.

IV.The Proposed Subclasses

Sat i s fy Rule 23 b)

3)

a Predominance

Rule

23(b)

(3) r eq u i r e s a proposed c las s rep re sen ta t ive

to

es t ab l i s h t h a t

common ques t ions o f law or f ac t predominate over

any

ques t ions

af fec t ing

only i nd iv idua l

members, and t h a t

a

c las s

ac t ion

i s

supe r io r

to othe r

ava i l ab le

means of

ad jud ica t ion . B i l lhofe r , 281 F.R.D. a t 158; see

a l so

Fed.

R.

29



Civ.

P. 23{b) (3) . The

predominance

inqu i ry

t e s t s

whether

proposed c las ses are s u f f i c i e n t ly

cohesive

to warrant

adjudica t ion

by r ep resen ta t ion . Amchem Prods . , 521 U.S. a t 623,

117 S. Ct.

2231.

However, [ i ) t

i s a more demanding

c r i t e r ion

than the commonality inqu i ry under

Rule

23(a)

.

Bi l lhofe r , 281

F.R.D. a t 158 ( c i t ing Amchem

Prods . ,

521 U.S.

a t 623-24). The

mat te rs p e r t i n en t to these f ind ings inc lude:

A) the c las s

members' i n t e r e s t s in i nd iv idua l ly

con t ro l l ing the prosecut ion or defense o f separa te ac t ions ;

B) the

extent

and natu re o f

any

l i t i ga t i on

concerning

the

con t roversy

a l ready

begun

by

o r

aga ins t

c l a s s members;

C) the

d e s i r a b i l i t y o r

u n d es i r ab i l i t y o f

concen t ra t ing the

l i t i g a t i o n of the cla ims in the

p a r t i c u l a r

forum;

and

D) the l i k e l y d i f f i c u l t i e s

in

managing a c l a s s

ac t ion .

Fed. R. Civ. P.

23(b)(3)(A)-{D).

Class-wide

i ssues predominate i re so lu t ion

o f some o f

the

l ega l

o r

fac tua l

quest ions

t h a t

qua l i fy

each

c l a s s

member's

case

as

a genuine con t roversy can

be

achieved

through genera l i zed

proof, and

i f these

p a r t i c u l a r

i ssues are

more s u b s t an t i a l than

the

i ssues subjec t

only

t o ind iv idua l i zed

proof . Moore v.

PaineWebber, Inc . , 306 F.3d

1247,

1252 (2d Cir.2002) {c i ta t ion

omi t t ed) .

Rule 23 (b) (3) does

ot requi re

a p l a i n t i f f seeking

c las s c e r t i f i c a t i o n

to

prove t h a t each

element

of

her

cla im i s

suscep t ib l e to

classwide

proof . What the

ru le

does requ i re i s

t h a t common quest ions predomin te over any quest ions

a f f ec t i n g

only ind iv idua l

c l a s s

members. Amgen, 133 S. Ct. a t

1196.

30



With these pr inc ip les

in

mind, before proceeding to analyze

the


ques t ions

in t h i s mat te r , t must

aga in

be

noted

t h a t t h i s

case

i s of

s tagger ing

s i ze , invo lv ing very

grea t

number

of p o ten t i a l

c la imants . See

supra §

I I I . a ) . The

presence o f common

quest ions

and answers

i s t he re fo re

an

ext remely

heavy

counterweight to

any

i nd iv idua l i zed ques t ions .

Defendants argue s t renuous ly

t h a t predominance

i s defea ted

because


inqu i r i es w i l l be

requ i red to

determine

whether

each

i nves to r knew

the t r u t h

of the a l leged

misstatements or omissions a t the t ime

of

t he i r

purchases .

Defs . '

Opp. a t 11-54.

I t

i s undeniable t h a t

Defendants have

shown t ha t l a rge number

of

p l a i n t i f f s

and p o ten t i a l

c las s

members

had

vary ing

degrees

o f

knowledge

about

mobi le ' s

n eg a t iv e

impact on Facebook s revenue,

Facebook s rev i sed pro jec t ions

given

t h a t impact ,

the

Syndica te

Ana lys t ' s Revised

Pro j ec t i o n s

given Facebook s r ep o r t o f

t h a t

impact , o r

some

combinat ion

t he reof . See supra n.

6-7.

Of

course ,

Defendants a re c o r r e c t

t h a t

for each

ind iv idua l with any

degree

of knowledge-whether

or

not

t h a t

knowledge i s found

on

the mer i t s

to

prec lude

t h a t

p a r t i c u l a r p l a i n t i f f ' s

c la im- i s sub jec t ive

inqu i ry

for

each

and every i nves to r . At the same t ime, t has been noted in

t h i s

D i s t r i c t t h a t

i nd iv idua l i s sues

wil l

l i ke ly

a r i s e

in

t h i s

case

31



as in a l l

c las s

ac t ion cases ,

and

to a l low

var ious

secondary

i ssues

of

p l a i n t i f f s '

c la im[s ) to prec lude c e r t i f i c a t i o n of

a

c las s

would render the ru le an impotent t oo l fo r

p r iv a t e

enforcement of the se c u r i t i e s l aws . Pub. Emps. ' Ret.

Sys.

o f

Miss i s s ipp i v. Merr i l l Lynch Co., 277

F.R.D.

97, 111

(S.D.N.Y.

2011) (c i t a t ions

and

i n t e rna l quota t ion marks omit ted)

( Pub.

Emps . ' ) . Moreover,

[a ] l though

a defense

may a r i s e

and

may

a f f e c t d i f f e r e n t

c l a s s

members d i f f e r e n t l y , t h i s does not compel

a

f inding t ha t indiv idua l i ssues predominate over

common

ones.

As

long

as

a

su f f i c i e n t

co n s t e l l a t i o n

of

common

i s sues binds

c las s members

toge ther ,

v a r i a t i o n s

in the sources

and

app l i ca t ion o f a defense w i l l not au tomat ica l ly fo rec lose c l a s s


under

Rule 23(b) (3) . B ro w n v. Kel ly , 609 F.3d

467, 483 (2d Cir . 2010) (c i t a t ions

and

i n t e rna l quota t ion marks

omit ted)

.

Given the

ex t raord ina ry s i ze of t h i s case,

t

i s

a

perplexing

problem t h a t the

sheer

number of

p o ten t i a l

p l a i n t i f f s

of

a l l

s t r i pe s

and

co lo rs with the

same

c la ims aga ins t the

same

defendants

i s

what

t h rea t ens

t h e i r

a b i l i t y to proceed

as a

c l a s s .

Though the

case i s not binding on

t h i s Court , the

approach of In re DJ Orthopedics , Inc . i s i n s t ru c t i v e in

reso lv ing the i s sue . 2003 U.S. Dis t .

LEXIS

21534 (S.D. Cal .

Nov.

16, 2003) ( DJ Orthoped ics ) .

DJ

Orthopedics i s s t a r t l i n g l y

32



comparable to

t h i s one f ac tua l ly : the defendant

company

had been

prepar ing to

go

publ i c

when they

l ea rned

of

dec l in ing

sa les

for

the

cur ren t qua r t e r ,

the

equ iva len t o f Facebook's r e a l i z a t i o n

of

mobi le ' s impact on ad

revenue.

See id . a t *4. The day before the

IPO,

underwr i t e r

s a l e s teams

con tac ted a l imi t ed

number of

i nves to rs t o

n o t i f y

them

o f

the new lowered pro jec t ions

fo r the

qua r t e r , the equ iva len t of the

Herman

Cal l s . See id . The IPO

went ahead, and

i nves to rs

subsequen t ly

brought

s u i t

aga ins t

the

company cla iming

the Regi s t ra t ion Sta tement

and Prospectus

i s sued in

connect ion

with

the

IPO-which had

not

been updated

a f t e r the r e a l i z a t i o n of dec l in ing

sa l e s -con ta ined ma te r i a l

misstatements and

omissions

in v io l a t i o n

of sec t ions

11,

12,

and

15 of

the S ecu r i t i e s

Exchange Act

o f 1934.

Id. a t *4-5.

P l a i n t i f f s sought


of

two subc lasses : a

knowledge

c l a s s ,

composed

of the

i nves to rs

the

underwr i t e rs

had

con tac ted , and

a

no-knowledge c las s

composed

of the

i nves to rs

the

underwr i t e rs d id not contac t . Id. a t

*8.

Jus t as in

t h i s

case , the

DJ

Orthopedics defendants argued t ha t


determinat ions

of

knowledge would predominate .

See

Id. a t

*25.

The Honorable Jud i th N Keep

of

the Southern D i s t r i c t o f

Cal i fo rn ia

agreed the

knowledge i ssues would

be s i g n i f i c a n t

for

the i nves to rs i n DJ Orthopedics

t h a t were

not con tac ted

by

underwr i t e rs , but

nonethe less

c e r t i f i e d

the

subclass

on four

33



pr inc ip les

appl icable

here :

f i r s t , the d iv i s ion

of

subc la sse s

reduc[ed]

the

need for

i nd iv idua l i zed dete rmina t ions on

the

i s sue o f

knowledge. Id .

a t *26-7.

Second,

p l a i n t i f f s

had

presented

mul t ip le common

ques t ions with

common

answers

appl icable to every

c las s member,

whereas defendan ts

i nd ica t e [d ]

only one

ques t ion t ha t

i s individual ized -knowledge.

Id .

a t

*27. Third ,

the

proof

regarding

the i nd iv idua l i zed i s sue

would

r e ly

as much on in fo rmat ion

common

to a l l subc lass members

(e .g. how widespread was the pub l i c dissemina t ion

o f

the

informat ion) as it would on

i nd iv idua l

in fo rmat ion (e .g. to what

sources of in fo rmat ion was each

subc la ss member

exposed) . Id .

Four th ,

the

t r i a l cour t has broad d i s c r e t i o n in determining

whether a

c l a s s

should

be

c e r t i f i e d .

Id .

(c i t a t ions omit ted) ;

see a l so Hamilton v. Accu-tek, 935

F.

Supp. 1307,

1331-32

(E.D.N.Y.

1996)

( I t

i s

un iver sa l ly

recognized

t ha t

a

d i s t r i c t

cour t

i s af forded broad d i sc re t ion

in determining

whether an ac t ion should be c e r t i f i e d under

Rule

23.

( c i t ing

City of

New

York v. Int l Pipe Ceramics Corp . ,

410

F.2d 295,

298 (2d Cir .1969) ; In re Jo in t E. S. Dis t . Asbestos Li t i g . ,

129

B.R.

710,

816 (E.D.N.Y.

1991} vaca ted , 982 F.2d 721 (2d

Cir .

1992) opinion modif ied on reh 'g , 993

F.2d 7

(2d

Cir .

1993);

In

l i ne Cases , 107 F.R.D. 719, 735 (W.D.Mo.1985) ( c i t i n g

cases

and

t r e a t i s e s ) ; 7A C. Wright ,

A.

Mil le r , M Kane,

Federal

Prac t i ce

and

Procedure§

1759,

a t 111

(2d ed.

1986)) ) .

34



Defendants

a t tempt to d is t ingu ish

DJ Orthopedics

on

the

grounds t ha t the

knowledge c l a s s

in tha t case

was

subjec t

to a

uniform di sc losure ,

and

no uniform di sc losure

i s presen t

here .

Defs . ' Opp. a t

37-8.

However, the case ' s

reasoning

c e r t i f i e d

the

c las s

desp i t e the indiv idua l ized

knowledge inqu i r i es

appl icable

to the

no-knowledge

s ubc l a s s - i . e . , the c las s not

subjec t

to

any formal

di sc losure ,

not

the

knowledge

subc lass

sub jec t to

uniform

di sc losure . 2003 U.S. Dis t .

LEXIS

21534, a t

*24-5

( f inding under the heading Putat ive-Knowledge

Subclass t h a t

no

indiv idua l ized

determinat ions [we] re necessary , while

gran t ing

under

the heading No-Knowledge

Subclass

t ha t

i nd iv idua l i zed quest ions , l i ke ly to be a s ign i f i can t

i ssue

nonetheless

did

not predominate)

DJ Orthopedics '

l og ic

and fac tua l s i m i l a r i t y i s persuas ive

in t h i s mat te r . With respec t to the i n s t i t u t i o n a l inves tor

c las s ,

Defendants '

evidence i s so

widespread

t

presents

yet

ano ther

common quest ion

and

answer:

whether

the

in fo rmat ion was

so d i f fuse

th a t

a l l i n s t i t u t i o n a l i nves to rs can be charged with

ac tua l knowledge of the t r u th of the mate r i a l

miss ta temen ts

and

omissions al leged.9

Indeed,

Defendants ' have re t a ined

an

exper t

9 Defendants at tempt

to

rebut t h i s add i t iona l common i s sue by

35



to

t e s t i f y

to

widespread d i f fus ion of informat ion.10 The d iv i s ion

of

subc lasses t he re fo re reduces the

need

fo r i nd iv idua l i zed

determinat ions on the

i ssue

of knowledge,

and

in f ac t adds more

weight to the predominance o f common quest ions

and

answers,

pra c t i c a l l y

negat ing the

i nd iv idua l i zed ques t ions

ra i sed .

Mult ip le common quest ions

and

answers to the i n s t i t u t i o n a l

i nves to r subc lass t he re fo re outweigh

any


ques t ions . Defendants

at tempt

to place a thumb on the sca l e

aga ins t

predominance by arguing a t

t imes in terms of shares

(which were

of t en

purchased

in

s i g n i f i c a n t numbers by

i n s t i t u t i o n a l inves to r s ) .

S e e ~ Defs . '

Sur-Reply

a t 6,

p r o t e s t i n g t h a t they

do not

in tend

to

put

fo r th a cons t ruc t ive

knowledge defense. See Defs . ' Sur-Reply a t 3. Regardless of the

meri t

o f such an argument , whether an in fe rence o f

ac tua l

knowledge

stemming from widespread

d i f fus ion of the in format ion

in ques t ion

can be

made

i s

s imi l a r to

but

d i s t i n c t

from

a

cons t ruc t ive

knowledge defense .

10

P l a i n t i f f s have

moved

to s t r i k e the repor t

of

Dr.

Aninyda

Ghose. Pls . ' Mot.

to

St r ike ,

E F

No. 292. The Court has

cons idered the Ghose Report in

determining

whether

uinformat ion

discuss ing the negat ive impact o f mobile usage

on Facebook s

revenue

was broad ly d i f fused .

Defs . ' Opp. to Pl s . ' Mot. to

St r ike the Report of Aninyda Ghose a t 5. In l i gh t of the

mul t i tudinous

examples of in fo rmat ion presen ted by Defendants

showing some

aspec t

o f

the Herman Cal ls

leaked

( to i n s t i t u t i ons ,

i nves to rs , and media) , t h i s conclusion appears warranted .

Never the less ,

fo r

a l l

the reasons

se t fo r th here in ,

the

common

ques t ions ,

f ac t s , and answers

presen ted predominate over the


ques t ions of knowledge t ha t

wil l

be re levan t in

reso lv ing Defendants a f f i rma t ive

defense . The motion

to s t r i k e

i s t he re fo re denied wi thout

pre jud ice ,

and

the

i ssue

of whether

the

Ghose Report s a t i s f i e s

Daubert i s moot.

In the event

Defendants o f fe r

Ghose

or

the

Ghose Report fo r

other

purposes ,

Pl a i n t i f f s are f ree to renew

t h e i r Daubert

objec t ion .

36



D efs . Ex.

a t 11.

However, how many i n d i v i d u a l i zed knowledge

i n q u i r i e s

a re

presen t and whether

t hey predominate

i s a mat t e r

o f

i nves to rs ,

not shares . Defendants need not ask a

s i n g l e

i n v es t o r

who

purchased 40,000 sh a res whether she knew

about

mo b i l e s negat ive

impact on

Facebook s revenue (or anything

e l se )

40,000

t imes .

Once

s

enough.11

Likewise , whether

any

i n v es t o r ,


o r r e t a i l ,

ga ined re levan t ac tua l knowledge from media r ep o r t s prec lud ing

t h e i r cla im p res en t s ano ther common ques t ion as to whether the

r e l ev an t

media

r ep o r t s conveyed

a l l

of

the

t r u t h

P l a i n t i f f s

a l l ege

was

mi s s t a t ed

o r omi t t ed .

See

D e f s . s

Opp a t . 26-28;

46-

49. For every

i n d i v i d u a l

ques t ion

of

whether

each i n v es t o r

had

ac t u a l knowledge stemming from t h ese

repor t s ,

t h e re a re s co res

of

common

fac t s

and

ques t ions

about

the con ten t of

each

and

every media repor t .

As to the r e t a i l

subc lass ,

Defendants have p resen ted much

l e s s ev idence

of ac t u a l

knowledge, and each a l l eg a t i o n i s

worth

address ing in

t u rn .

F i r s t , Defendants

a l l ege

t h a t r e t a i l

11 A maxim as ap p l i cab l e t o f ac t discovery as to l i f e and broken

hea r t s . See W i l l i e

Nelson, Steven

Tyler , One Time Too Many, on

The

E s s en t i a l W i l l i e

Nelson

(Columbia/Legacy 2003); Lyle

Love t t ,

Once

i s

Enough, on Lyle Lovet t and His Large Band

(MCA/Curb

Records 1989) ; Elv i s Pres ley , Once

i s

Enough, on K iss in Cousins

RCA V ic to r 1964) .

37



i nves to rs who purchased s tock

in

the IPO through accounts

managed

by investment adv isors can be imputed with the knowledge

o f

i n s t i t u t i ona l

adv isors . Defs . '

Opp a t

50.

This argument loops

back

to a t l e a s t one

common

quest ion

o f

whether i n s t i t u t i ona l

i nves to rs

can

a l l be charged with ac tua l

knowledge.

See supra

t ex t accompanying

n.9-10.

Regardless , P l a i n t i f f s have

c l a r i f i e d

t h a t

these i nd iv idua l s

who

purchased t h e i r shares through

i n s t i t u t i o n a l i nves to rs

a re

cons idered a

p a r t of

the

i n s t i t u t i o n a l i nves to r c l a s s both by the indus t ry and fo r

purposes of t h i s

c las s

ac t ion

i f

the i nves to r made

the

purchase

dec i s ion .

Pl s . '

Reply

a t

33,

Tr. 77:4-7 ( The quest ion i s what

i s the s t a t u s of the person making the investment

dec is ion .

I f

t ha t person i s an investment advisor , they are under FINRA a

quote-unquote i n s t i t u t i on .

And they

are t rea ted tha t way. ) .

Fur thermore ,

19 i n s t i t u t i o n s wi l l

be

excluded

from

the

c las s

(see Exclus ions ,

s u p r a § I ) ,

s i g n i f i c a n t l y reducing

the weight

of the i s sue with regard to the i n s t i t u t i ona l i nves to r subc lass .

Next, Defendants a l l ege Ian DelBalso l ea rned a t l e a s t

some

of the

re levant

f ac t s

from

h is fa the r , an employee a t Jennison ,

one of the i n s t i t u t i o n a l i nves to rs . Defs . ' Opp. a t 52. This

i nc red ib ly unique s e t

of f ac t s

app l i e s

s o l e ly

to

Mr.

DelBalso,

hardly

p res en t i n g an

i s sue

of predominance o r even p laus ib le

specula t ion

t h a t the same circumstances of

knowledge might apply

38



on any widespread b as i s . Regardless , he

i s

excluded from the

r e t a i l c l a s s

as

se t fo r t h

above.

P l s . '

Reply

a t 39.

Defendants

a l l e g e Larry Kim had ac t u a l

knowledge

ev idenced

by

h i s blog pos t s voic ing

concerns about Facebook 's

a b i l i t y

to

monet ize i t s

mobi le

pla t fo rm. Defs . ' Opp. a t 52. Mr. Kim's

i n s ig h t f u l an a l y s i s of read i ly apparen t

p u b l i c i n format ion

( s p ec i f i c a l l y , t h a t Facebook did not o f f e r mobi le ads, and t h a t

mobi le use was growing

fas t ) alone hard ly s u f f i c e s to meet the

high bar of the ac t u a l knowledge of the s p ec i f i c miss ta t ement s

and omiss ions a l l eg ed i n t h i s case . Simi la r ly ,

Defendants

a l l ege

Connie

Pra te r , consumer

news

wri t e r ,

had

ac t u a l

knowledge

due

to having r e f e r r e d readers to a r t i c l e s

about

Facebook 's

dece le ra t ing

revenue growth

and rev i sed pro jec t ions ,

and

t e s t i fy i n g t h a t she i n v es t ed

knowing

the r i s k s . Id . a t 52-3.

As with Mr. Kim,

t h i s

evidence

does

not r i s e to the l eve l of the

ac tua l

knowledge s tandard .

Regardless , even assuming

t h a t

Defendants had s u f f i c i e n t l y

proven each

of these

i n d i v i d u a l s had ac t u a l knowledge su f f i c i e n t

t o d e fea t t h e i r p a r t i c u l a r

c la ims ,

and even

assuming

none

were

exc luded from the r e t a i l c la s s as the

s ig n i f i c an t

p o r t i o n o f

i n d i v i d u a l s

who

inves ted through i n s t i t u t i o n a l inves to rs

wi l l

be, t h i s i s

r e l a t i v e l y

miniscu le p o r t i o n of the t o t a l

proposed

39



c las s

of r e t a i l i nves to rs

when compared to

the

whole. Grant ing

a l l of

the

above

arguendo,

the s ing le i nd iv idua l i zed

issue

of

knowledge as

to

a smal l handful of

r e t a i l

i nves to rs s not

enough to

defea t

predominance fo r

the

r e t a i l

subc lass .

Both

qua l i t a t i ve ly

and

quan t i t a t ive ly , the

many

common

ques t ions ,

answers, and f ac t s a r t i c u l a t e d above predominate

over the

indiv idua l ized i ssue of

knowledge.

To

defea t

predominance, Defendants a l so r e ly

heavi ly

on In

re PO where

the

Second

Circu i t found predominance of

indiv idua l quest ions of knowledge

defea ted

common quest ions in a

lO(b)

ac t ion . 471

F.3d a t 27. The Second Circu i t subsequent ly

c l a r i f i ed In

re

PO

by d is t ingu ish ing

the

d i f f e r e n t

circumstances

of Sect ion 11

and

12

c la ims . In re

IPO I I , 483

F.3d

70,

73n. l

(2d

Cir .

2007);

see

a l so

Pub.

Emps. ' ,

277

F.R.D.

a t 117 ( The Second C i r c u i t ' s

c l a r i f i ca t i on

is not t r i v i a l

in

t h i s

con tex t ,

as cour ts genera l ly

focus on

the l i a b i l i t y

i ssue

in deciding whether

the predominance

requirement

i s

met,

and i f

the l i a b i l i t y i ssue i s common to the c lass , common quest ions are

held

to

predominate over i nd iv idua l ques t ions .

( c i t ing Dura-

B i l t Corp. v. Chase Manhattan Corp. , 89

F.R.D.

87, 93

(S.D.N.Y.1981) ( in te rna l

quotat ion

marks

omi t t ed ) ) .

Moreover,

cour ts dec l ine to fol low PO in ins tances where, as

here ,

the

proposed

c las s does

not

include

i nves to rs who

are

a l leged to

40



have p a r t i c i p a t e d in

the fraud

in quest ion .

See

In

re Moody's

Corp. Sec. L i t i g . , 274 F.R.D. 480, 491 (S.D.N.Y. 2011)

(decl in ing

to

fol low IPO in

lO(b) (5)

ac t ion

where Defendant could not

poin t to

anyth ing

t h a t r i se s to the

same

l eve l of ac tua l

knowledge or , even a reasonable in fe rence o f

such

knowledge,

t ha t the market

had

in IPO ); Pub. Emps. ' , 277

F.R.D.

a t

117

(decl in ing to fol low In

re IPO given [ t ]h e re

i s

no a l l eg a t i o n

in t h i s case t ha t

any

c las s

member ac tu a l l y

par t i c ipa ted in the

conduct

descr ibed in

the Amended Compla in t . ) ; see

a l so

In re

Lehman Bros. Sec.

ERISA

Li t ig . , No. 08

CIV.

5523 LAK 2013 WL

440622, a t

*4

(S.D.N.Y. Jan.

23,

2013) .

Defendants

argue

t ha t the same knowledge

i ssues

undermine


because

P l a i n t i f f s

have not

ca r r i ed t h e i r

burden

to

prove

t ha t

causa t ion

and damages

are c lass -wide

i s sues

. . .

and t ha t ma te r i a l i ty w i l l be a common

ques t ion .

Defs . ' Opp. a t

54.

Regarding mater i a l i ty , the law i s

c l ea r : Because

m a t e r i a l i t y i s

judged

according to an objec t ive s tandard , the

m a t e r i a l i t y

o f (Defendant 's ]

a l l eged misrepresen ta t ions and

omissions i s a

ques t ion

common to

a l l members

o f

the

c l a s s .

.

As to mater i a l i ty , t he re fo re , the

c l a s s i s e n t i r e l y cohesive:

I t wil l preva i l o r

f a l l in

unison.

In

no event wil l the

41



ind iv idua l ci rcumstances of p a r t i c u l a r c las s members bear on

the

inqu i ry . Amgen, 133 S. Ct.

a t 1191. This

Court having

found

m a t e r i a l i t y

on c lass -wide

bas i s

su f f i c i e n t

to

uphold

P l a i n t i f f s ' c la ims on the

motion

to dismiss de fea t s Defendants '

argument . MT Opinion a t 519

522.

Never the less ,

to whatever

ex t en t Defendants

are

concerned t ha t huge swaths

of

the

c las s

had

' add i t iona l in fo rmat ion ' c rea t ing

uncommon

mater i a l i ty

i s su e s , t

i s

p ra c t i c a l l y reso lved

by

c e r t i f i c a t i o n of

the

subc lasses .

With respec t

to

l os s causa t ion , t h i s i s not an element of

any

o f

P l a i n t i f f s

claims.

See

MT

Opinion a t

522-3.

The causes

o f

the

Facebook s tock dec l ines a re fac tua l ques t ions s u i t ab l e

fo r r e s o l u t i o n on class-wide

bas i s .

Defendants

have

yet to

prov ide

su f f i c i e n t

evidence

a t

t h i s

s tage

to

e s t a b l i sh

negat ive

causa t ion .

Whether

subsequent re so lu t ion

w i l l be

in favor

of

Defendants such

t h a t

i nves to rs who

made t h e i r purchases on

c e r t a i n dates wil l

be

precluded from recovery

does

not

cons t i tu t e

an


ques t ion , nor does t

t i p the

sca l e s

of predominance

in Defendants ' favor.

Tangen t ia l ly to t he i r l os s causa t ion

argument ,

Defendants

next

submit

t h a t the damages i n q u i r i e s here

are indiv idua l ized ,

r e s u l t i n g both predominant

uncommon

ques t ions , and mismatch

42



between damages and P l a i n t i f f s '

t h eo ry

o f l i a b i l i t y bar red by

Comcast v.

Behrend.

Defs . ' Opp. a t 54-60; Defs . ' Sur-Reply a t

34-40;

see

g en e ra l l y ,

133 S. Ct. 1426,

185

L. Ed. 2d 515

(2013).

Defendants

a l l ege a mismatch due

to incongru i ty

between the

a l l eg a t i o n s

in

the

Complaint

( s p ec i f i c a l l y , t h a t

the May

22

Facebook s tock pr ice dec l ine

was

a r e su l t

o f repor t s

o f the

underwr i t e rs ' r ev i s ions ) , and P l a i n t i f f s '

pos t -mot ion

to dismiss

p o s i t i o n

( tha t

the mat e r i a l miss ta t ement or

omission

a t

i ssue i s

t ha t Facebook

had

determined mobile was reducing

revenues and

cut

i t s own revenue pro jec t ions as a r e s u l t ) . Defs . ' Opp. a t 55-

( c i t ing Compl. 184;

Pl s . ' Mot.

a t 7, 23, 28}. Comcast was

an

a n t i t r u s t

case where the r eg re s s i o n

model

used

to

ca l cu l a t e

damages did

not

measure damages a t t r i b u t a b l e to the su rv iv ing

theory

of l i a b i l i t y .

133 S. Ct. a t 1433 ( There i s no ques t ion

t h a t

the

model

fa i l ed

to

measure

damages

r e s u l t i n g

from

the

p a r t i c u l a r

a n t i t r u s t i n j u ry on

which

pe t i t i one r s ' l i a b i l i t y in

t h i s

ac t ion

i s premised . ) .

The case

r eq u i r e s t h a t a t the

c l a s s - c e r t i f i c a t i o n s tage

(as a t t r i a l } , any

model suppor t ing a

p l a i n t i f f ' s

damages case

must be

cons i s t en t with i t s l i a b i l i t y

case . Id .

F i r s t , Comcast does

not

mandate

t h a t


pursuan t to

Rule 23(b) (3)

requ i re s

a

f ind ing

t ha t damages are

capable of

measurement

on a c lasswide

b a s i s .

Roach v. T.L.

43



Cannon Corp. , 778 F.3d 401,

402

(2d Cir . 2015) .

The

Second

Circu i t

did

not read

Comcast

as over ru l ing

the law

of t h i s

Circu i t holding

the

f ac t t ha t damages may have to be

asce r t a ined on an

i nd iv idua l

bas i s i s not su f f i c i e n t to

defea t

c las s

c e r t i f i c a t i on under

Rule

23(b)

(3)

. Id . a t 405.

Second,

Comcast

does not

bar ce r t i f i ca t i on

here,

where

Sect ion

11(e)

of

the

S ecu r i t i e s Act prov ides

a

s t a tu to ry formula fo r damages.

N.J . Carpen ters Heal th

Fund

v.

Resident ia l Capi ta l , LLC

No. 08

V

5093

HB 2013

WL

6839093,

a t

*5

(S.D.N.Y.

Dec.

27,

2013)

( r e jec t ing Comcast ' s

app l i ca t ion to

cla ims

under

Sect ions 11,

12 (a) (2), and

15

of the Secur i t i e s Act where Sect ion

11 (e)

provided

a

damages formula}

.

Defendants a t tempt

to

r e fu te t h i s

conclus ion by

charac te r iz ing t as an argument

t h a t

Comcast

appl ies

only

to a n t i - t r u s t

a c t i o n s , an

e a s i e r point to

disprove .

Defs . '

Sur-Reply

a t

45.

Quite

to

the

con t ra ry ,

Comcast

appl ies

beyond

an t i t ru s t ,

but t does

not bar c e r t i f i c a t i o n for

the

cla ims P l a i n t i f f s have

presen ted . New Jersey

Carpen ters ,

2013 WL 6839093, a t

*5 ( While

[Comcast 's] ana lys i s i s

not

l imi t ed to the a n t i - t r u s t con tex t ,

see

v. Hears t Co

. ,

293

F.R.D.

489,

497 (S.D.N.Y. 2013},

t i s inappos i t e

here,

where

damages

r e f l e c t l i a b i l i t y by s t a tu to ry formula .u}. Because the

s t a t u t o ry

formula

app l i e s , the ind iv idua l damages quest ions are

s u f f i c i e n t ly reduced

t h a t

predominance of the common quest ions ,

answers, and fac t s

remains. Likewise, the

o f f se t o f the Nasdaq

44



se t t l ement pre sen t s ano ther

weighty common

ques t ion (and perhaps

severa l )

t ha t

outweighs the


mat te r of

how

it wi l l

apply to ind iv idua l i nves to rs , mat te rs t ha t

can

be

admin i s t ra t ive ly managed

as se t

fo r th

below.

Ci t ing Morrison v. National Aus t ra l i a

Bank,

561 U.S. 247

(2010),

Defendants

p o s i t

t ha t the

c las s

cannot be c e r t i f i e d

because

U.S. se c u r i t i e s laws do not apply e x t r a t e r r i t o r i a l l y ,

but

only

where titl

to the

s ecu r i t y

t r a n s fe r s within

the

u . s . n Defs. Opp.

a t

74. Defendants

submit

t h e i r proof of

i n t e r n a t i o n a l

inves tors stems from P l a i n t i f f s ' evidence showing

t h a t

over

53

mil l ion shares

(out o f the 421

mil l ion

IPO

s ize)

were

a l loca ted

to a t l eas t 295 i nves to rs

i d e n t i f i e d

in myriad

foreign

loca t ions .n Id . Coupling

t h i s fac t

with the purchase of

many

of

the shares impl ica ted

in

t h i s

ac t ion

on

secondary

market , Defendants argue

t h a t

P l a i n t l f f s a re unable to t r a ce

vas t number o f

shares to domest ic

t r ansac t ions , and

t he re fo re

f a i l Morisson. Defs , ' Opp. a t 74-5.

Fi r s t , Defendants ' argument admit tedly goes to

295

inves tors

in

po ten t i a l

c l a s s o f many thousands.

See id . a t

74. For

t h i s

reason

alone,

it does not d e fea t predominance.

Second, the i d e n t i f i e d

in

myriad foreign l oca t ions language i s

notab ly imprecise in l i gh t of doc t r ine t ha t asks exac t ly where

45



i r r ev o cab

l i a b i l i t y

was incur red .

That

any buyers were

i d en t i f i ed

outs ide

the Uni ted

S t a t e s i s

not d e te rmin a t iv e of

where t h e i r t r ansac t ions

occur red .

[ I ) n order to

adequa te ly

a l l ege

t h e

ex i s t en ce o f

a domest ic

t r ansac t ion ,

it

i s su f f i c i e n t

fo r

a p l a i n t i f f to a l l ege fac t s l ead in g to the p l a u s i b l e

i n fe ren ce t h a t the

p a r t i e s incur red i r revocab le

l i a b i l i t y with in

the United S t a t e s . Absolu te A ct iv i s t Value Master Fund Ltd. v .

Fice to ,

677 F.3d 60,

68

{2d Ci r . 2012) . Af te rmarke t

notwi ths tand ing , t h a t P l a i n t i f f s have a l l eg ed t h a t any

fo re ig n

a l locan t s

p a r t i c ip a t ed in a s t r i c t l y

U.S. IPO

of a

U.S. company

in order to

r ece iv e

shares r e g i s t e r e d in the United Sta t e s with

the SE t h a t would t r ad e ex c l u s i v e l y on an American exchange

i s

su f f i c i e n t

to es t ab l i s h t h a t

p l a u s i b i l i t y . P l s . '

Reply

a t 83

(emphasis o mi t t ed ) . Defendants ' o t h e r arguments on

t h i s

i s su e

a re

not

p ersu as iv e ,

and

to

the

ex t en t

t r a c e a b i l i t y

i s sues

e x i s t

to over tu rn the p l a u s i b l e in fe rence ,

Defendants

a re f r ee to

presen t

t h ese i s sues a t a l a t e r s t ag e .

F i n a l l y ,

Defendant ' s

put fo r t h a

Sur-Reply

p ray e r to defer

ru l i n g on

(or ,

more

p re c i s e l y , d e fe r gran t ing)

c l a s s


pending the

Supreme

Co u r t ' s

re so lu t ion o f

Tyson

Foods,

Inc .

v. Bouaphakeo.

See

Defs . ' Sur Reply a t

43;

see a l s o

2015 W 1285369 (U .S . ) . Decis ion in t h a t case may touch upon the

23(b)

(3)

predominance

inqu i ry , but it may a l s o

r e s t on

s o l e l y

46



independent

grounds r e l a t i ng to

a

1974 wage-and-hour

rul ing.12

The Cour t decl ines to

wait and

see

for

a poss ib ly r e l evan t

ru l ing

t ha t

may never a r r ive .

For

the reasons s e t for th above, the i nd iv idua l i zed

i nqui r i e s Defendants present are

not

more subs t an t i a l than the

many

common

ques t ions ,

answers,

and f ac t s

subjec t

to

genera l ized

proof ,

and

thus the P l a i n t i f f s

have

met t he i r

burden

of

12(b) (3)

predominance. See Moore, 306 F.3d

a t

1252.

C e r t i f i c a t i on does

not bar Defendants from exerc i s ing t h e i r due process r igh t to

r a i s e

i nd iv idua l i zed knowledge defenses, as

they

have r epea t ed ly

suggested . e e ~ Tr.

31:16-18,

35:9-13. I t

i s

admin i s t r a t ive ly

feas ib le

(and indeed

f a r

more

f eas ib le

than the

prospec t of thousands

of

ful l -blown i nd iv idua l i zed

t r i a l s

for

each

and

every c la imant

necessa r i ly

involving the

same

f ac t s

and

quest ions) to manage Defendants ' ac tua l knowledge ques t ions as

r e l i ance was managed in In re Vivendi . See genera l l y 284 F.R.D.

144 (2012) ( Vivendi I I ) . Defendants may submit t h e i r c la ss

wide ac tua l

knowledge defense arguments

on

a

motion for

summary

judgment

and/or a t t r i a l ,

and

i nd iv idua l i zed ac tua l knowledge

12

In fac t , o ra l argument seems

to

suggest the opinion in

Tyson

Foods

wi l l say[] nothing about Rule 23. See Lyle

Denniston,

Argument Analysis :

Big t e s t of c l a s s

act ion

maybe not so big ,

Scotusblog.com

(Nov. 10,

2015, 1:48pm),

h t tp :/ /www .sco tusb log .com/2015 /11 /a rgument -ana lys is -b ig t e s t - o f

c l as s -ac t i on -maybe-no t - so -b ig / .

47



can be adequa te ly managed

p o s t - t r i a l th rough

an i n d i v i d u a l i zed

phase

invo lv ing s ep a ra t e j u ry

t r i a l s i f

necessary . This i s the

most

e f f i c i e n t way to manage both the predominant

common

ques t ions and the i n d i v i d u a l i zed ques t ions in t h i s

case

wi thout

overwhelming

the

common

ad j u d i ca t i o n

with

i n d i v i d u a l i zed

i s sues

and v ice versa . The s p ec i f i c procedures

fo r

management through

adequate

n o t i ce

and

the cla im process can be r e so lv ed

when

t hose

ma t t e r s a re p ro p e r ly

before the

Court .

b Superiori ty

The s u p e r io r i t y r equ i r ement a sks cour t s to

ba lance ,

in

terms of

fa i rne ss and

e f f i c i e n c y , the advantages of

a

c l a s s

ac t i o n ag a i n s t

t hose o f a l t e r n a t i v e

ava i l ab le methods of

ad jud ica t ion .

Vivendi

I ,

242

F.R.D.

a t

91; Fed.

R.

Civ.

P.

23

(b)

(3) The i n t e r e s t s of the c l a s s members in c o n t ro l l i n g

s ep a ra t e ac t ions , the ex t en t and

n a tu re

of any l i t i g a t i o n

a l read y commenced, the

d e s i r a b i l i t y

of

concen t ra t ing

the

l i t i g a t i o n

in a

p a r t i c u l a r forum, and

the d i f f i c u l t i e s

in

management a re a l l to

be

cons ide red

in the s u p e r io r i t y ana lys i s .

See

Fed. R.

Civ. P.

23 (b) (3) .

Su p er i o r i t y

o f

managing

t h i s l i t i g a t i o n

as

a c l a s s

ac t i o n

i s

r e a d i l y apparen t fo r both

subc lasses ,

as t

i s in most

48



s e c ur i t i e s s u i t s . See In re Blech Sec.

Li t i g . ,

187 F.R.D.

97,

107 S.D.N.Y. 1999). As

has

been r e i t e r a t e d in

t h i s

D is t r i c t :

Most v io la t ions of

the federa l s e c ur i t i e s

laws ... i n f l i c t

economic i n ju ry on

l a rge numbers of geograph ica l ly

d i spersed persons

such

t ha t

the cos t

of pursuing ind iv idua l

l i t i g a t i o n

to

seek recovery i s of t en not f eas ib le . Mult ip le

l awsu i t s

would

be cos t ly and i ne f f i c i e n t , and the exclus ion

of

c l a s s

members who cannot a f fo rd sepa ra t e rep re sen ta t ion

would

ne i the r

be f a i r nor an ad jud ica t ion of t h e i r

c la ims . Moreover,

al though

a

l a rge number of i nd iv idua l s

may

have

been

in ju red ,

no one person may

have

been damaged

to

a

degree

which

would

induce him

to

i n s t i t u t e

l i t i ga t i on

so le ly on h is own behal f .

Pub. s.

277

F.R.D. a t 120

quot ing

In re Merr i l l

Research Sec. L i t i g . , 249 F.R.D. 124, 132 S.D.N.Y.2008)

quot ing

All of

the

Rule 23 bl 3)

fac to rs

weigh in favor o f

proceeding as a c lass : the re i s

no

weighty i n t e r e s t

for

each

c las s member to

proceed

i nd iv idua l ly

here,

and

the

i n t e r e s t s

o f

any

c l a s s

members in proceeding as separa te ac t ions can e a s i l y

be met

through

the opt -out process . Meanwhi a

c l a s s

ac t ion

ach ieves the benef i t o f al lowing a

c las s

of geograph ica l ly and

economical ly diverse

p l a i n t i f f s

t o ad jud ica t e

t h e i r cla ims

exped i t ious ly and e f f i c i e n t ly . For the i n s t i t u t i o n a l i nves to r

subc lass , t h i s al lows i n s t i t u t i o n s

for

whom it may not

be

a

sound t r adeof f of bus iness

resources

to l i t i g a t e t he i r cla ims

i nd iv idua l ly to

nonetheless

ob ta in red re ss . For the r e t a i l

i nves to r

subc lass ,

recovery

may be

obta ined

for cla ims

49



f inanc ia l ly

s i g n i f i c a n t

to

an

i nd iv idua l o r

fami ly ,

but

too

minor to

j u s t i fy

h i r ing independent counsel

and proceeding

ind iv idua l ly .

3 Proceeding

as a

c las s a l so gives these smal le r

players

l everage in a

barga in ing

dynamic where

most

o f the power

l i e s in

the hands o f

a

l a rge corpora t ion .

277

F.R.D.

a t 120

( c i t ing Board

o f Tr.

of AFTRA

Ret. Fund v.

JPMorgan

Chase

Bank,

N.A., 269

F.R.D.

340, 355 (S.D.N.Y. 2010)) .

The d e s i r a b i l i t y of concen t ra t ing t h i s l i t i g a t i o n in

a

pa r t i c u l a r forum

and

reduced d i f f i c u l t y

of

case management by


of

a c las s

i s evidenced

by

the fac t t h a t

consol ida t ion has

helped

t h i s

case proceed

smoothly,

and

for the


reasons

out l ined above tha t

make

adjudica t ion

of

a

s ing le c las s ac t ion , fol lowed by i nd iv idua l i zed

inqu i r i es

i f

necessary ,

the

super ior

method

of

process .

See

§

IV.a) .

[C)oncen t ra t ing l i t i g a t i o n in

a

s ing le forum

p la in ly

has

a

number of

benef i t s ,

including

e l imina t ing

the r i sk of

i ncons i s t en t

adjudica t ions

and promoting

the f a i r

and

e f f i c i e n t

use

of

the j ud ic i a l system,

and

the Southern D is t r i c t o f

ew

13 Defendants argue t ha t such smal l

c la ims

a re

not

an

i ssue

here

because

l a rge

cla ims can be shown. Defs . '

Opp.

a t 77.

This

case

does impl ica te

r e l a t i ve ly

smal l c la ims such as

the

Meltons '

( 13,000) and Sharon

Morley ' s

( 14,000). Pl s . ' Reply a t

88.

Moreoever, the

exis tence

of

l a rge indiv idua l

cla ims t ha t a re

su f f i c i e n t fo r

indiv idua l

s u i t s i s no bar

to

a c las s when the

advantages of uni t a ry

ad jud ica t ion e x i s t

to determine

the

de fendan t ' s

l i a b i l i t y . Pub.

Emps. '

277 F.R.D. a t

120.

50



York i s well known to have exper t i s e in s e c ur i t i e s

law.

Pub.

W 5178546, a t

*12

(S.D.N.Y. Dec.

23,

2009) ( in te rna l quota t ion

marks omit ted)) .

Pl a i n t i f f s

have

met

t he i r

burden to es tab l i sh

s u p e r io r i t y .

c Ascer ta inab i l i t y

Rule 23 con ta ins an impl ied

requirement

of

a s c e r t a ina b i l i t y .

Brecher

v.

Republic

of Argent ina ,

No.

14-

4385, 2015

W 7273415, a t

*2

(2d

Cir .

Nov. 18,

2015)

( co l lec t ing

c i t a t i o n s ) . [T]he touchstone of

a s c e r t a ina b i l i t y i s

whether

the

c las s i s

usuf f i c i en t ly de f in i t e

so

t ha t

t

i s admin i s t ra t ive ly

f eas ib le

for the court to

determine

whether a

p a r t i c u l a r

ind iv idua l

i s

a

member.

Id .

(c i t a t ions

and

i n t e rna l

quota t ion

marks omi t t ed) . A c l a s s i s ascer ta inab le

when

def ined

by

objec t ive

c r i t e r i a

t ha t are admin i s t ra t ive ly

f eas ib le and when

iden t i fy ing i t s

members

would

not

requ i re a

mini -hear ing

on the

mer i t s o f each case . Id . (quot ing Charron v.

Pinnacle

Grp. N.Y.

LLC

269 F.R.D.

221,

229 (S.D.N.Y.2010)

(c i t a t ions and

in te rna l

quota t ion marks omit ted)) . Though objec t ive

c r i t e r i a

are

necessary , they are not alone s u f f i c i e n t , and must es tab l i sh

the

d e f i n i t e boundaries o f

a

r ead i ly i d e n t i f i a b l e

c l a s s . Id .

51



The s tandard fo r a s c e r t a ina b i l i t y i s not

demanding.

I t

i s

designed

only to

preven t the c e r t i f i c a t i o n of

a

c las s whose

membership i s t r u ly inde te rminab le . St inson v. Ci ty o f

New

York,

282 F.R.D.

360,

374 (S.D.N.Y.

2012)

( c i t ing

Gortat v.

Capala Bros . ,

Inc . ,

No. 07-CV-3629(ILG), 2010

W

1423018, a t *2,

(E.D.N.Y.

Apr.

9, 2010) ( in te rna l quota t ion marks omi t t ed) .

This

s tandard

in mind, P l a i n t i f f s have proposed ascer ta inab le

subc lasses . Given

t h a t

the subc lasses may be asce r t a ined with

re fe rence to i nves to r

records ,

t i s admin i s t ra t ive ly f eas ib le

to determine whether an i nves to r i s a

member

of the


inves tor

subc lass ,

the

r e t a i l

i nves to r

subc lass ,

o r no subc lass a t a l l . See Pl s . ' Reply a t 59. Though

documenta t ion

may

be

required ,

mini -hear ings

on

the

mer i t s

of

each i n v e s t o r ' s inc lus ion in the subc lasses wil l not be.

With respec t to

c l a s s a l l o ca t i o n ,

whether an IPO a l locan t

i s

a

member of

the r e t a i l

c las s or

the

i n s t i t u t i o n a l c las s i s

determined

f i r s t

by re fe rence to

Facebook's own

Fina l Al locan t

Lis t ,

which l i s t s


i nves to rs . Graziano Deel. Ex.

42.

Obvious

i n s t i t u t i o n s t ha t

rece ived

shares from both

the


and

r e t a i l

a l l o ca t i o n s appearing on

t h i s l st

(Morgan

Stanley Investment

Management,

Will iam Bla i ,

Levin

Capi ta l St ra t eg ie s )

remain p a r t

of the i n s t i t u t i o n a l subc lass .

The

odd few


inves tors

tha t

a l l eged ly received

52



r e t a i l a l loca t ions remain par t of

the


subclass

because t h e i r i den t i ty ,

not the

source o f t he i r shares ,

con t ro l s .

Whether an

af te rmarke t

purchaser i s p a r t o f

the

r e t a i l

o r


c l a s s

i s determined by applying the Financ 1

Indus t ry

Regula tory Author i ty d e f in i t i o n s

to

the ind iv idua l who

made

the investment

dec i s ion . See Tr.

25:10-11.

These

objec t ive

s t eps l ead

to d e f i n i t e

boundaries ,

and

thus high ly asce r t a inab le

subc lasses (not to mention r e su l t in i n t u i t i v e

determinat ions

of

which inves to rs

belong

to which

subc la s s ) .

Defendants

p r o t e s t t h a t

P l a i n t i f f s did not provide a

d e f i n i t i o n fo r

e i t h e r


i nves to r

o r

r e t a i l

i nves to r in

t h e i r

moving

papers , and thus two subc lasses cannot

be c e r t i f i e d . Defs . ' Opp.

a t

72-4. I t i s

dis ingenuous

a t

bes t

r

Defendants

to

sugges t

the subc lasses a re unascer ta inab le ,

and

thus t h a t the Court

cannot

fea s ib ly determine

when

an

i n d i v i d u a l f a l l s in one c l a s s or the

other ,

while Defendants

d is t ingu ish between

r e t a i l

and

i n s t i t u t i o n a l i nves to rs

on t h e i r

own i n i t i a t i v e in t h e same motion. See

e . g . ,

Defs . ' Opp a t

11

( Defendants have compiled

unrebu t ted

evidence

showing

thousands

o f c las s members, inc lud ing both


and ind iv idua l

i nves to rs (emphasis

omi t t ed ) ) ;

3 ( An anal

tat

Jenn i son .

. ,

an i n s t i t u t i o n a l a l locan t ) ; 49 54

( Re ta i l Inves to rs

53



Also Had Actual Knowledge o f

the

Alleged Omission

and

Misrepresenta t ion ) .

Defendants a l so

argue the damaged

thereby language

requ i re s

mer i t s

determinat ions

and

de fea t s

ascer ta inab i l i ty .14

Defs . '

Opp. a t

71-2. Notably , Defendants prov ide no Second

Circu i t au thor i ty

to

support

t he i r argument. This language

i s

s tandard ,

and

rega rd le s s ,

(w]hether

a po ten t i a l

c las s member

purchased [Defendant 's ]

shares

in

the

of fe r ing

and

held

those

shares un t i l the cor rec t ive di sc losure can be determined

via

ob jec t ive

c r i t e r i a . Thus,

members of the

c l a s s

are

as ce r t a in ab l e .

In re Bank of Am

Corp.

Sec . , Der iva t ive ,

Employee

Ret.

Income Sec. Act

(ERISA) Li t i g . , 281

F.R.D. 134,

140 (S.D.N.Y.

2012)

14 Defendants a l so

r e - r a i s e

t he i r

same

knowledge

argument , which

the Court f inds

unpersuas ive

for a l l the

reasons se t

fo r th in

the

predominance

sec t ion .

See

§ IV.a) .

54



V.

Conclusion

For the foregoing reasons and as

se t

fo r th above the

motions

fo r

c l a s s

ce r t i ca t ion

appointment

as

Class

Represen ta t ives

and

appointment

of Class Counsel

are g ran ted .

In

l i gh t

o f

the

c o n f i d e n t i a l i t y s t i p u l a t i o n and

order

en te red in t h i s

case

the p a r t i e s are d i rec ted to j o i n t l y submit

redac ted vers ion o f

t h i s

opinion to be f i l e d publ i c ly .

I t i s so ordered .

ew

York

Y

December //

2015

U.S.D.J .

55



B



UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

IN RE FACEBOOK, INC., IPO SECURITIESAND DERIVATIVE LITIGATION

MDL No. 12-2389 (RWS)

CONSOLIDATED CLASS ACTIONCOMPLAINT

JURY TRIAL DEMANDED

This document relates to theConsolidated Securities Action:

No. 12-cv-4081 No. 12-cv-4099 No. 12-cv-4131

No. 12-cv-4150 No. 12-cv-4157 No. 12-cv-4184 No. 12-cv-4194 No. 12-cv-4215 No. 12-cv-4252 No. 12-cv-4291 No. 12-cv-4312 No. 12-cv-4332 No. 12-cv-4360 No. 12-cv-4362

No. 12-cv-4551 No. 12-cv-4648

No. 12-cv-4763 No. 12-cv-4777 No. 12-cv-5511

No. 12-cv-7542 No. 12-cv-7543 No. 12-cv-7544 No. 12-cv-7545 No. 12-cv-7546 No. 12-cv-7547 No. 12-cv-7548 No. 12-cv-7550 No. 12-cv-7551 No. 12-cv-7552 No. 12-cv-7586

No. 12-cv-7587

Case 1:12-md-02389-RWS Document 71 Filed 02/28/13 Page 1 of 95



i

TABLE OF CONTENTS

Page

I. INTRODUCTION .............................................................................................................. 2

II. JURISDICTION AND VENUE ......................................................................................... 9

III.

PARTIES .......................................................................................................................... 10

A. Lead Plaintiffs ....................................................................................................... 10

B. Named Plaintiffs ................................................................................................... 11

C. Defendants ............................................................................................................ 12

1. Corporate Defendant ................................................................................. 12

2. The Individual Defendants ........................................................................ 12

3. The Underwriter Defendants..................................................................... 15

IV. OVERVIEW ..................................................................................................................... 18

A.

Facebook’s Meteoric Rise Creates Unprecedented Market AnticipationFor Its IPO............................................................................................................. 18

B. Facebook Files For Its IPO, And The Market Reacts Positively To Its DisclosuresConcerning Its Revenue, Growth, And Positioning In The Mobile Market ......... 20

C. The SEC Questions Facebook’s Disclosures ........................................................ 23

D. As Facebook Prepares For Its Roadshow, The Company Continues ToEmphasize Its Growth Prospects In The Mobile Market To Investors ................. 24

E. As Facebook Begins Its Roadshow, It Determines That Its Revenues For TheSecond Quarter And The Year Have Been Materially Impacted ......................... 30

F.

Facebook Discloses Its Severe Revenue Declines To A Select Group Of Investors,But Not To The Market......................................................................................... 33

G. With The Market Unaware Of The Pronounced Deterioration In Facebook’sRevenue, Facebook Increases The Price And Size Of The Offering, AndAllocates An Extremely High Number Of Shares To Small Investors ................ 39

H. Facebook Conducts Its Historic IPO..................................................................... 43

I. Facebook’s Market Debut Fizzles As Morgan Stanley Is Forced To DesperatelyProp Up The Company’s Stock Price To Prevent A “Broken Issue” ................... 45

J. Facebook Stock Collapses On Monday And Tuesday As The Truth Emerges .... 48

K. The Financial Media Acknowledges That The Declines In Facebook’s RevenueEstimates Were Not Conveyed By Facebook’s Public Disclosures, AndSignificantly Altered The Total Mix Of Information ........................................... 52

V. THE NEGATIVE CHANGE IN FACEBOOK’S REVENUE ESTIMATESSIGNIFICANTLY ALTERED THE TOTAL MIX OF INFORMATION IN THEMARKETPLACE ............................................................................................................. 54




ii

VI. MATERIALLY UNTRUE AND MISLEADING STATEMENTSAND OMISSIONS ........................................................................................................... 59

VII. CLASS ACTION ALLEGATIONS ................................................................................. 67

VIII. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR ANDBESPEAKS CAUTION DOCTRINE .............................................................................. 69

IX. CAUSES OF ACTION ..................................................................................................... 70

COUNT I .......................................................................................................................... 70

For Violations Of Section 11 Of The Securities Act (Against DefendantsZuckerberg, Ebersman, Spillane, The Facebook Board, And TheUnderwriter Defendants)

COUNT II ......................................................................................................................... 72

For Violations Of Section 12(a)(2) Of The Securities Act (Against Facebook,Defendants Zuckerberg, Sandberg, and Ebersman,

and The Underwriter Defendants)

COUNT III ........................................................................................................................ 75

For Violations Of Section 15 Of The Securities Act (Against the IndividualDefendants)

X. PRAYER FOR RELIEF ................................................................................................... 77

XI. JURY TRIAL DEMANDED ............................................................................................ 77




1. Court-appointed Lead Plaintiffs, the North Carolina Department of State

Treasurer on behalf of the North Carolina Retirement Systems, Banyan Capital Master Fund

Ltd., Arkansas Teacher Retirement System, and the Fresno County Employees’ Retirement

Association (collectively, “Lead Plaintiffs”), and Named Plaintiffs Jose G. Galvan and Mary Jane

Lule Galvan, bring this action individually and on behalf of all persons and entities who

purchased or otherwise acquired the Class A common stock of Facebook, Inc. (“Facebook” or the

“Company”) in or traceable to Facebook’s initial public offering (the “IPO”), which occurred on

or about May 17, 2012, and were damaged thereby (collectively, the “Class”). Excluded from

the Class are Defendants (as set forth herein), present or former executive officers of Facebook

and their immediate family members (as defined in 17 C.F.R. § 229.404, Instructions (1)(a)(iii)

and (1)(b)(ii)).

2. Lead Plaintiffs allege the following based upon personal knowledge as to

themselves and their own acts and upon information and belief as to all other matters. Lead

Plaintiffs’ information and belief is based on, inter alia, the independent investigation of Court-

appointed Co-Lead Counsel, Bernstein Litowitz Berger & Grossmann LLP and Labaton

Sucharow LLP. This investigation included, but was not limited to, a review and analysis of: (i)

public filings with the Securities and Exchange Commission (“SEC”) by Facebook; (ii) research

reports by securities and financial analysts; (iii) transcripts of investor conference calls; (iv)

publicly available presentations by Facebook; (v) press releases and media reports; (vi) economic

analyses of securities movement and pricing data; (vii) publicly available filings in the legal

action brought against Morgan Stanley & Co. LLC by the Massachusetts Securities Division (the

“Massachusetts Enforcement Action”); (viii) consultations with relevant experts; and (ix) other

publicly available material and data identified herein. Co-Lead Counsel’s investigation into the




2

factual allegations contained herein is continuing, and many of the relevant facts are known only

by the Defendants named herein, or are exclusively within their custody or control. Lead

Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set

forth herein after a reasonable opportunity for further discovery.

3. As set forth further below, the claims asserted herein arise solely under the

Securities Act of 1933 (the “Securities Act”). These Securities Act claims are based solely on

strict liability and negligence, and are not based on any reckless or intentionally fraudulent

conduct by or on behalf of the Defendants – i.e., these claims do not allege, arise from, or sound

in, fraud. Lead Plaintiffs specifically disclaim any allegation of fraud, scienter, or recklessness in

these non-fraud Securities Act claims.

I. INTRODUCTION

4. 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 on May 17, 2012. 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 United States by

any company.

5. A key factor influencing the value of Facebook’s stock was its ability to generate

large and rapidly growing amounts of revenue through its core advertising business. Thus, the

Registration Statement pursuant to which Facebook conducted its IPO repeatedly represented

that the Company had experienced “rapid growth,” stating, for example, that its annual revenues

had increased from approximately $150 million to more than $3.7 billion in the four years before

its IPO. In the months and weeks leading up to the IPO, the financial press repeatedly reported




3

that the Company’s revenue growth had created “extraordinary” and “astronomical” demand for

its IPO, and that Facebook was “a must-own stock.”

6. On April 16, 2012, as Facebook was preparing to market the IPO to institutional

investors through its roadshow, the Company’s CFO, Defendant David Ebersman, provided

revenue guidance to the analysts from the investment banks that were underwriting the IPO (the

“Syndicate Analysts”). Ebersman informed the Syndicate Analysts that Facebook was estimating

that it would report revenue of as much as $1.2 billion for the second quarter of 2012 – the

quarter in which Facebook was going public – and $5 billion for the year. Based on Facebook’s

guidance, the Syndicate Analysts generated revenue estimates that mirrored the figures Ebersman

had provided, and provided their estimates to the large clients of their investment banks that were

considering investing in the IPO.

7. 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.

8. The first and most damaging change concerned a shift in the way that users

accessed Facebook. 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. That is because Facebook displayed large amounts of advertising to its

desktop users, but displayed much less advertising to its mobile users. Thus, as Facebook’s users




4

shifted from desktop computers to mobile devices, the Company was generating far less

advertising revenue than it had expected.

9. At the same time that Facebook determined that its users were increasingly

migrating to mobile devices, Facebook also determined that certain “product decisions” it had

made – such as decisions concerning the type of the advertisements it displayed – had

compounded the steep decline in its expected revenue. In particular, the Company’s product

decisions had reduced the number of advertisements per page that Facebook displayed to its

users, thereby exacerbating the deterioration in the Company’s advertising revenue caused by the

shift to mobile devices.

10.

As a direct result, ten days before the IPO was scheduled to occur, Facebook

drastically slashed the revenue estimates it had provided to the Syndicate Analysts only three

weeks earlier. Specifically, by no later than May 8, 2012, Facebook cut its estimated revenue for

the second quarter of 2012 by as much as $100 million, or more than 8.3%, and for the year by

as much as $175 million, or 3.5%.

11.

Facebook’s most senior executives immediately recognized that the pronounced

deterioration in Facebook’s revenue was highly material. The same day that Facebook cut its

revenue estimates, Defendant Ebersman and the head investment banker on the IPO, Michael

Grimes of lead underwriter Morgan Stanley, concluded that the decline in Facebook’s revenue

was so significant that Facebook had to promptly disclose its lowered revenue estimates.

However, rather than publicly disclose this information, Facebook decided to disclose it only to a

handful of its largest and most significant potential investors. Thus, on May 9, Facebook filed an

amended Registration Statement in which it misleadingly represented that the two factors noted

above might have a negative impact on its revenues. Specifically, in its amended Registration




5

Statement, Facebook merely stated that, as a result of increasing mobile usage and the

Company’s product decisions, the Company’s users were growing more quickly than the number

of ads that company was displaying to them. At no time, however, did the Registration

Statement disclose that the Company’s revenues had been negatively impacted by these factors.

To the contrary, the amended Registration Statement stated only that these factors “may

negatively affect our revenue and financial results” – the exact same information the Company

had disclosed prior to determining that they had negatively impacted its revenue and financial

results. Accordingly, the warnings themselves in the amended Registration Statement constituted

false statements.

12.

The actions that Facebook’s own senior officers took after the amended

Registration Statement was filed confirm that they understood that the information regarding the

declines in Facebook’s revenues was highly material, not conveyed by the amended Registration

Statement, and not otherwise part of the total mix of information in the market. Thus, beginning

on the evening of May 9 – only twelve minutes after Facebook filed the amended Registration

Statement – Facebook’s Treasurer, Cipora Herman, began to conduct nineteen separate telephone

calls with the Syndicate Analysts. Each of these calls had the same purpose: to inform the

Syndicate Analysts of the material facts which the Registration Statement had not disclosed. On

these calls, Herman read from a script prepared by Grimes, and told the Syndicate Analysts that

the two factors discussed above had already materially impaired Facebook’s revenue for the

second quarter and year, and that, as a result, Facebook had sharply lowered the revenue

estimates it had given them only three weeks earlier.

13. As Facebook knew they would, the Syndicate Analysts immediately lowered their

own internal estimates for Facebook’s revenue to mirror Facebook’s revised guidance, and




6

communicated these lowered estimates to a small, select group of institutions that were

considering investing in the IPO. The Syndicate Analysts did not issue any public reports with

respect to their lowered estimates of Facebook prior to the completion of the IPO.

14. The few institutions who received this information immediately recognized that it

was new, material information that reflected a highly negative change in Facebook’s financial

condition. As Reuters would subsequently report after the IPO, these institutions said that the

Syndicate Analysts’ decision to reduce their estimates during the time period when the roadshow

was occurring was “very, very unusual,” and they had “never before seen that in 10 years.”

Similarly, according to Reuters and The Wall Street Journal, the few investors who were told of

the revenue declines were “shocked” by the “deceleration” in Facebook’s revenues, which raised

a “significant red flag” about Facebook’s ability to generate the level of revenue that the market

expected, and called the Company’s value into serious question. Indeed, institutions that

received this non-public information cancelled or cut their orders for Facebook shares, dropped

the price they were willing to pay, or sold their shares immediately after the IPO.

15.

However, because the market had not been put on notice of the fact that

Facebook’s business had been materially impaired, in the week before the IPO, market demand

for Facebook shares reached levels that the financial press described as “astronomical.” In

response to this surge of demand, days before it went public, the Company and the underwriters

significantly increased the price and size of the IPO, boosting the price to $38 per share (from a

previously announced range of $28 to $35 per share), and increasing the size of the offering by

more than 80 million shares. All of the new shares made available to the public came from

selling insiders, including certain of the Company’s directors and one of its underwriters,




7

Goldman Sachs, who each decided to vastly increase the number of shares they were selling to

the public.

16. With the market unaware of Facebook’s pronounced revenue deterioration,

Facebook completed its IPO as scheduled after the close of the market on May 17. The IPO not

only generated billions of dollars for Facebook, but it made many of the Company’s senior

executives and directors exceptionally rich. Based on the IPO price, the stock held by

Facebook’s 28-year-old CEO, Defendant Mark Zuckerberg, was worth $19 billion, making him

one of the wealthiest men in the world.

17.

Facebook stock began publicly trading the next day, Friday, May 18. After

opening at $42.05 on a surge of retail demand, Facebook stock immediately began to plummet,

falling back to the IPO price of $38 per share, and ultimately closing at $38.23, a performance

that analysts and the financial press concluded was surprising and disappointing.

18. Beginning on the night of May 18 and continuing over the next several days,

news of the decline in Facebook’s revenues began to emerge. On the night of May 18, Reuters

reported that, days before the IPO, Facebook had taken the “rare and disruptive” step of lowering

its guidance to analysts during the time period that its roadshow was occurring. This news swept

through the market and, over the weekend of May 19-20, members of the financial press reported

that this information was highly material and fundamentally affected the value of Facebook’s

stock. For example, on May 19, Business Insider reported that Facebook’s decision to reduce its

guidance “mid-way through a series of meetings designed for the sole purpose of selling the

stock” was “highly material information. [S]uch a late change in guidance would mean that

Facebook’s business was deteriorating rapidly – between the start of the roadshow and the

middle of the roadshow. Any time a business outlook deteriorates that rapidly, alarm bells start




8

going off on Wall Street, and stocks plunge.” As Business Insider further noted, investors who

were not informed of this critical new information have “every right to be furious. Because this

would have been highly material information that some investors had and others didn’t – the

exact sort of unfair asymmetry that securities laws are designed to prevent.”

19. On the very next trading day, Monday, May 21, Facebook shares collapsed.

Facebook stock opened sharply down from the IPO price and plummeted throughout the day on

extremely high trading volume, closing down at $34.03, a decline of nearly 11% from the IPO

price.

20.

Prior to the opening of trading on May 22, Reuters again shocked the market by

reporting that, “while an investor roadshow was underway,” lead underwriters Morgan Stanley,

J.P. Morgan, and Goldman Sachs had taken the highly unusual step of “significantly” cutting

their revenue forecasts for Facebook, but appeared to have told only a few “major clients” about

this highly “negative” development. On Tuesday, May 22, Facebook shares again swiftly

plummeted. Facebook stock opened the day down sharply from the prior close, and ended the

trading session at $31 per share, a decrease of approximately 9%, again on extremely high

volume. Thus, in just two trading days over May 21 and 22 – only Facebook’s second and third

trading days as a public company – its shares had fallen more than 18% from the IPO price,

wiping out billions of dollars of Facebook’s market capitalization. As Bloomberg reported, the

collapse in Facebook’s stock on May 21 and 22 was “epic:” based on that two-day decline,

Facebook’s IPO became the single worst performing initial public offering in 10 years, making it

the “flop of the decade.”

21. Following the collapse in Facebook’s stock price, numerous market commentators

pointedly wrote that the Registration Statement failed to disclose highly material information




9

regarding Facebook’s revenue declines, and that the belated disclosure of this information had

significantly altered the total mix of information in the market. For example, Business Insider

reported that, “This was selective disclosure of critical non-public information. Facebook’s

amended prospectus did not say that the company’s business had suddenly weakened and

management’s outlook had changed. And that information is vastly more important than what

the prospectus did say, which was that users are growing faster than revenue.”

22. Similarly, Venture Beat , a widely read publication that covers technology and

finance, reported that Facebook’s amended Registration Statement did not put investors on notice

that there had been a material change in Facebook’s business in the weeks leading up to the IPO:

In that May 9 update [referring to the amended Registration Statement], Ebersmandecided to use vague language when describing how the company’s secondquarter was looking. It was extremely understated, considering what we wouldlater find out. … [T]his update itself didn’t send any alarm bells to mostinvestors, and it shouldn’t have. … [T]he reality is that this wording was just toovague to be construed by normal people as meaning anything more than what hadalready been mentioned before. … The fact is, there is nothing within the S-1update on May 9 that would give normal investors the sense that there had been amaterial change about Facebook’s revenue prospects.

23.

Based on the facts alleged herein, Lead Plaintiffs assert claims under: (i) Section

11 of the Securities Act against Facebook, certain of its senior executives, its directors, and the

underwriters of its $16 billion IPO; (ii) Section 12(a)(2) of the Securities Act against Facebook,

certain of its senior executives, and the underwriters of its IPO; and (iii) Section 15 of the

Securities Act against Facebook’s senior executives and directors.

II. JURISDICTION AND VENUE

24. The claims asserted herein arise under Sections 11, 12 and 15 of the Securities

Act, 15 U.S.C. §§ 77k, 77l, and 77o.




10

25. This Court has jurisdiction over the subject matter of this action pursuant to

Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1331, because this is a civil

action arising under the laws of the United States.

26. Venue is proper in this District pursuant to Section 22(a) of the Securities Act, 15

U.S.C. § 77v, and 28 U.S.C. § 1391(b), (c) and (d). Many of the acts and transactions that

constitute violations of law complained of herein, including the dissemination to the public of

untrue statements of material facts, occurred in this District.

27. In connection with the acts alleged herein, Defendants directly or indirectly used

the means and instrumentalities of interstate commerce, including, but not limited to, the United

States mails, interstate telephone communications, and the facilities of national securities

exchanges.

III. PARTIES

A. Lead Plaintiffs

28. Lead Plaintiff the North Carolina Department of the State Treasurer on behalf of

the North Carolina Retirement Systems (“North Carolina DST”) is an arm of the Government of

the State of North Carolina, which is entrusted by statute with managing the pooled funds held

on behalf of the North Carolina Retirement Systems. The North Carolina Retirement Systems

are statutory retirement and benefit plans that cover more than 850,000 public employees and

teachers. North Carolina DST purchased 685,373 shares of Facebook in the IPO. On December

6, 2012, this Court appointed North Carolina DST as a Lead Plaintiff for this litigation.

29. Lead Plaintiff the Arkansas Teacher Retirement System (“Arkansas Teacher”) is a

state-wide retirement system that provides retirement benefits for the employees of Arkansas’

public schools and other educational institutions. As of June 30, 2011, Arkansas Teacher

managed more than $11.7 billion in assets for the benefit of its members. Arkansas Teacher




11

purchased 246,849 shares of Facebook in the IPO. On December 6, 2012, this Court appointed

Arkansas Teacher as a Lead Plaintiff for this litigation.

30. Lead Plaintiff the Fresno County Employees’ Retirement Association (“Fresno”)

provides retirement benefits for the employees of the County of Fresno, Superior Courts of

California Fresno, and for other participating agencies. As of March 31, 2012, Fresno managed

over $3.2 billion in assets for the benefit of its members. Fresno purchased 95,900 shares of

Facebook in the IPO. On December 6, 2012, this Court appointed Fresno as a Lead Plaintiff for

this litigation.

31.

Lead Plaintiff Banyan Capital Master Fund Ltd. (“Banyan”) is an investment fund

that has been in operation since 2004. Banyan purchased 1,415,862 shares of Facebook common

stock traceable to the IPO. On December 6, 2012, this Court appointed Banyan as a Lead

Plaintiff for this litigation.

32. Lead Plaintiffs purchased Facebook common stock in or traceable to the IPO as

detailed in the certifications already on file with the Court and attached hereto as Appendix A,

and suffered damages as a result of the violations of the federal securities laws alleged herein.

B. Named Plaintiffs

33. Named Plaintiffs Jose G. Galvan and Mary Jane Lule Galvan, a married couple,

jointly purchased 21,100 shares of Facebook stock on May 18, 2012 that were traceable to the

IPO. Named Plaintiffs’ purchases of Facebook common stock traceable to the IPO are detailed

in the certification already on file with the Court and attached hereto within Appendix A.

Named Plaintiffs suffered damages as a result of the violations of the federal securities laws

alleged herein.




12

C. Defendants

1. Corporate Defendant

34.

Defendant Facebook is a Delaware corporation headquartered at 1601 Willow

Road, Menlo Park, California 94025. The Company operates the world’s largest social

networking service through its website at www.facebook.com, which is accessed by more than

900 million active users per month. Facebook provides a platform for its users to, among other

things, create their own profiles, connect with other individuals they identify as “friends,” share

communications, post photographs, and play games with one another. On or about May 17,

2012, Facebook conducted its IPO, in which it issued 421,233,615 shares of its Class A common

stock to the public, with an underwriter option to issue an additional 63,185,042 shares of Class

A common stock, generating total proceeds of more than $16 billion. The IPO was conducted

pursuant to several documents that were filed with the SEC and disseminated to the investing

public, including: (i) Facebook’s Registration Statement dated February 1, 2012 and filed with

the SEC on Form S-1, as amended by eight subsequent amendments, which contained versions

of the prospectus (the “Registration Statement”); and (ii) the final prospectus, which was filed

with the SEC on May 18, 2012 on Form 424(b)(4) (the “Prospectus”). Facebook securities

actively trade on the NASDAQ under the ticker symbol FB and, as of January 29, 2013, there

were 1,684,185,170 shares of its Class A common stock outstanding.

2. The Individual Defendants

35. Defendant Mark Zuckerberg is the founder, Chairman and Chief Executive

Officer of Facebook. Zuckerberg signed the Registration Statement filed with the SEC on

February 1, 2012 and all subsequent amendments. He also made numerous statements

concerning Facebook’s business in Facebook’s roadshow video and at Facebook’s roadshow

meetings with investors, through which the Company marketed its IPO to investors. Zuckerberg




13

sold 30.2 million shares of Facebook Class A common stock in the IPO for proceeds of

approximately $1.15 billion. Following the IPO, Zuckerberg retained control of approximately

56% of the voting power of Facebook’s capital stock, rendering Facebook a “controlled

company” under the corporate governance rules for NASDAQ-listed companies. Because of his

senior position within and control of the Company, Zuckerberg possessed the power and

authority to control the contents of the Registration Statement and Prospectus, Facebook’s press

releases, investor and media presentations, and other SEC filings.

36. Defendant Sheryl K. Sandberg is Facebook’s Chief Operating Officer (“COO”),

the Company’s most senior officer behind Defendant Zuckerberg. Sandberg made numerous

statements concerning Facebook’s business in Facebook’s roadshow video and at Facebook’s

roadshow meetings with investors. Because of her senior position within and control of the

Company, Sandberg possessed the power and authority to control the contents of the Registration

Statement and Prospectus, Facebook’s press releases, investor and media presentations, and other

SEC filings.

37.

Defendant David Ebersman is Facebook’s Chief Financial Officer (“CFO”).

Ebersman signed the Registration Statement filed with the SEC on February 1, 2012 and all

subsequent amendments. Ebersman also made numerous statements concerning Facebook’s

business in Facebook’s roadshow video and at Facebook’s roadshow meetings with investors.

Because of his senior position with the Company, Ebersman possessed the power and authority

to control the contents of the Registration Statement and Prospectus, Facebook’s press releases,

investor and media presentations, and other SEC filings.

38. Defendant David M. Spillane is Facebook’s Director of Accounting (“DOA”).

Spillane signed the Registration Statement filed with the SEC on February 1, 2012 and all




14

subsequent amendments. Because of his senior position with the Company, Spillane possessed

the power and authority to control the contents of the Registration Statement and Prospectus,

Facebook’s press releases, investor and media presentations, and other SEC filings.

39. Defendants Zuckerberg, Sandberg, Ebersman, and Spillane are collectively

referred to as the “Officer Defendants.”

40. Defendant Marc L. Andreessen is a Director of Facebook.

41. Defendant Erskine B. Bowles is a Director of Facebook.

42. Defendant James W. Breyer is a Director of Facebook.

43.

Defendant Donald E. Graham is a Director of Facebook.

44.

Defendant Reed Hastings is a Director of Facebook.

45. Defendant Peter A. Thiel is a Director of Facebook.

46. Defendants Andreessen, Bowles, Breyer, Graham, Hastings, and Thiel are

collectively referred to as the “Facebook Board” or the “Facebook Board Defendants.”

47. The Facebook Board Defendants approved the IPO, signed the Registration

Statement and all subsequent amendments, and were directors of the Company at the time of the

IPO. They further participated in Facebook Board meetings and conference calls. In their

capacities as signatories of the documents set forth above, as well as by virtue of their authority

to approve the IPO, the Facebook Board Defendants possessed the power and authority to

control the contents of the Registration Statement and Prospectus, Facebook’s press releases,

investor and media presentations, and other SEC filings.

48. The Officer Defendants and the Facebook Board Defendants are collectively

referred to as the “Individual Defendants.”




15

3. The Underwriter Defendants

49. Defendant Morgan Stanley & Co. LLC (“Morgan Stanley”) was the lead

underwriter and lead book-running manager of the IPO, selling 162,174,942 shares of Class A

common stock in the IPO.

50. Defendant J.P. Morgan Securities LLC (“J.P. Morgan”) was a co-lead underwriter

of the IPO, selling 84,878,573 shares of Class A common stock in the IPO.

51. Defendant Goldman, Sachs & Co. (“Goldman Sachs”) was a co-lead underwriter

of the IPO, selling 63,185,042 shares of Class A common stock in the IPO.

52.

Defendant Allen & Company LLC was an underwriter of the IPO, selling

8,424,672 shares of Class A common stock in the IPO.

53. Defendant Barclays Capital Inc. was an underwriter of the IPO, selling


54. Defendant Blaylock Robert Van LLC was an underwriter of the IPO, selling

673,974 shares of Class A common stock in the IPO.

55.

Defendant BMO Capital Markets Corp. was an underwriter of the IPO, selling


56. Defendant C.L. King & Associates, Inc. was an underwriter of the IPO, selling


57. Defendant Cabrera Capital Markets, LLC was an underwriter of the IPO, selling


58. Defendant CastleOak Securities, L.P. was an underwriter of the IPO, selling





16

59. Defendant Citigroup Global Markets Inc. was an underwriter of the IPO, selling


60. Defendant Cowen and Company, LLC was an underwriter of the IPO, selling


61. Defendant Credit Suisse Securities (USA) LLC was an underwriter of the IPO,

selling 9,477,755 shares of Class A common stock in the IPO.

62. Defendant Deutsche Bank Securities Inc. was an underwriter of the IPO, selling


63.

Defendant E*TRADE Securities LLC was an underwriter of the IPO, selling


64. Defendant Itaú BBA USA Securities, Inc. was an underwriter of the IPO, selling


65. Defendant Lazard Capital Markets LLC was an underwriter of the IPO, selling


66.

Defendant Lebenthal & Co., LLC was an underwriter of the IPO, selling 673,974

shares of Class A common stock in the IPO.

67. Defendant Loop Capital Markets LLC was an underwriter of the IPO, selling


68. Defendant M.R. Beal & Company was an underwriter of the IPO, selling 673,974


69. Defendant Macquarie Capital (USA) Inc. was an underwriter of the IPO, selling





17

70. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated was an

underwriter of the IPO, selling 27,380,185 shares of Class A common stock in the IPO.

71. Defendant Muriel Siebert & Co., Inc. was an underwriter of the IPO, selling


72. Defendant Oppenheimer & Co. Inc. was an underwriter of the IPO, selling


73. Defendant Pacific Crest Securities LLC was an underwriter of the IPO, selling


74.

Defendant Piper Jaffray & Co. was an underwriter of the IPO, selling 421,234


75. Defendant Raymond James & Associates, Inc. was an underwriter of the IPO,

selling 421,234 shares of Class A common stock in the IPO.

76. Defendant RBC Capital Markets, LLC was an underwriter of the IPO, selling


77.

Defendant Samuel A. Ramirez & Company, Inc. was an underwriter of the IPO,


78. Defendant Stifel, Nicolaus & Company, Incorporated was an underwriter of the

IPO, selling 421,234 shares of Class A common stock in the IPO.

79. Defendant Wells Fargo Securities, LLC was an underwriter of the IPO, selling


80. Defendant The Williams Capital Group, L.P. was an underwriter of the IPO,





18

81. Defendant William Blair & Company, L.L.C. was an underwriter of the IPO,


82. The Defendants named in paragraphs 49-81 are collectively referred to as the

“Underwriter Defendants.”

IV. OVERVIEW

A. Facebook’s Meteoric Rise Creates Unprecedented Market Anticipation For Its IPO

83. In February 2004, Defendant Zuckerberg founded Facebook in his Harvard

University dorm room as a social networking website through which Harvard students could

connect to one another and share information about their lives. In July 2004, Facebook was

formally incorporated as a private company. Facebook soon opened its website to other

universities and the general public, and proved to be extremely popular.

84. Between the time of its founding and its IPO in May 2012, Facebook experienced

meteoric growth in its user base and its operations. Within eight years, Facebook became the

largest social network in the world and one of the country’s best-known technology companies.

As of March 31, 2012, Facebook reported that 901 million “active users” accessed its website

each month – nearly half of all people who use the Internet and approximately 13% of the

world’s population. At the time of its IPO, Facebook’s site was the number one website in the

world as measured by the total minutes spent by users on the site and total page views.

85. In 2011, as Facebook sought to rival cash-rich technology companies such as

Google and Apple, the Company began to seriously explore engaging in an IPO. While the

Company’s shares traded on private exchanges, accessing the public markets through an IPO

would provide the Company with several unique benefits. Among other things, an IPO would

provide the Company with large amounts of cash necessary to compete with the giants in the

technology field through acquisitions and expansion of its own operations. It would also create a




19

highly liquid market for its stock, and had the potential to significantly increase its value by

tapping into widespread market demand.

86. By the end of 2011, reports emerged that Facebook was exploring filing for one of

the largest IPOs in history. For example, in November 2011, The Wall Street Journal reported

that Facebook was

exploring raising $10 billion in its IPO – what would be one of the largestofferings ever – in a deal that might assign Facebook a $100 billion valuation, anumber greater than twice that of such stalwarts as Hewlett-Packard Co. and 3MCo. A Facebook IPO has been hotly anticipated for several years, and viewed asa defining moment for the latest Web investing boom.

87. By January 2012, news had spread that Facebook would file for its IPO on

February 1, and market anticipation of the offering reached nearly unprecedented levels. As

reported by TheStreet.com, analysts said that Facebook’s offering was so significant that it would

give the entire market a much-needed lift: “[A]n analyst from GreenCrest Capital said that …

‘Facebook is obviously the IPO of the year, maybe the IPO of the decade, likely the largest IPO

in dollar value in American history. The market is a pretty dim environment right now, but you

have a very bright light coming in.’” Reuters quoted the CEO of investment bank Montgomery

& Co. as stating that “[t]he Facebook IPO will be iconic.” Given the significance ascribed to

Facebook’s IPO, investor demand for Facebook stock was expected to be immense. As the Los

Angeles Times reported, “‘The minute the IPO is filed, there will be pandemonium,’ said [an

analyst from] IPO Boutique[], who says he has never seen anything quite like the pent-up

demand for Facebook shares.”

88. Against the backdrop of what was expected to be one of the largest and most

closely-watched offerings in history, the market was intently focused on the information that

would be set forth in Facebook’s Registration Statement and Prospectus. Because Facebook had




20

operated as a private company, it had never before publicly disclosed detailed information

concerning its business and financial condition. As reported by the Los Angeles Times:

Can Facebook stake its fortune in social networking in the wildly profitable way

Google did with the Internet search? Swarms of investors can’t wait to find out.Even everyday users are looking forward to poring over Facebook’s prospectus –the first in-depth glimpse of Facebook’s financials …. How much money thecompany is making is a closely-guarded secret. But that will soon change.

B. Facebook Files For Its IPO, And The Market Reacts Positively To Its Disclosures

Concerning Its Revenue, Growth, And Positioning In The Mobile Market

89.

On February 1, 2012, Facebook publicly filed its initial Registration Statement

with the SEC. Investor interest in these disclosure documents was so intense that the SEC’s

“website crashed [] under the pressure of investors seeking access to the Facebook filing

document,” according to The Wall Street Journal.

90. The Registration Statement highlighted the Company’s dominant market position

and growth. It stated that, “[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 “9.7 billion minutes per day on Facebook.” It further

stated that the Company has consistently “experienced rapid growth in the number of users and

their engagement.”

91. As the Registration Statement explained, Facebook generally does not charge its

users for any of the social networking services it provides. Instead, Facebook’s business model

depends almost entirely on selling advertisements to companies that want to reach Facebook’s

user base, whose ads Facebook displays to its members as they use its website. Thus, the key

driver of the Company’s growth, and the principal determinant of Facebook’s value, was its

advertising revenue. Indeed, the Company’s advertising revenue accounted for 98%, 95% and

85% of the Company’s revenues in 2009, 2010, and 2011.




21

92. The Registration Statement disclosed that Facebook’s advertising and total

revenue grew at a torrid pace in the years before its IPO. Between 2007 and 2011, Facebook’s

annual advertising revenue grew from approximately $153 million to $3.2 billion – multiplying

more than twenty times. In turn, during this time period, Facebook’s annual revenue grew from

$153 million to more than $3.7 billion – a 24-fold increase. Moreover, in the year before its IPO,

Facebook’s revenue surged 88%, climbing from almost $2 billion in 2010 to the aforementioned

$3.7 billion in 2011, which “was due primarily to a 69% increase in advertising revenue,”

according to the Registration Statement.

93.

Facebook also described certain factors that were critical to its financial results,

two of which are relevant here. The first and principal factor was the growing usage of

Facebook on mobile devices, as opposed to the use of Facebook through traditional, stationary

desktop computers. Mobile devices include those devices through which people access the

Internet remotely, such as “smart” mobile phones (like iPhones) and tablets (like iPads). The

usage of Facebook on mobile devices was critical to Facebook’s financial performance for three

principal reasons.

94. First, Facebook’s mobile market was extremely large. At the time Facebook filed

its initial Registration Statement, 425 million (or approximately half) of Facebook’s monthly

users accessed the website through their mobile devices, either as a supplement to their use of

Facebook through desktop computers or as their only means of accessing Facebook. Second,

Facebook’s mobile users were growing more rapidly than the rest of the Company’s user base.

As Facebook stated, the growth rate for its mobile users “will continue to exceed the growth rate

of our overall [member base] for the foreseeable future.” Third, while the Company showed

large volumes of advertising to users who accessed its website through desktop computers, it did




22

not yet show advertisements to its mobile users. Thus, the mobile market was an untapped

revenue stream, and an extremely important engine of Facebook’s future growth.

95. Accordingly, in the Registration Statement, Facebook emphasized that the mobile

market was a “critical” area of “growth” and a “significant opportunity” that the Company was

actively developing products to capitalize on. Facebook stated that “[i]mproving our mobile

products and increasing mobile usage of Facebook are key company priorities,” and it was

“devoting substantial resources to developing engaging mobile products and experiences for a

wide range of platforms” by “working across the mobile industry … to improve the Facebook

experience on mobile devices and make Facebook available to more people around the world.”

96.

The second factor that Facebook identified as important to its financial results was

the Company’s “product decisions.” Facebook’s product decisions were decisions that the

Company made concerning the design and features of its website, the type of advertising it

displayed, and the price of its advertisements. These product decisions were important to the

Company’s financial results because they could result in new advertising products, the

elimination of certain advertisements, or changes in the price of advertisements – each of which

could impact the amount of advertising Facebook displayed and, in turn, its revenues.

97. The market reacted positively to the disclosures in the Registration Statement, as

the financial press reported that Facebook’s advertising revenue growth was strong, and the

Company was well-positioned to capitalize on the mobile market. For example, after the

Company filed its initial Registration Statement, Bloomberg reported that Facebook expected its

“next 1 billion users to come mainly from mobile devices,” and was therefore “increasing its

focus on mobile technology to take advantage of the shift to smartphones and tablets.” The

report quoted the director of research at investment-advisory firm Renaissance Capital as stating




23

that “Investors are still very much willing to pay up for growth. There’s just phenomenal interest

in this company and its potential.” Similarly, The New York Times reported that “the filing shed

some light on how [Facebook’s] meteoric run has turned the upstart into a formidable money

maker. … [M]any analysts believe Facebook’s fortunes will rapidly multiply as advertisers

direct more and more capital to the Web’s social hive.”

C. The SEC Questions Facebook’s Disclosures

98. On February 28, 2012, the SEC sent the Company a “comment letter” concerning

certain of the Company’s disclosures in the initial Registration Statement. Among other things,

the SEC questioned certain of Facebook’s disclosures about potential factors that might impact

its revenues, including growing mobile usage, and instructed the Company to provide additional

information to investors on these subjects.

99. As the SEC noted, Facebook’s Registration Statement contained a “risk factor”

purporting to warn investors that Facebook’s revenue “may” be negatively affected by increasing

mobile usage “if” certain contingencies occurred. Specifically, this disclosure stated as follows

Growth in use of Facebook through our mobile products, where we do not

currently display ads, as a substitute for use on personal computers may

negatively affect our revenue and financial results.

We had more than 425 million MAUs [monthly active users] who used Facebookmobile products in December 2011. We anticipate that the rate of growth inmobile users will continue to exceed the growth rate of our overall MAUs for theforeseeable future, in part due to our focus on developing mobile products toencourage mobile usage of Facebook. Although the substantial majority of ourmobile users also access and engage with Facebook on personal computers wherewe display advertising, our users could decide to increasingly access our products

primarily through mobile devices. We do not currently directly generate anymeaningful revenue from the use of Facebook mobile products, and our ability todo so successfully is unproven. Accordingly, if users continue to increasinglyaccess Facebook mobile products as a substitute for access through personalcomputers, and if we are unable to successfully implement monetization strategiesfor our mobile users, our revenue and financial results may be negatively affected.




24

100. The SEC instructed Facebook that, rather than merely saying that its results

“may” be negatively affected under certain circumstances, it must “fully address” the potential

impact on the Company’s revenue if the contingencies concerning mobile usage materialized.

Specifically, the SEC comment letter stated that, “assuming that the trend towards mobile

continues and your monetization efforts are unsuccessful, ensure that your disclosure fully

addresses the potential consequences to your revenue and financial results rather than just saying

that they ‘may be negatively affected.’”

101. In addition, the SEC directed Facebook to disclose any trends that were having, or

were reasonably expected to have, a material impact on its “revenue growth and advertising

revenue growth.” Specifically, the SEC instructed Facebook to disclose, pursuant to Item 303(a)

of SEC Regulation S-K, “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.”

102. 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. In particular, Facebook asserted that

because many of its mobile users also continued to access Facebook through their 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.

D. As Facebook Prepares For Its Roadshow, The Company Continues To Emphasize

Its Growth Prospects In The Mobile Market To Investors

103. During March and April 2012, Facebook was preparing for a critical part of its

IPO: its “roadshow,” which was scheduled to begin on May 7 and end on May 17. The




25

roadshow consisted of a series of meetings, primarily with groups of institutional investors, held

across the country. During these meetings, Facebook’s most senior executives – including

Defendants Zuckerberg, Sandberg, and Ebersman – made presentations and answered investor

questions. The roadshow was one of the most important parts of the IPO process because it was

a principal way that Facebook and the lead underwriters marketed the IPO directly to

institutional investors, and thereby increased investor demand for the Company’s stock.

104. To track demand for the Company’s stock, during the roadshow, the lead

underwriters built the “book” of orders for the IPO. The book contained the number of shares

that each institutional investor wanted to purchase, as well as the price that each investor was

willing to pay for the stock. Based on the orders in the book, at the end of the roadshow,

Facebook and the lead underwriters determined how many shares to sell in the IPO and the price

per share. These determinations not only set the value of the IPO, but they also set Facebook’s

market value as a company.

105. The two Facebook executives who had principal responsibility for managing

Facebook’s roadshow were Defendant Ebersman and Facebook’s Treasurer, Cipora Herman.

Michael Grimes, the Head of Technology Investment Banking at lead underwriter Morgan

Stanley, served as the Company’s principal advisor on behalf of the Underwriter Defendants.

106. In preparation for the roadshow, on April 16, 2012, Defendant Ebersman met with

the Syndicate Analysts. The purpose of the meeting was for Facebook to provide the Syndicate

Analysts with information about its business, including its estimated revenues for the second

quarter of 2012 and the full year. Based on that information, the Syndicate Analysts would

generate estimates of the Company’s revenues and financial results. These estimates would then




26

be incorporated into “institutional selling memoranda,” which the Underwriter Defendants’ sales

force would use to market the IPO to institutional investors.

107. At the April 16 meeting, Ebersman informed the Syndicate Analysts that

Facebook’s internal revenue estimate for the second quarter, which had begun on April 1, ranged

from $1.1 to $1.2 billion. Ebersman further informed the Syndicate Analysts that Facebook’s

internal revenue estimate for the 2012 fiscal year was $5 billion. These figures translated into

year-over-year growth rates of as much as 34% for the second quarter and 35% for the year.

108. The Syndicate Analysts incorporated the Company’s internal estimates into their

financial models and generated estimates that mirrored Facebook’s guidance. For example, the

analysts for lead underwriters Morgan Stanley, J.P. Morgan, and Goldman Sachs, as well as Bank

of America, concluded that Facebook’s revenues for the second quarter would be at the high end

of Facebook’s range of $1.1 billion to $1.2 billion, and its revenues for the full-year 2012 would

be approximately $5 billion. These estimates, which are set forth below, translated into expected

year-over-year growth rates of up to 35% for the second quarter, and 39% for the year:

Underwriter 2Q 2012 RevenueGrowth

RateAnnual Revenue Growth Rate

Goldman Sachs $1.207 billion 35% $5.169 billion 39%

J.P. Morgan $1.182 billion 32% $5.044 billion 36%

Morgan Stanley $1.175 billion 31% $5.036 billion 36%

Bank of America $1.166 billion 30% $5.040 billion 36%

109. These estimates were then incorporated into the institutional selling memoranda

that these Underwriter Defendants used to market the IPO to investors.




27

110. Meanwhile, Facebook continued making positive public statements emphasizing

its growth and the steps it was taking to capitalize on the mobile market, which gave rise to

similar expectations for Facebook’s performance among analysts who published their reports to

the market. For example, in an amended Registration Statement filed on March 7, Facebook

disclosed that it had taken a key step toward generating revenue from its mobile users by starting

to display advertisements to them. Specifically, Facebook stated that it was beginning to display

one of its principal advertising products, called “Sponsored Stories,” to its mobile users.

111. Facebook also underscored that it was achieving greater penetration in the mobile

market, thereby expanding its revenue opportunities there. In its amended Registration

Statement, Facebook stated that its mobile application – the product through which mobile users

accessed the Company’s website – was the most popular mobile application “among …

smartphone users in the United States.” In an amended Registration Statement filed on April 23,

2012, Facebook further stated that, as of March 31, 2012, the number of users who accessed its

website through mobile products had grown to 488 million, an increase of 15% over such users

as of December 2011.

112. In the amended Registration Statement filed on April 23, 2012, Facebook also

disclosed its first quarter results. Facebook reported more than $1 billion in revenue for the first

quarter of 2012, an increase of 45% from the first quarter of 2011, which was driven by a 35%

increase in the number of ads delivered. Although Facebook’s revenue had declined from the

fourth quarter of 2011, Facebook stated that this was “driven by seasonal trends” in advertising

spending, which traditionally surges in the fourth quarter during the holiday season, and

decreases in the first quarter. Facebook stated that this “seasonality” may have been “partially

masked” in prior years by “[t]he rapid growth in our business.”




28

113. On May 3, 2012, Facebook filed an amended Registration Statement confirming

that it was aiming to conduct an IPO of historic dimensions. Facebook announced that it was

planning to sell more than 337 million shares in the offering (consisting of 180 million shares

from Facebook, and more than 157 million from selling shareholders), and was planning to price

the shares between $28 and $35. At these levels, the IPO would raise up to approximately $12

billion in proceeds and result in a market valuation of as much as $96 billion for Facebook –

numbers that would make Facebook the largest company to go public in history, and the IPO the

largest ever for a technology company (and one of the largest ever for any U.S. company). The

IPO was also slated to make Defendant Zuckerberg one of the richest men in the world: at the

top of the price range, his Facebook holdings would be worth $18.7 billion.

114. That same day, Facebook posted its “roadshow” video presentation on its website,

which prominently featured Defendants Zuckerberg, Sandberg, and Ebersman. In the

presentation, Facebook again emphasized its continuing growth, stating that “[o]ur advertising

revenue has grown from $272 million in 2008 to $3.2 billion last year,” and “we’ve only just

begun.” Facebook also stated that the mobile market was a critical growth opportunity that the

Company was well-positioned to capitalize on. Specifically, COO Sandberg stated that the

mobile market was “a key area of growth for Facebook” and that Facebook had “just introduced

Sponsored Stories … on mobile devices” to monetize its mobile users. Sandberg further

represented that Facebook was not experiencing challenges in the mobile market, stating that,

“[f]or 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. Since sponsored stories are now available

… on mobile, they become a really natural part of the Facebook mobile experience.”




29

115. Analysts and the financial press again reacted positively to Facebook’s

disclosures. For example, on May 4, 2012, the day after Facebook released the roadshow video,

Bloomberg ran an article with the headline “Facebook’s Sandberg Says Mobile Advertising Is

Key Growth Area,” reporting that Sandberg, “in a video recorded for prospective investors, said

one of the company’s main sources of revenue gains will be mobile advertising. ‘Mobile is a key

area of growth for Facebook,’ Sandberg said in the video, which Facebook will use to drum up

interest in its shares before a planned initial public offering.” On May 7, 2012, after Facebook

announced the price range and size of the IPO, Reuters reported that “the size of the IPO reflects

the company’s growth and bullish expectations about its money making potential as a hub for

everything from advertising to commerce.” Similarly, on May 4, 2012, The Wall Street Journal

reported that “Facebook pulled back the curtain on how much it thinks it is worth, targeting a

valuation as rich as $96 billion in what would be a record debut for an American company. …

Facebook’s IPO will be a watershed moment for Silicon Valley, spawning a new generation of

millionaires and a handful of billionaires, including founder and Chief Executive Mark

Zuckerberg, whose stake is worth as much as $18.7 billion.”

116. Thus, by the time that Facebook’s roadshow was scheduled to begin in early May,

demand for Facebook stock remained extremely high. As The New York Times reported on May

3:

Facebook, which plans to make a market debut this month that could value it at$86 billion, is the stock that everyone seems to want. … The excitement overFacebook has come on the back of its rapid growth. For many, Facebook is theInternet. After a flurry of eye-popping market debuts by other Internet start-ups,… Facebook’s will be the biggest yet. … Demand to attend the Facebook[roadshow] presentations has been extraordinarily high, with underwriters alreadydrawing up waiting lists for the meetings[.]

117. Similarly, on May 1, Reuters quoted an analyst from the research firm IPO

Boutique as stating that “I have not seen as broad based interest in an IPO since Google.




30

Investor demand is immense. I expect a roadshow that will rival all roadshows where investors

will be turned away at the door.”

E. As Facebook Begins Its Roadshow, It Determines That Its Revenues For The Second

Quarter And The Year Have Been Materially Impacted

118. On May 7, 2012, Facebook began its roadshow with a presentation to investors in

New York City. As expected, investor interest was overwhelming. The Wall Street Journal

reported that “the line leading to a second-floor ballroom where the meeting was scheduled to be

held … stretched down the first floor and spilled out of the hotel for nearly half a city block.”

More than 500 of the country’s most prominent investors and analysts were in attendance.

119.

At the roadshow meeting, Facebook played the video presentation, described

above in paragraphs 114-115, in which Defendant Sandberg emphasized the Company’s strong

growth prospects and ability to capitalize on the mobile market. Afterwards, Defendants

Zuckerberg, Ebersman, and Sandberg took the stage and answered investors’ questions, including

a question concerning the Company’s “plans to boost revenue from mobile products,” according

to The Wall Street Journal.

120. Based on the Company’s roadshow presentation and the disclosures in the

Registration Statement, analysts widely recommended that investors buy Facebook stock. On

May 8, The Wall Street Journal summarized the overwhelmingly positive analyst coverage in an

article titled “Facebook Gets Bullish Reception – Wall Street Analysts Sound Positive Notes

Before IPO; Valuation of $160 Billion?” which reported that:

Analysts are starting to chime in with support for the bullish case on socialnetwork Facebook Inc. ahead of its initial public offering. Sterne Agee onMonday initiated coverage at “buy[.]” … It isn’t typical for analysts to publishresearch before a company goes public. But Sterne did so because many clientswere considering investing, said initiating analyst Arvind Bhatia in an interview.

[Bhatia] set a one-year price target of $46 for the stock, solidly above the range of$28 to $35 a share targeted by Facebook for its IPO. “Facebook had 48% of the




31

world-wide Internet population, and they have half a percent of the advertisingmarket world-wide,” Mr. Bhatia. “We think they have significant runway aheadof them,” referencing the company’s potential for growth.

121.

Analysts also widely reported that, for the second quarter and year-end 2012,

Facebook would experience revenue growth rates of at least 35% year-over-year, based in part on

the Company’s ability to make money from its mobile users. For example, the Sterne Agee

report described in the above paragraph emphasized Facebook’s strong positioning in the mobile

market, stating that, “[w]ith 488 million MAUs [monthly active users] using Facebook mobile

products in the month of March 2012, FB clearly has the reach on mobile platforms….

Furthermore, the Facebook mobile app was the most downloaded app … in the month of January

2012….” Thus, Sterne Agee concluded that “mobile monetization [is] a significant long-term

growth opportunity for FB” and Facebook could “triple its revenue” in the next 4 years based in

part on its “mobile monetization potential.” For 2012, Sterne Agree projected that Facebook

would report more than $1.2 billion in revenue for the second quarter (a 36% increase over its

revenue for the second quarter of 2011) and more than $5 billion in revenue for the year (a 35%

increase over its revenue for full-year 2011).

122. Unbeknownst to investors, however, within hours of Facebook’s first roadshow

meeting, Facebook determined that two developments in its business had severely impaired its

estimated revenues for the second quarter and the full year, and thus, its revenues were going to

be much lower than the Company had led potential investors to believe. First, during the second

quarter of 2012, as the Company’s users had increasingly migrated from desktop computers

(where the Company displayed large amounts of ads) to mobile devices (where Facebook

showed less advertising), the Company was generating far less advertising revenue than it had

expected. Second, the Company had made certain product decisions in the second quarter of

2012 that reduced the average amount of advertisements displayed on each page of Facebook’s




32

website, which, in combination with the shift to mobile usage, had exacerbated the decline in

Facebook’s expected revenues.

123. Accordingly, on the evening of May 7, 2012, Defendant Ebersman approached the

lead Morgan Stanley banker on the IPO, Michael Grimes, and informed him that, based on

second quarter data received to date, Ebersman was no longer confident that Facebook would

meet its internal revenue estimates. According to Grimes’ sworn testimony in the Massachusetts

Enforcement Action, Ebersman informed Grimes that, “based upon their experience in Q2 to

date, [Ebersman] was less confident in his financial projections – in reaching or exceeding his

financial projections than previously.” As Grimes testified, Ebersman further informed him that

the two developments noted above, i.e., increasing mobile usage and the Company’s product

decisions, had caused the rapid deterioration in Facebook’s revenues.

124. Indeed, by no later than May 8, Facebook had already materially lowered its

internal revenue figures due to these developments. Specifically, Facebook determined that its

revenue for the second quarter would be as low as $1.1 billion, or more than 8.3% below the top

of its prior range. Further, the Company determined that these factors were expected to continue

to negatively impact its revenue for the rest of the year. Thus, Facebook was now estimating that

its 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%. Significantly, Facebook’s revised

revenue estimates translated into sharply lower year-over-year revenue growth rates of as little as

23% for the second quarter and 30% for the year, as compared to growth rates of as much as

34% for the second quarter and 35% for the year based on the Company’s prior estimates.




33

F. Facebook Discloses Its Severe Revenue Declines To A Select Group Of Investors, But

Not To The Market

125. On May 8, 2012, immediately after Facebook had revised its expected revenues

for the second quarter and the year materially downward, its most senior executives determined

that the change was so significant that it warranted disclosure to the Syndicate Analysts. Thus,

that day, Facebook’s Treasurer, Cipora Herman, sent an email to employees in the finance

department with the subject line: “Q2 estimates from analysts IMPORTANT PLS THIS

MORNING.” Herman wrote that Facebook had “updated our forecast and we’re trying to gauge

how far off our new forecast is from where the analysts are coming out.” Herman stated that she

and Morgan Stanley bankers immediately needed to see “the q2-q4 by quarter revenue estimates

from the analysts for whom we have detailed models,” and that she was “[c]opying [a Morgan

Stanley banker] on this so we can get some efficiency – I don’t want to be the bottleneck in

getting the info to MS.”

126. As noted above, Facebook’s revised revenue figures were far below the Syndicate

Analysts’ estimates. Accordingly, later that day, after Morgan Stanley bankers 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 revise their models based on this new information and provide it to the

Company’s largest potential investors, thereby informing them of the change in Facebook’s

financial condition.

127.

As emphasized by the SEC in its February 28, 2012 comment letter to Facebook,

Item 303(a) of SEC Regulation S-K requires public disclosure of “any known trends or

uncertainties that have had or that the registrant reasonably expects will have a material

favorable or unfavorable impact on net sales or revenues or income from continuing operations.”




34

17 C.F.R. § 229.303. In addition to the identification of such “known trends,” Item 303 requires

disclosure of (i) whether those trends have had or are reasonably expected to have a material

unfavorable impact on revenue; and (ii) the extent of any such impact on revenue. Moreover,

pursuant to SEC Regulation C, registrants have an overarching duty to disclose material

information necessary to ensure that representations in a registration statement are not

misleading. Specifically, Rule 408 states that, “In addition to the information expressly required

to be included in a registration statement, there shall be added such further material information,

if any, as may be necessary to make the required statements, in light of the circumstances under

which they are made, not misleading.” 17 C.F.R. § 230.408(a).

128.

However, Facebook did not publicly disclose the information that it had decided

to provide the Syndicate Analysts. Instead, on the night of May 8, 2012, Facebook executives,

including Ebersman and Herman, with input from Grimes, decided that the Company would file

an amended Registration Statement containing an extremely vague and limited disclosure about

certain trends in the Company’s business. Notably, this new disclosure would continue to

represent only that increasing mobile usage and the Company’s product decisions might have a

negative impact on Facebook’s revenue. Accordingly, on May 9, 2012, the Company filed an

amended Registration Statement, which stated as follows:

Based upon our experience in the second quarter of 2012 to date, the trend we sawin the first quarter of DAUs [daily active users] increasing more rapidly than theincrease in number of ads delivered has continued. We believe this trend isdriven in part by increased usage of Facebook on mobile devices where we haveonly recently begun showing an immaterial number of sponsored stories in NewsFeed, and in part due to certain pages having fewer ads per page as a result of product decisions. For additional information on factors that may affect thesematters, see “Risk Factors—Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results” and“Risk Factors—Our culture emphasizes rapid innovation and prioritizes userengagement over short-term financial results.”




35

129. This new disclosure was itself materially false and misleading. In the amended

Registration Statement, Facebook disclosed only that, as a result of increasing mobile usage and

its product decisions, the growth in the Company’s users was exceeding the growth in the

number of ads it was delivering. Significantly, nowhere in the amended Registration Statement

did Facebook state that these factors had already materially impaired its revenue, or otherwise

describe the impact they were having on its business. To the contrary, in the amended

Registration Statement, Facebook misleadingly repeated the same purported “risk disclosure”

that it had included in its prior registration statements: namely, that these factors only “may

negatively affect our revenue and financial results,” when, in reality, Facebook had already

determined that they had materially and negatively impacted its revenue and financial results.

130. The actions that Facebook took after the Company filed the amended Registration

Statement confirm that the decline in Facebook’s revenue estimates was highly material, not

conveyed by the May 9 amended Registration Statement, and not otherwise part of the total mix

of information in the market. Specifically, within minutes after Facebook filed its amended

Registration Statement on May 9, Facebook contacted the Syndicate Analysts to tell them what

the amended Registration Statement did not provide notice of – namely, that growing mobile

usage and the Company’s product decisions had already had a material negative impact on the

Company’s revenues, and that Facebook had cut its guidance as a direct result. Facebook

provided this information to the analysts precisely because it understood that the market was

unaware that these factors had negatively impacted its revenues, and that the magnitude of these

impacts was significant. Indeed, had the market been aware of these critical facts, or had these

facts been unimportant, there would have been no reason for Facebook to communicate this

information to the Syndicate Analysts.




36

131. The manner in which Facebook chose to contact the Syndicate Analysts further

confirms that the Company’s revenue cuts were highly material and not part of the information in

the marketplace. SEC Regulation FD generally provides that, whenever an issuer discloses

“material nonpublic information” about its business to an analyst in connection with an offering,

the issuer must also disclose that same information to the public. However, under certain

circumstances, Regulation FD provides a limited exception to this disclosure requirement for

information that is conveyed through “[a]n oral communication” in connection with an offering.

Because Facebook’s senior executives understood that the Company’s lowered guidance was

“material nonpublic information” that would have to be publicly disclosed if it was

communicated in writing, they sought to avail themselves of the exception for “oral

communications.” Specifically, in an effort to avoid Regulation FD in the event that it applied,

Ebersman, Herman, and Grimes decided that Facebook would not convey the lowered guidance

to the Syndicate Analysts in writing, but would do so over the phone, by reading the information

to them, in a series of calls that lasted for days.

132.

Accordingly, within twelve minutes after Facebook filed the amended

Registration Statement, Treasurer Herman began calling the Syndicate Analysts from her

Philadelphia hotel room. With calls to the Syndicate Analysts scheduled every 15 minutes,

Herman called a total of eleven Syndicate Analysts on the night of May 9, including all of the

lead underwriters’ analysts. On May 10 and May 15, Herman called an additional eight

Syndicate Analysts to inform them of Facebook’s lowered guidance.

133. Herman conducted these nineteen separate phone calls with the aid of a script that

Grimes had prepared for her. This script provides further confirmation that the market was

unaware of the fact that growing mobile usage and the Company’s product decisions had had a




37

material negative impact on Facebook’s revenue. Indeed, in contrast to the vague and inadequate

disclosure that Facebook made on May 9, the script that Herman used specifically stated that

these trends had negatively impacted Facebook’s revenue and that Facebook had significantly cut

its revenue estimates as a result. Specifically, the script stated as follows:

I wanted to make 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 endof our $1.1 to $1.2 bn range for Q2 based upon the trends we described in thedisclosure. A lot of investors have been focused on whether the trend of adimpressions per user declining (primarily as a result of mobile) was a one-time, orcontinuing, occurrence. As you can see from our disclosure, the trend iscontinuing. You can decide what you want to do with your estimates, our longterm 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.

134. Although Grimes’ original script did not provide the impact of these factors on

Facebook’s yearly revenues, Herman specifically wrote this information into the script. Herman

wrote that because of “trends/headwinds over the next six to nine months as this run[s] through

the rest of the year, [Facebook] could be 3 to 3 and a half percent off the 2012 $5 billion

[revenue] target” that was previously given to the Syndicate Analysts.

135.

The actions that the Syndicate Analysts took after being informed of the cuts to

Facebook’s revenue estimates provide further confirmation that these declines were highly

material, and that the market was unaware of this significant information. Based on the new

information provided by Herman, a significant number of the Syndicate Analysts sharply

lowered their revenue estimates for Facebook to reflect the impact of the new information they

had been told. Indeed, as Morgan Stanley admitted in a statement issued after news of

Facebook’s revenue cuts was revealed to the market following the IPO, “a significant number of

research analysts in the syndicate who were participating in investor education reduced their

earnings views” after May 9 to reflect their estimate of the impact of the new information.




38

136. For example, the Syndicate Analysts of the three lead underwriters, as well as

Bank of America, produced much lower revenue figures that were all within Facebook’s new

guidance and reflected significant deterioration in the Company’s business. As set forth below,

these analysts cut their estimates of Facebook’s annual revenue by as much as 6%, and their

estimates of Facebook’s second quarter revenue by as much as 7%.

Underwriter 2Q 2012 Revenue

Decrease

from April

Estimate

Annual Revenue

Decrease

from April

Estimate

Goldman Sachs $1.125 billion -6.79% $4.852 billion -6.13%

J.P. Morgan $1.096 billion -7.28% $4.839 billion -4.06%

Morgan Stanley $1.111 billion -5.45% $4.854 billion -3.61%

Bank of America $1.100 billion -5.66% $4.815 billion -4.46%

137. As Facebook understood they would, the Syndicate Analysts immediately

provided this new information to some of the Company’s most important potential investors – a

select, hand-picked group of some of the biggest hedge funds and other institutions on Wall

Street. In particular, in the days immediately following May 9, the Syndicate Analysts made a

series of private phone calls to these select investors to inform them of an extraordinary piece of

news: in the midst of the Facebook roadshow, these analysts had taken the extremely rare step of

cutting their revenue estimates for the Company they were actively promoting as a model of

rapid growth.

138. The chosen few investors who received this critical information reacted with

astonishment. As Reuters would later report after Facebook’s IPO:




39

The sudden caution very close to Facebook’s initial public offering – while aninvestor road show was underway – was a big shock to some, said two investorswho were advised of the revised forecast. … ‘This was done during theroadshow – I’ve never before seen that in 10 years,’ said a source at a mutual fundfirm who was among those called by Morgan Stanley.

139.

These investors immediately recognized that the lowered revenue estimates meant

that there had been a significant negative change in Facebook’s financial condition and value. As

was reported by The Wall Street Journal after the IPO, the lowered revenue figures raised “a

significant red flag” to those investors who received them. Similarly, according to Reuters,

“That deceleration [showed by the revised revenue figures] freaked a lot of people out.” This

information caused many investors who received it to change their investment decisions by

cancelling or reducing orders, or reducing the price they were willing to pay for Facebook stock.

For example, after the IPO, The Wall Street Journal reported that when the hedge fund Capital

Research & Management was “warned” by an Underwriter Defendant “about Facebook’s

dimming revenue prospects,” the fund concluded that the IPO price of $38 per share was

“ridiculous,” and “slashed the number of shares it intended to buy,” while “[s]ome Capital

Research fund managers didn’t buy into the IPO at all.”

G. With The Market Unaware Of The Pronounced Deterioration In Facebook’s

Revenue, Facebook Increases The Price And Size Of The Offering, And Allocates An

Extremely High Number Of Shares To Small Investors

140. Given the misleading nature of the new disclosure in Facebook’s May 9 amended

Registration Statement, the financial press continued to report only that increasing mobile usage

might impact Facebook’s revenue depending on the occurrence of future events. For example,

on the night of May 9, The New York Times reported that:

The company [] warned that if Facebook users continued to gain access to thesocial network on mobile devices, instead of computers, and if Facebook was“unable to successfully implement monetization strategies for our mobile users,”the company’s revenue growth could be harmed.




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141. Similarly, on May 9, The Wall Street Journal reported that the Registration

Statement stated only that increasing mobile usage “may” negatively impact revenue:

[Facebook] has warned that, as more people use Facebook on mobile phones

rather than personal computers, that trend “may negatively affect” financialresults. … The issues are important as Facebook heads into the final stretch before its IPO, expected on May 18 in an offering that would value the companyat as much as $96 billion. Executives from the [] Company have been pitchingthe company’s stock to would-be investors this week in a roadshow, where theyhave fielded questions about Facebook’s mobile strategy and growth.

142. Further demonstrating that the market was unaware of the fact that Facebook’s

business had been materially impacted by increasing mobile usage, analysts other than the

Syndicate Analysts, who had not been called by Facebook, continued to widely expect Facebook

to report revenues that were in line with the original, higher guidance Facebook had given in

April. As of May 18, 2012, the date that Facebook went public, analysts’ consensus estimates

according to Thomson’s Institutional Brokers’ Estimate System were for Facebook to report

revenues of more than $1.2 billion for the second quarter and $5 billion for the year – exactly in

line with Facebook’s original yearly guidance and slightly above its quarterly guidance.

143.

Because the market was unaware of the impact that increasing mobile usage had

already had on Facebook’s business, investor demand for Facebook stock far exceeded the

number of shares being offered in the week before the offering was scheduled to occur. On May

11, Reuters reported that “Facebook Inc.’s record initial public offering is already oversubscribed

… days after the world’s largest social network embarked on a cross-country roadshow to drum

up investor enthusiasm.” On May 14, Bloomberg reported that demand for Facebook shares was

so intense that the Underwriter Defendants were “swamped” with orders and were going to close

the order book days before they had planned to:

Facebook plans to stop taking orders tomorrow for its initial public offering, twodays ahead of schedule…. The offer of 337.4 million shares at $28 to $35 eachhas been oversubscribed…. “They’re swamped with the orders that are in,” said




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Jon Merriman, chief executive officer at investment firm Merriman Holdings Inc.in San Francisco. “They just need time to determine the price. They can send themessage – the books are closing, send in your orders now.”

144.

Accordingly, in the week before the IPO, Facebook increased both the price and

size of its IPO. Raising both the price and size of an IPO is exceedingly rare – indeed, it has

occurred in only 3.4% of all IPOs since 1995. Demand for Facebook stock was so extreme that,

in the week before the IPO, Facebook was not only able to raise both the price and size of its

IPO, but it was able to increase them by very significant amounts.

145. Specifically, on May 14, The New York Times reported that “Facebook is planning

to increase the price for its hotly awaited initial public offering to a range of $34 to $38 a share

because of rampant investor demand.” The next day, May 15, Facebook filed an amended

Registration Statement disclosing that it was indeed increasing the price range from the previous

range of $28 to $35, to a new range of $34 to $38 – an increase of more than 21% at the bottom

of the range and nearly 9% at the top. The large size of Facebook’s price increase caused the

financial press to uniformly conclude that market demand for the Company’s stock had reached

astronomical levels, with the The Associated Press reporting that “[d]emand is obscenely high.”

146. Notably, the financial press reported that Facebook’s ability to significantly raise

the IPO price demonstrated that the Company had succeeded in “convincing investors that [it]

can make money from mobile users.” As Bloomberg reported on May 14:

Chief Executive Officer Mark Zuckerberg, in a roadshow pitch to the IPOinvestors, may be winning over skeptics who initially balked at buying the shares,said Erik Gordon, a professor at the University of Michigan’s Ross School of

Business. “Raising the range would be the best signal of what the underwritersare hearing from their institutional buyers who have seen the roadshow.” …Zuckerberg is celebrating his 28th birthday today, during the final leg of amarketing tour aimed at building demand for the IPO and convincing investorsthat Facebook can make money from mobile users.




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147. The next day, May 16, Facebook and its insiders increased the size of the offering

by nearly 25%, raising the number of shares being offered by approximately 84 million shares.

All the additional shares were offered by Facebook insiders, including directors and large, early

shareholders. Director Defendants Breyer and Thiel, and the private equity arm of Defendant

Goldman Sachs, each significantly increased the number of shares they were selling in the

offering. Specifically, as reflected in Facebook’s final Prospectus, director Defendant Breyer and

entities affiliated with his private equity fund, Accel Partners, increased the number of shares

they were selling from 38.2 million to 57.7 million, or 51%. Director Defendant Thiel more than

doubled the number of shares his private equity funds were selling in the IPO, increasing it from

7.7 million to 16.8 million, or by approximately 120%. Similarly, the private equity arm of

Defendant Goldman Sachs nearly doubled the number of shares it was selling, increasing it from

13.2 million to 24.3, or by more than 85%.

148. Then, on May 17, 2012, Reuters reported that the underwriters were releasing

significantly more shares to retail investors than was previously expected. For example, the

brokerage arm of Defendant Morgan Stanley “previously set a cap of 500 shares per retail client,

but e-mailed advisers late on Thursday afternoon [May 17] that it had increased the limit to 5,000

shares.” Similarly, while Merrill Lynch “had sent multiple emails over the last several weeks

warning [brokerage] advisers not to expect to receive many shares for [individual] clients,” on

the morning of May 17, Merrill informed advisers that they would get thousands of shares per

retail client. Reuters quoted a Merrill Lynch retail investment adviser as stating that the

allocation “was about four times what he had expected. ‘It’s a hell of a lot more than I would

have anticipated.’” As an analyst from the research firm IPO Boutique confirmed to Reuters on




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May 18, “[r]etail got a lot more than I thought they did. … [S]ome of the retail clients who

called me today said they were getting 15,000 to 20,000 shares.”

H. Facebook Conducts Its Historic IPO

149.

On the afternoon of May 17, Facebook’s Registration Statement became effective.

That evening, Defendant Ebersman and representatives from the three lead underwriters,

including Grimes, held a conference call to decide on the price of the IPO. In a highly unusual

move, Morgan Stanley’s CEO, James Gorman, participated in the conference call. As Bloomberg

subsequently reported, “[t]he involvement of an investment bank’s CEO in IPO pricing

discussions is unusual, and it reflects the importance that Morgan Stanley (MS) ascribed to its

role as lead underwriter on the largest-ever technology IPO.” The participants discussed a price

range of between $36 and $41 per share, and ultimately decided to price the IPO at $38 per share

– the very top of the range that Facebook had publicly disclosed. As The New York Times

reported after the IPO occurred, “a banker involved in the process” said that the $38 figure was

chosen because “demand was astronomical.”

150.

Later that evening, Facebook announced that it had priced its stock at $38 per

share and conduced one of the largest IPOs in history, selling more than 421 million shares of the

Company’s Class A common stock to the public for proceeds of more than $16 billion. The IPO

was extraordinary by any measure. The IPO was by far the largest ever for a technology

company – indeed, it was nearly 10 times larger than the second-largest technology IPO,

Google’s $1.67 billion offering in 2004. The IPO also gave the Company a market capitalization

of more than $104 billion, the largest ever for a U.S. company at the time it went public, and

larger than the market value of such well-established companies as McDonald’s and Citigroup.

In fact, Facebook’s $104 billion valuation was almost double the valuation achieved by the

second-largest company to complete an IPO, the $60 billion valuation that United Parcel Service




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Inc. reached when it went public in 1999. The amount of proceeds raised in Facebook’s IPO was

the third-largest in U.S. history.

151. The IPO generated huge amounts of wealth for Facebook’s executives and

directors. For example, based on the IPO price, Defendant Zuckerberg’s Facebook’s holdings

were worth more than $19 billion, and he instantly became the 23rd richest person in the world.

Similarly, Director Defendant Breyer and his private equity fund, Accel, reaped approximately

$2.2 billion in proceeds from the sale of shares in the IPO, and their retained holdings were

worth nearly $5.5 billion based on the IPO price. Director Defendant Thiel and his private

equity funds received proceeds of approximately $640 million from the IPO, and the value of

their retained holdings was more than $1.05 billion. Following the IPO, Director Defendant

Marc Andreesen possessed holdings worth nearly $251 million, while the stock owned by

Defendants Ebersman and Sandberg was worth approximately $91 million and $72 million,

respectively.

152. With Facebook stock set to begin trading on the NASDAQ the next morning,

Friday, May 18, analysts and the financial press widely expected that the shares would

experience a large “pop” because demand was so “intense,” as described above. For example, on

May 15, just after Facebook raised the IPO price, Reuters reported that:

The price increase [to $38] indicates intense market demand, which meansFacebook’s shares are likely to see a big pop on their first days of trading on Nasdaq on Friday, analysts said. “It’s confounding but the evidence is that ifcompanies raise the range they will pop more,” said Josef Schuster, founder ofChicago-based financial services firm IPOX Schuster LLC “It signals that thereis such strong demand that it will create a momentum for other investors to jumpon.”

153.

On May 17, Reuters further reported that analysts expected Facebook’s shares to

rise as much as 50% on the first day of trading, and that a driving force of this expected pop was




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“frenzied” demand from retail investors eager to own a piece of a Company that they knew and

used in their everyday lives:

Frenzied demand, especially from individual investors hoping to buy into an

Internet juggernaut that touches hundreds of millions of people every day, isexpected to drive Facebook well above its initial public offering price of $38 pershare, which was already at the top end of its target of $34 to $38. Analysts weredivided on how high the price might go on the first day of trad[ing], with someexpecting a relatively modest gain of 10 percent to 20 percent while others saidanything short of a 50 percent jump would be disappointing. “It will be bananastomorrow,” said Greencrest Capital analyst Max Wolff. … “The stock couldinitially rise and then it could go parabolic on a wave of retail investor hope.”

I. Facebook’s Market Debut Fizzles As Morgan Stanley Is Forced To Desperately Prop

Up The Company’s Stock Price To Prevent A “Broken Issue”

154.

On the morning of May 18, Defendant Zuckerberg rang the opening bell on the

NASDAQ, ushering in what was expected to be an historic trading day for the Company and the

U.S. financial markets. While trading in Facebook stock was expected to begin at 11 a.m.

Eastern Standard Time, it was delayed by approximately half an hour.

155. Prior to the opening of trading, small investors placed a flood of orders to buy

Facebook stock. The Associated Press reported on May 19 that there was a “rush from small

investors” as trading was set to begin, and “Steve Quirk, who oversees trading strategy at [giant

retail broker] TD Ameritrade, said that about 60,000 orders were lined up before Facebook

opened.” Within the first 45 minutes of trading, Facebook accounted for a record 24% of all

trades executed by TD Ameritrade, as compared with a norm of between 2% to 5% on the day a

company goes public.

156.

Once trading began at 11:30, Facebook stock was buoyed by the swell of retail

demand and opened at $42.05, an immediate 11% pop from the IPO price. Soon after the initial

pop occurred, however, the price of Facebook began to drop. As was subsequently reported, the

drop occurred when investors who had been informed of Facebook’s deteriorating revenue began




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to cash out, selling their shares at $42 in order to capture the quick gain and eliminate their

exposure to a stock that, unbeknownst to the market, had become far less valuable. As The New

York Times reported on May 22:

But Facebook shares quickly began to tumble [after opening at $42]. Oneinvestor, after being briefed on Facebook’s revised forecast, unloaded all of itsholdings in the first hour of trading, according to Scott Sweet, the founder of theIPO boutique, who advises mutual funds, hedge funds and individuals. Theinvestor sold hundreds of thousands of shares at about $42. “They knew the jigwas up,” Mr. Sweet said.

157. Thus, by approximately 11:45 a.m., Facebook stock had dropped close to the IPO

price of $38. Facebook stock was thus swiftly headed below the offering price on the first

trading day, and appeared certain to become a broken issue. To prevent this outcome, the

underwriters were forced to aggressively and immediately prop up the share price by buying

massive amounts of stock. Each time the stock came close to dropping below $38 in the face of

massive selling, the underwriters were forced to “defend” the IPO price by buying huge blocks

of stock at $38 per share to ensure that the stock price never dipped below that line.

158. As the lead underwriter for the IPO, Morgan Stanley was responsible for leading

the effort to “defend” the IPO price by buying tens of millions of Facebook shares in the open

market. The shares that Morgan Stanley purchased were not retained by the underwriters, but

rather were used to cover a short position that had been created when the underwriters sold the

overallotment into the market at the time of the IPO. The underwriters sold the overallotment

into the market at the time of the IPO without having previously purchased those shares from

Facebook, thereby creating a “short” position equal to the size of the overallotment, which was

approximately 63 million shares. To support Facebook’s stock price on May 18, Morgan Stanley

began to cover this short position by buying back as much as 63 million Facebook shares at




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prices of $38 per share or higher. As The Wall Street Journal reported in a May 19, 2012 article

titled “Facebook’s Launch Sputters – Underwriters Forced to Prop Up IPO of Social Network:”

The stock had been widely predicted to soar on its first day. Instead, up until the

closing moments of the trading sessions, Facebook’s underwriters battled to keepthe stock from slipping below its offering price of $38 per share. Such a stumblewould have been a significant embarrassment, particularly for a prominent newissue like Facebook, the most heavily traded IPO of all time. … Morgan Stanleywas forced to buy Facebook shares as the price slid toward $38 in order to preventthe price from crossing into negative territory…. Morgan Stanley … had to dipinto an emergency reserve of around 63 million Facebook shares – worth morethan $2.3 billion at the offer price – to boost the price and create a floor around$38 a share…. In successful IPOs, the reserve, known as the “over-allotment” or“green shoe,” is used to meet soaring demand but in this case, it was used to propup Facebook’s ailing share price.

159.

As Morgan Stanley battled to keep Facebook’s stock price from dipping below

$38, the trading volume in Facebook shares reached enormous levels on May 18. That day, more

than 573 million shares of Facebook were traded – the largest volume in history for a Company’s

IPO. “For perspective, that is roughly equal to the combined trading volume of 28 of the 30

stocks in the Dow Jones industrial average,” The Associated Press reported. Facebook stock

closed essentially flat at $38.23. As The Washington Post reported, “[s]hare prices would have

plunged immediately if not for the intervention of Morgan Stanley.”

160. Facebook’s debut was officially a disappointment. Reuters reported that the

“Historic Facebook debut falls short of expectations. … ‘We have got some unhappy guys out

there,’ said Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on

Wall Street. ‘They were hoping for Facebook to be considerably better. I bet there are a lot of

disappointed people in the market.” Similarly, the San Jose Mercury News reported that analysts

had called the trading debut “surprising and disappointing.”




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J. Facebook Stock Collapses On Monday And Tuesday As The Truth Emerges

161. After the close of the market on Friday, May 18, and continuing through the next

two trading days, news of the decline in Facebook’s expected revenues, including the fact that

the lead underwriters had cut their revenue estimates in advance of the IPO, began to emerge.

Only hours after the close of Facebook’s first day of public trading, at approximately 10 p.m. on

Friday, May 18, Reuters reported a piece of stunning news. Specifically, Reuters revealed that

“Facebook [] altered its guidance for research earnings last week, during the road show, a rare

and disruptive move.” As Reuters further reported, the fact that Facebook cut its guidance

contributed to the stock’s “rocky first day of trading,” and was a reason why “Facebook’s shares

spent much of the day struggling to stay above the $38 IPO price,” and the “underwriters had to

absorb mountains of stock to defend the $38 level and keep the market from dipping below it.”

162. Other members of the financial press quickly picked up the Reuters report and

wrote that news of Facebook’s lowered guidance significantly altered the mix of information in

the marketplace concerning Facebook’s performance and value. For example, at approximately

7:30 a.m. on Saturday, May 19, Business Insider reported that the lowered guidance was “highly

material information,” and the selective disclosure of that information represented “the exact sort

of unfair symmetry that securities laws are designed to prevent:”

Earnings guidance is highly material information.… Any time any companygives any sort of forecast, stocks move – because the forecast offers a very wellinformed view of the future by those who have the most up-to-date informationabout a company’s business. … [I]f Facebook really had “reduced guidance”mid-way through a series of meetings designed for the sole purpose of selling the

stock this would have been even more highly material information. [S]uch a latechange in guidance would mean that Facebook’s business was deterioratingrapidly – between the start of the roadshow and the middle of the roadshow. Anytime a business outlook deteriorates that rapidly, alarm bells start going off onWall Street, and stocks plunge.

[N]ow Reuters has just reported [that] “Facebook [] altered its guidance forresearch earnings last week, during the roadshow, a rare and disruptive move.”




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Hmmm. If this really happened, anyone who placed an order for Facebook whowas unaware that 1) Facebook had issued any sort of earnings guidance, and 2)reduced that guidance during the roadshow, has every right to be furious.Because this would have been highly material information that some investorshad and others didn’t – the exact sort of unfair asymmetry that securities laws are

designed to prevent.

163. On Monday, May 21, the first trading day after it was revealed that Facebook had

cut its guidance during the roadshow, Facebook shares declined significantly on extremely high

volume. Morgan Stanley’s efforts to prop up Facebook stock were overwhelmed by the immense

selling pressure caused by news of Facebook’s reduced guidance, and Facebook opened at

$36.53, far below the IPO price, and continued to fall in the opening minutes of trading. As

Reuters reported on May 21, Facebook stock declined so rapidly at the open that it triggered

NASDAQ’s “circuit breakers” banning short sales in order to prevent any additional pressure on

the downward spiraling stock:

The drop was so steep that circuit breakers kicked in a few minutes after the opento restrict short sales in the stock, according to a notice from Nasdaq. … Withoutthat same level of defense [from Morgan Stanley], [Facebook] shares fell $4.50 to$33.73 in the first 1-1/2 hours of trading. That represented a decline of 11.8 percent from Friday’s close and 25 percent from the intra-day high of $45 pershare. … Volume was again massive, with more than 96 million shares tradinghands by 11 a.m., making it by far the most active stock on the U.S. market.

164. Facebook shares closed on May 21 at $34.03, a decline of nearly 11 percent from

the Company’s IPO price. Volume for the day was extraordinarily heavy, with more than 168

million shares traded in total. In a single day, this precipitous decline in the value of Facebook

stock wiped out more than $1.6 billion of the Company’s market capitalization.

165.

At approximately 1 a.m. on May 22, Reuters issued a report which revealed new

significant facts about Facebook’s lowered revenue estimates. Specifically, Reuters reported that

lead underwriters Morgan Stanley, J.P. Morgan, and Goldman Sachs had “significantly” cut their




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revenue forecasts for Facebook in the middle of the roadshow, but appeared to have told only a

few “major clients” about this highly “negative” and “shock[ing]” development:

In the run-up to Facebook’s $16 billion IPO, Morgan Stanley, the lead

underwriter on the deal, unexpectedly delivered some negative news to majorclients: The bank’s consumer Internet analyst, Scott Devitt, was reducing hisrevenue forecasts for the company. The sudden caution very close to the hugeinitial public offering, and while an investor roadshow was underway, was a bigshock to some, said two investors who were advised of the revised forecast. Theysay it may have contributed to the weak performance of Facebook shares, whichsank on Monday – their second day of trading – to end 10 percent below the IPO price.

The people familiar with the revised Morgan Stanley projections said Devitt cuthis revenue estimate for the current second quarter significantly, and also cut hisfull-year 2012 revenue forecast.

“That deceleration freaked a lot of people out,” said one of the investors.

166. Reuters further reported that it was almost unprecedented for a lead underwriter to

significantly cut its revenue estimates in the midst of the roadshow:

“This was done during the roadshow – I’ve never seen that before in 10 years,”said a source at a mutual fund firm who was among those called by MorganStanley. Scott Sweet, senior managing partner at the research firm IPO Boutique,… said it is unusual for analysts at lead underwriters to make such changes so

close to the IPO. “That would be very, very unusual for a book runner to do that,”he said.

167. These material new facts further confirmed the significance of Facebook’s

lowered guidance, and immediately swept through the market. Before the market opened on

May 22, Business Insider reported that the news that the lead underwriters’ analysts had cut their

revenue estimates during the time period when the roadshow was occurring was a “bombshell.”

As Business Insider explained, Facebook’s reduced revenue estimates obviously were “material

information,” that significantly changed the total mix of information available to investors

considering whether to purchase Facebook stock:

And now comes some news about the Facebook IPO that buyers deserve to beoutraged about. Reuters [] is reporting that Facebook’s lead underwriters … all




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cut their earnings forecasts for the company in the middle of the IPO roadshow.This by itself is highly unusual (I’ve never seen it during 20 years in and aroundthe tech IPO business.). But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who wasconsidering an investment in Facebook. This is a huge problem, for one big

reason:

Selective dissemination. Earnings forecasts are material information, especiallywhen they are prepared by analysts who have had privileged access to companymanagement. As lead underwriters on the IPO, these analysts would have hadmuch better information about the company than anyone else. So the fact thatthese analysts suddenly all cut their earnings forecasts at the same time, during theroadshow, and then this information was not passed on to the broader public, is ahuge problem.

Any investor considering an investment in Facebook would consider an estimatecut from the underwriters’ analysts “material information.” … [D]uring themarketing of the Facebook IPO, investors who did not hear about theseunderwriter estimates were placed at a meaningful and unfair informationdisadvantage … and they suffered for it.

168. Similarly, within hours of Reuters’ report, tech news outlet Cnet also reported

that Morgan Stanley’s lowered earnings estimates for Facebook “came as a huge shock to some,

likely contributing to the lackluster performance of the social-networking giant’s stock” and

“sink[ing] the … much anticipated offering well before its first trade.” During trading on May

22, The Wall Street Journal reported that “investors are angry” to learn that Facebook’s

underwriters lowered “their financial forecasts for the company while it was holding IPO

roadshow meetings,” and that Facebook shares were “slid[ing] sharply” as a result of this

revelation. Shortly after the market opened on May 22, Forbes also reported that, “Particularly

troubling is if the underwriters only notified select clients of their more cautious outlook on

Facebook’s growth, at a time when both the price range and the size of the offering were soon to

be increased,” and noted that Facebook stock had fallen more than 6.5% “in early trading” after

the release of this news.




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169. Indeed, on May 22, Facebook shares plunged once more. Facebook stock opened

the day down sharply at $32.61, and closed down at $31 per share, a decrease of another 9%, on

extremely high volume of almost 102 million shares traded. The financial press widely reported

that the “shocking” news of the revenue cuts had caused the nearly unprecedented decline in

Facebook stock between May 21 and 22. For example, as Reuters reported after trading on May

22:

Investors expressed disappointment, skepticism and even shock on Tuesday afterlearning that an analyst at lead underwriter Morgan Stanley cut his Facebookrevenue forecasts in the days before the company’s initial public offering –information that apparently did not reach small investors before the stock went

public and subsequently tumbled.

170. In sum, in just two trading days over May 21 and 22, Facebook’s second and third

trading days as a public company, its shares had fallen $7 per share – or more than 18% from the

IPO price – wiping out billions of dollars of Facebook’s market capitalization. While the market

had believed less than a week ago that Facebook’s IPO would go down as a momentous success,

the IPO was now an historic failure: the collapse in Facebook’s stock on May 21 and 22 made

the IPO the single worst performing initial public offering in 10 years, prompting Bloomberg to

call it an “epic fail” and label it the “flop of the decade.”

K. The Financial Media Acknowledges That The Declines In Facebook’s Revenue

Estimates Were Not Conveyed By Facebook’s Public Disclosures, And Significantly

Altered The Total Mix Of Information

171. Following the disclosure of the declines in Facebook’s revenue estimates,

contemporaneous market commentators continued to widely report that this highly material

information was not disclosed in Facebook’s Registration Statement, and that its belated

disclosure significantly altered the total mix of information in the marketplace. For example, on

May 23, 2012, Venture Beat reported that the Company’s revenue cuts were “material

information” and that the disclosures in the Registration Statement were “woefully short on hard




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data,” causing “institutional and retail investors [to] take the hit as Facebook’s stock value

tanked” when news about these facts emerged after the IPO.

172. Venture Beat also quoted the CEO of research firm PrivCo, who concluded that

the “revisions to Facebook’s earnings estimates” were “enormously material changes” that

“absolutely” should have been disclosed in the Registration Statement because they

“dramatically change the valuation of the company.” As this analyst stated:

“The reduction to Facebook’s forecasts of this magnitude – reducing the revenuegrowth rate by over 6 percentage points – is so material that it should absolutelyhave been disclosed in a revised S-1 filing before the IPO pricing,” [the analyst]said. “The combined net effect for Facebook in this case of both the reduction in

the financials and the valuation multiple would have lowered Facebook’svaluation by at least one third.”

173. Similarly, Business Insider reported on May 24 that the purported disclosures in

the Registration Statement did not disclose highly material information:

Every investor on the planet deserved to know about Facebook’s sudden businessslowdown. And the fact that only a select group of institutional investors heardabout it—verbally—is outrageous. … This was selective disclosure of critical

non-public information. Facebook’s amended prospectus did not say that thecompany’s business had suddenly weakened and management’s outlook hadchanged. And that information is vastly more important than what the prospectusdid say, which was that users are growing faster than revenue.

174. On May 25, Venture Beat reported that the purported warnings in the Registration

Statement had failed to disclose critical facts that dramatically altered the information that had

been provided to investors:

In that May 9 update, Ebersman decided to use vague language when describinghow the company’s second quarter was looking. It was extremely understated,

considering what we would later find out. According to the filing, … Facebooksaid that it was experiencing the same trend in the second quarter that it had seenin the first quarter, that growth in “daily active users” (DAUs) was increasingmore rapidly than the growth in ad impressions, driven by many users’ shift tomobile devices.

Now Facebook is generally growing quickly – and its ads are growing, even ifthey are growing more slowly on mobile – and so this update itself didn’t send




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any alarm bells to most investors, and it shouldn’t have. After all, Facebook hadlong warned about this mobile problem, ever since the first IPO prospectus filingon Feb 1, that revenues could be negatively affected by its huge mobile growth, because monetizing mobile hadn’t been proven. …

Facebook’s lawyers may, in the wake of the legal mess it has gotten into, try toargue that the new May 9 language about “DAU’s increasing more rapidly thanthe increase in number of ads delivered” pointed to something more significantthan what Facebook had released before. But the reality is that this wording was just too vague to be construed by normal people as meaning anything more thanwhat had already been mentioned before. … The fact is, there is nothing withinthe S-1 update on May 9 that would give normal investors the sense that there had been a material change about Facebook’s revenue prospects.

175. As the press also widely reported, Facebook’s IPO had conclusively demonstrated

that the market was unaware of the highly material information that Facebook had selectively

disclosed, and the market had suffered badly because of it. As The Associated Press reported on

May 24:

Wall Street appears bent on convincing Main Street that the game is rigged.Investor anger is mounting over the initial public offering of Facebook stock lastweek…. Judson Gee, a financial advisor…, placed a call on Wednesday morning[May 23] to a client who had plowed $50,000 into Facebook stock on Friday, theday of the IPO. Gee said he called to tell the client, a restaurateur, about reportsthat Morgan Stanley had told only select customers about an analyst’s reduction

of revenue estimates for Facebook just before the IPO. “I could see his jawdropping on the other side,” Gee said. “A lot of expletives came out.” He saidhis client had asked “How can they give that information to the big boys and notgive it to the public?”

V. THE NEGATIVE CHANGE IN FACEBOOK’S REVENUE ESTIMATES

SIGNIFICANTLY ALTERED THE TOTAL MIX OF INFORMATION IN THE

MARKETPLACE

176. The following facts establish that the decline in Facebook’s estimated revenue

was highly material and significantly altered the total mix of information in the marketplace

before Facebook’s IPO.

177. First, Facebook’s own actions confirm that the declines in the Company’s

estimated revenues were highly material and significantly altered the total mix of information in




55

the market. As set forth above at paragraphs 125-134, immediately after Facebook filed its

amended Registration Statement on May 9, 2012, Facebook’s Treasurer made nineteen separate

phone calls over the course of three days to the Syndicate Analysts, precisely to inform them of

the material information that was omitted from the Registration Statement: namely, that the

Company’s business had been materially impacted by the shift to mobile devices and, as a result,

Facebook had significantly reduced its revenue estimates for the second quarter and the year.

Had this information been immaterial, or part of the total mix of information in the market,

Facebook obviously would not have felt the need to make these nineteen separate phone calls to

the Syndicate Analysts.

178.

Second, the actions of the lead underwriters confirm that the declines in

Facebook’s estimated revenues were material and significantly altered the total mix of

information in the market. As set forth above at paragraphs 125-134, immediately after being

informed of Facebook’s lowered guidance, the lead underwriters determined that the change in

Facebook’s financial condition was so significant that it had to be disclosed to the Syndicate

Analysts. Precisely because the amended Registration Statement filed on May 9 did not disclose

or otherwise convey the fact that Facebook’s business had been materially impaired, lead

underwriter Morgan Stanley drafted a detailed script disclosing the declines in Facebook’s

estimated revenues, which Facebook read from when it provided this new information to the

Syndicate Analysts during the 19 separate phone calls that Facebook conducted after filing its

amended Registration Statement. If the information about the declines in Facebook’s estimated

revenues was immaterial, or had otherwise been conveyed by the amended Registration

Statement, Morgan Stanley would not have determined that Facebook needed to provide this

information separately to the Syndicate Analysts.




56

179. Third, the actions of the Syndicate Analysts upon being informed of Facebook’s

lowered guidance confirm that this information was highly material and significantly altered the

total mix of information in the market. As set forth above in paragraphs 135-137, immediately

after learning of Facebook’s lower revenue estimates, the Syndicate Analysts significantly

reduced their own estimates of Facebook’s revenue to reflect the impact of the new information.

The Syndicate Analysts then held a series of calls with a select group of the Company’s potential

investors and informed them of their lowered estimates. If the new information concerning

Facebook’s revenue declines was unimportant or already part of the total mix of information in

the market, the Syndicate Analysts would not have significantly lowered their revenue estimates

based on that information, and would not have felt the need to hold a series of calls with a select

group of Facebook’s potential investors specifically to inform them of this development.

180. Fourth, the reactions of the select investors who were informed of the reductions

in the Syndicate Analysts’ estimates confirm that the decline in Facebook’s revenue was highly

material, and significantly altered the total mix of information in the market. As set forth above

at paragraphs 138-139, the financial press reported that the lowered revenue figures were a “big

shock” to those investors who received them, raised “a significant red flag” about Facebook’s

financial condition, and the “deceleration [showed by the lower revenue figures] freaked a lot of

people out.” Many investors who were informed of the lowered revenue estimates cancelled or

reduced their orders, or reduced the price they were willing to pay for Facebook stock.

181. Fifth, the contemporaneous reaction of the financial media following the public

disclosure of the decline in Facebook’s revenue estimates confirms that this information was

highly material, and significantly altered the total mix of information. Significantly, as set forth

above at paragraphs 162, 167, 171-174, the financial media specifically reported that the change




57

in Facebook’s revenue estimates was neither disclosed nor conveyed by Facebook’s Registration

Statement, and that such information significantly altered the total mix of information in the

market. For example, Business Insider reported that “Facebook’s amended prospectus did not

say that the company’s business had suddenly weakened and management’s outlook had

changed. And that information is vastly more important than what the prospectus did say, which

was that users are growing faster than revenue.” Similarly, Venture Beat reported that the

disclosures in Facebook’s May 9 amended Registration Statement were “extremely understated,”

“vague,” and failed to disclose highly material information. As Venture Beat explained, the May

9 Registration Statement merely stated that “the growth in daily active users [] was increasing

more rapidly than the growth in ad impressions, driven by many users’ shift to mobile devices.”

Because this disclosure represented that Facebook’s ads “are growing, even if they are growing

more slowly on mobile … this update itself didn’t send any alarm bells to most investors, and it

shouldn’t have…. [T]he reality is that this wording was just too vague to be construed by normal

people as meaning anything more than what had already been mentioned before. … The fact is,

there is nothing within the S-1 update on May 9 that would give normal investors the sense that

there had been a material change about Facebook’s revenue prospects.”

182. Sixth, the reaction of the market after Facebook filed the May 9 amended

Registration Statement confirms that it did not put the market on notice of the fact that

Facebook’s business had been materially impaired. As set forth above at paragraph 142, after

Facebook filed its amended Registration Statement on May 9, the analysts who had not been told

of the decline in Facebook’s estimated revenues continued to widely expect Facebook to report

revenues that were in-line with Facebook’s original estimates from April. Indeed, as of May 18,

the date that Facebook went public, analysts’ consensus estimates according to Thomson’s




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Institutional Brokers’ Estimate System were for Facebook to report revenues of more than $1.2

billion for the second quarter and $5 billion for the year – exactly in line with Facebook’s

original guidance. Had the May 9 amended Registration Statement conveyed to the market the

fact that increasing mobile usage and Facebook’s product decisions had materially impaired the

Company’s business, these analysts would not have continued to expect Facebook to report

revenues that were in line with its original guidance.

183. Seventh, the reaction of investors following the filing of the amended Registration

Statement on May 9 confirms that the amended Registration Statement did not put investors on

notice of the fact that Facebook’s business had been materially impaired. As noted above at

paragraphs 143-147, in the week before the IPO, investor demand for Facebook shares spiked to

“astronomical” and “rampant” levels because Facebook had succeeded in “convincing investors

that Facebook can make money from mobile users.” Because of this extraordinary surge in

investor demand, on May 15 and 16 – nearly a week after Facebook filed its amended

Registration Statement – Facebook significantly increased both the size of the IPO and the price

of its shares – something that has been done in only 3.4% of all IPOs since 1995. Had investors

been on notice of the pronounced decline in Facebook’s revenues prior to the IPO, investor

demand for Facebook shares would not have risen to “astronomical” levels, and Facebook would

not have been able to take the extremely rare step of significantly increasing both the size of the

IPO and its price days before the offering occurred.

184. Eighth, the reaction of the market when the news of Facebook’s revenue declines

was publicly revealed establishes that this information was highly material, and significantly

altered the total mix of information that previously existed in the market. As set forth above at

paragraphs 161-170, when news of Facebook’s and the Syndicate Analysts’ reduced estimates




59

was disclosed to the market, investors reacted with “shock” and “anger,” and Facebook stock fell

precipitously, declining nearly 11% on May 21, and approximately 9% on May 22, on extremely

high trading volume both days. This two-day decline destroyed billions of dollars of Facebook’s

market capitalization. The financial press specifically attributed these declines to the disclosure

of Facebook’s and the Syndicate Analysts’ reduced estimates, stating that these revelations

caused Facebook shares to “slide sharply” on May 21 and 22. If the information concerning

Facebook’s revenue declines had been immaterial or otherwise part of the total mix of

information in the market, Facebook’s stock price would not have collapsed when this

information was revealed.

185.

Ninth, Facebook’s own disclosures establish the importance of Facebook’s

undisclosed revenue declines to the market. As noted above at paragraphs 89-97, the

Registration Statement repeatedly highlighted that Facebook’s revenue and advertising revenue

were Facebook’s most significant financial metrics. Similarly, the declines in these key metrics

were driven by a factor – increasing mobile usage – that the Registration Statement identified as

“critical” to Facebook’s business. Moreover, Facebook itself recognized that any decline in its

future revenues impacted the value of its stock, stating in the Registration Statement that its

“business prospects” were a “factor[] [it] considered in determining the initial public offering

price.” Accordingly, the disclosures in the Registration Statement demonstrate that the reduction

in Facebook’s estimated revenues was highly material to investors considering whether to

purchase Facebook stock.

VI. MATERIALLY UNTRUE AND MISLEADING STATEMENTS AND OMISSIONS

186.

Facebook filed its initial Registration Statement and Prospectus with the SEC on

Form S-1 on February 1, 2012. Facebook amended the Registration Statement and Prospectus

eight subsequent times, filing the final amended Registration Statement on May 16, 2012.




60

Among other things, the Registration Statement described Facebook’s business, set forth its

financial results, and provided the terms of the IPO.

187. On May 17, 2012, the Registration Statement became effective. That day,

Facebook and its selling stockholders sold more than 421 million shares of Class A common

stock to the public in the Company’s IPO, at $38 per share. Through the IPO, Facebook and its

selling stockholders received proceeds of more than $16 billion. Facebook stock began trading

on the NASDAQ on May 18, 2012.

188. As set forth in detail below, the Registration Statement pursuant to which

Facebook’s common stock was issued was materially untrue and misleading for several reasons:

a.

First, the Registration Statement contained a series of statements in whichFacebook purported to warn investors only that increasing mobile usage“may” negatively affect its revenues. These statements were materially untrueand misleading because Facebook had already determined that increasingmobile usage had negatively affected its revenues to a material degree.

b. Second, the Registration Statement contained a series of statements in whichFacebook purported to warn investors only that its product decisions “may”negatively affect its revenues. These statements were materially untrue andmisleading because Facebook had already determined that its productdecisions had negatively affected its revenues to a material degree.

c. Third, the Registration Statement failed to disclose the information required by Item 303 of Regulation S-K, which required Facebook to disclose thatincreasing mobile usage and the Company’s product decisions had had amaterial negative impact on its revenues, and the magnitude of that impact.

d. Fourth, the Registration Statement failed to disclose the information required by Rule 408 of SEC Regulation C, which also required Facebook to disclosethat increasing mobile usage and the Company’s product decisions had had amaterial negative impact on its revenues, and that Facebook had alreadysignificantly lowered its estimated revenues as a result.

e. Finally, in addition to the failure to report known facts concerning thesignificant negative effects on Facebook’s revenues from increasing mobileusage and the Company’s product decisions, the Company also failed todisclose that it was going to disseminate this revised financial information tothe Syndicate Analysts only.




61

189. In a section of the Registration Statement and Prospectus called “Risk Factors,”

Facebook purported to warn investors that:

Growth in use of Facebook through mobile products, where our ability to

monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.

We had 488 million MAUs [monthly active users] 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 mobileusage will exceed the growth in usage through personal computers for the

foreseeable future, in part due to our focus on developing mobile products to

encourage mobile usage of Facebook. We have historically not shown ads to

users accessing Facebook through mobile apps or our mobile website. In March2012, we began to include sponsored stories in users’ mobile News Feeds.

However, we do not currently directly generate any meaningful revenue from the

use of Facebook mobile products, and our ability to do so successfully isunproven. We believe this increased usage of Facebook on mobile devices has

contributed to the recent trend of our daily active users (DAUs) increasing more

rapidly than the increase in the number of ads delivered. If users increasinglyaccess Facebook mobile products as a substitute for access through personalcomputers, and if we are unable to successfully implement monetizationstrategies for our mobile users, or if we incur excessive expenses in this effort,our financial performance and ability to grow revenue would be negativelyaffected.

190. This statement was materially untrue and misleading. It was misleading to

represent that increasing mobile usage might negatively impact Facebook’s revenue when

Facebook had already determined that increasing mobile usage had “negatively affect[ed]” its

“revenue and financial results.” Indeed, prior to the IPO, Facebook had already determined that,

as a direct result of increasing mobile usage, the Company’s estimated revenues for the second

quarter of 2012 had declined by as much as 8.33%, and its estimated annual revenues had

declined by as much as 3.5%. As set forth above at paragraphs 176-185, these declines in

Facebook’s expected revenues for the second quarter of 2012 and the year were highly material

and significantly altered the total mix of information in the market.




62

191. In the “Risk Factors” section of the Registration Statement and Prospectus,

Facebook also purported to warn investors that:

We generate a substantial majority of our revenue from advertising. The loss of

advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.

The substantial majority of our revenue is currently generated from third partiesadvertising on Facebook. In 2009, 2010, and 2011 and the first quarter of 2011and 2012, advertising accounted for 98%, 95%, 85%, 87%, and 82%,respectively, of our revenue. As is common in the industry, our advertiserstypically do not have long-term advertising commitments with us. Many of ouradvertisers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products, such assponsored stories and ads with social context, as experimental and unproven.Advertisers will not continue to do business with us, or they will reduce the pricesthey are willing to pay to advertise with us, if we do not deliver ads and othercommercial content in an effective manner, or if they do not believe that theirinvestment in advertising with us will generate a competitive return relative toother alternatives. Our advertising revenue could be adversely affected by anumber of other factors, including:

…

• increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement

with Facebook on personal computers where we monetize usage by displayingads and other commercial content;

• product changes or inventory management decisions we may make that reducethe size, frequency, or relative prominence of ads and other commercial contentdisplayed on Facebook;

…

The occurrence of any of these or other factors could result in a reduction indemand for our ads and other commercial content, which may reduce the prices

we receive for our ads and other commercial content, or cause advertisers to stopadvertising with us altogether, either of which would negatively affect ourrevenue and financial results.


represent that increasing mobile usage and the Company’s product decisions might negatively




63

impact revenue when Facebook had already determined that these factors had “adversely

affected” its advertising revenues. Indeed, prior to the IPO, Facebook had already determined

that, as a direct result of these factors, the Company’s estimated revenues for the second quarter

of 2012 had declined by as much as 8.33%, and its estimated annual revenues had declined by as

much as 3.5%. As set forth above at paragraphs 176-185, these declines in Facebook’s expected

revenues for the second quarter of 2012 and the year were highly material and significantly

altered the total mix of information in the market.

193. In the disclosure in the Company’s amended Registration Statement and

Prospectus filed on May 9 – one day after the Company revised its expected revenues for the

second quarter and year sharply downward due to the negative impact of increasing mobile usage

and the Company’s product decisions – Facebook continued to emphasize that any potentially

negative impact of these factors was uncertain. Specifically, this disclosure stated that:

Based on our experience in the second quarter of 2012 to date, the trend we sawin the first quarter of DAUs [daily active users] increasing more rapidly than theincrease in number of ads delivered has continued. We believe this trend isdriven in part by increased usage of Facebook on mobile devices where we haveonly recently began showing an immaterial number of sponsored stories in NewsFeed, and in part due to certain pages having fewer ads per page as a result of product decisions. For additional information on factors that may affect thesematters, see “Risk Factors—Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results” and“Risk Factors—Our culture emphasizes rapid innovation and prioritizes userengagement over short-term financial results.”


represent that increasing mobile usage and the Company’s product decisions might negatively

impact its revenue when Facebook had already determined that these factors had “negatively

affect[ed]” its “revenue and financial results.” Indeed, prior to the IPO, Facebook had already

determined that, as a direct result of these factors, the Company’s estimated revenues for the




64

second quarter of 2012 had declined by as much as 8.33%, and its estimated annual revenues had

declined by as much as 3.5%. As set forth above at paragraphs 176-185, these declines in

Facebook’s expected revenues for the second quarter of 2012 and the year were highly material

and significantly altered the total mix of information in the market.

195. Similarly, in the “Risk Factors” section of the Registration Statement and

Prospectus, Facebook also purported to warn investors that its product decisions might

negatively impact its revenue, stating:

[W]e frequently make product decisions that may reduce our short-termrevenue or profitability if we believe that the decisions are consistent with our

mission and benefit the aggregate user experience and will thereby improve ourfinancial performance over the long term. As an example, we believe that therecent trend of our DAUs increasing more rapidly than the increase in thenumber of ads delivered has been due in part to certain pages having fewer ads per page as a result of these kinds of product decisions. These decisions maynot produce the long-term benefits that we expect, in which case our usergrowth and engagement, our relationships with developers and advertisers, andour business and results of operations could be harmed.

196. For the reasons set forth above at paragraph 194, this statement was materially

untrue and misleading. In particular, it was materially misleading to state that the Company’s

product decisions “may reduce” its revenue when Facebook had already determined that its

product decisions had reduced its advertising revenues.

197. The Registration Statement and Prospectus was also materially untrue and

misleading because it failed to disclose the information required by Item 303 of Regulation S-K.

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.” In addition to

the identification of such “known trends,” Item 303 specifically requires disclosure of (i) whether

those trends have had or are reasonably expected to have a material negative impact on revenue;

and (ii) the extent of any such impact on revenue.




65

198. Accordingly, as the SEC has repeatedly emphasized, the “specific provisions in

Item 303 [set forth above] require disclosure of forward-looking information.” Indeed, the SEC

has stated that Item 303 is “intended to give the investor an opportunity to look at the company

through the eyes of management by providing both a short and long-term analysis of the business

of the company … with particular emphasis on the registrant’s prospects for the future.” See

Management’s Discussion and Analysis of Financial Condition and Results of Operation,

Securities Act Release No. 6835, 1989 WL 1092885, at *3 (May 18, 1989). Thus, “material-

forward looking information regarding known material trends and uncertainties is required to be

disclosed as part of the required discussion of those matters and the analysis of their effects.”

See Commission Guidance Regarding Management’s Discussion and Analysis of Financial

Condition and Results of Operation, Securities Act Release No. 8350, 2003 WL 22996757, at

*11 (December 29, 2003).

199. Disclosure of forward-looking information concerning the registrant’s revenue is

required by Item 303 “where a trend, demand, commitment, event or uncertainty is both [i]

presently known to management and [ii] reasonably likely to have material effects on the

registrant’s financial condition or results of operations.” See Management’s Discussion and

Analysis of Financial Condition and Results of Operation, Securities Act Release No. 6835, 1989

WL 1092885, at *4 (May 18, 1989).

200. As set forth in detail above, both of these conditions were satisfied here. First, as

set forth above at paragraphs 122-134, the two trends that were negatively impacting Facebook’s

revenue – namely, increasing mobile usage and the Company’s product decisions – were widely

“known” to Facebook’s management prior to the IPO. Second, the facts set forth above establish

that these two trends were “reasonably likely to have material effects on [Facebook’s] financial




66

condition or results of operations.” Specifically, as set forth above at paragraphs 122-134, as a

direct result of the impact of these two trends, Facebook reduced its revenue estimates for the

second quarter and the year by material amounts, and immediately provided its lowered guidance

to the Syndicate Analysts so that they could inform a select group of Facebook’s potential

investors of this highly significant development.

201. Accordingly, pursuant to Item 303, Defendants were required to disclose: (i)

whether increasing mobile usage and the Company’s product decisions had or were reasonably

expected to have a “material … unfavorable impact on … revenues,” and (ii) to what extent

those trends had impacted or were reasonably expected to impact Facebook’s revenue.

Nevertheless, Defendants failed to disclose any of this information in the Registration Statement

and Prospectus. Specifically, in violation of Item 303, the Registration Statement and Prospectus

failed to disclose that: (i) the known trends of increasing mobile usage and the Company’s

product decisions had had a material negative impact Facebook’s revenue for the second quarter

and the year; (ii) as a result of these trends, Facebook had decreased its expected revenue for the

second quarter of 2012 by as much as 8.33%, lowering it from as much as $1.2 billion to as little

as $1.1 billion; and (iii) as a result of these trends, Facebook had decreased its expected revenue

for the year by as much as 3.5%, lowering it from $5 billion to as little as $4.825 billion.

202. Finally, the Registration Statement and Prospectus were also materially false and

misleading because they failed to disclose the information required by Rule 408 of SEC

Regulation C. Rule 408 requires that, “[i]n addition to the information expressly required to be

included in a registration statement, there shall be added such further material information, if

any, as may be necessary to make the required statements, in light of the circumstances under

which they are made, not misleading.” 17 C.F.R. § 230.408(a). The Registration Statement and




67

Prospectus in their entirety, and as set forth specifically above, were materially untrue and

misleading and omitted to state material information necessary to make them not misleading, in

violation of Facebook’s duty of disclosure under Rule 408. The Registration Statement and

Prospectus specifically failed to disclose: (i) that growing mobile usage and Facebook’s product

decisions had already had a material unfavorable impact on the Company’s revenues; and (ii)

that Facebook had significantly lowered its estimated revenues as a direct result of that impact.

VII. CLASS ACTION ALLEGATIONS

203. Lead Plaintiffs bring this action on behalf of themselves and as a class action

pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of a Class

consisting of all persons and entities who purchased or otherwise acquired the Class A common

stock of Facebook in or traceable to Facebook’s IPO, and were damaged thereby. Excluded from

the Class are Defendants (as set forth herein), and present or former executive officers of

Facebook and their immediate family members (as defined in 17 C.F.R. § 229.404, Instructions

(1)(a)(iii) and (1)(b)(ii)).

204.

The members of the Class are so numerous that joinder of all members is

impracticable. For example, Facebook issued 421,233,615 shares of Class A common stock in

its IPO, with an underwriter option to issue an additional 63,185,042 shares of Class A common

stock. After the IPO, Facebook stock actively traded on the NASDAQ. While the exact number

of Class members is unknown to Lead Plaintiffs at this time, Lead Plaintiffs believe that Class

members number in the thousands, if not millions.

205. Lead Plaintiffs’ claims are typical of the claims of the members of the Class.

Lead Plaintiffs and the other members of the Class purchased or otherwise acquired Facebook

Class A common stock in the IPO and sustained damages as a result of Defendants’ conduct

complained of herein.




68

206. Lead Plaintiffs will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class and securities litigation.

Lead Plaintiffs have no interests that are adverse or antagonistic to the Class.

207. Common questions of law and fact exist as to all members of the Class, and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether Defendants violated the Securities Act as alleged herein;

b. whether the Registration Statement and Prospectus containedmaterially untrue statements or failed to disclose material facts;and

c. the extent of damages sustained by the Class, and the propermeasure of damages.

208. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. Because the damages suffered by individual members of the

Class may be relatively small, the expense and burden of individual litigation make it

impracticable for Class members individually to seek redress for the wrongful conduct alleged

herein. There will be no difficulty in managing this action as a class action.

209. The names and addresses of those persons and entities that purchased or otherwise

acquired Facebook’s Class A common stock in or traceable to the IPO are available from the

Company’s transfer agent(s) or other sources. Notice may be provided to such class members

via first-class mail using techniques and a form of notice similar to those customarily used in

securities class actions.




69

VIII. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR AND

BESPEAKS CAUTION DOCTRINE

210. The statutory safe harbor and/or bespeaks caution doctrine applicable to forward-

looking statements under certain circumstances do not apply to any of the untrue and misleading

statements pleaded in this Complaint.

211. First, Section 27(A) of the Securities Act provides that the statutory safe harbor

“shall not apply to a forward-looking statement … that is … made in connection with an initial

public offering.” 15 U.S.C. § 77z-2(b)(2)(D).

212. Second, none of the misstatements complained of herein were forward-looking

statements. Rather, they were misstatements concerning current facts and conditions existing at

the time the statements were made. Specifically, as set forth above at paragraphs 189-196,

Facebook’s Registration Statement and Prospectus misleadingly stated that increasing mobile

usage and the Company’s product decision might negatively impact Facebook’s revenue when

Facebook had already determined before the IPO that these factors had negatively impacted its

estimated revenues for the second quarter of 2012 and the year. Accordingly, the materially

untrue statements and omissions complained of herein concerned the then-existing fact that, as of

the time of the IPO, growing mobile usage and the Company’s product decisions had had a

material negative impact on Facebook’s business.

213. Third, those statements were not accompanied by meaningful cautionary language

identifying important facts that could cause actual results to differ materially from those in the

statements. As set forth above in detail, then-existing facts contradicted Defendants’ statements

regarding the impact of mobile usage and the Company’s product decisions on its revenue.

Given the then-existing facts contradicting Defendants’ statements, the generalized risk




70

disclosures made by Defendants were not sufficient to insulate Defendants from liability for their

materially untrue and misleading statements.

IX. CAUSES OF ACTION

COUNT I

For Violations Of Section 11 Of The Securities Act

(Against Defendants Zuckerberg, Ebersman, Spillane, The Facebook Board, And The

Underwriter Defendants)

214. This claim does not sound in fraud. For the purposes of this Section 11 claim,

Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent, which

are not elements of a claim under Section 11 of the Securities Act. This claim is based solely on

strict liability as to Facebook, and negligence as to the remaining Defendants.

215. Lead Plaintiffs repeat and reallege the allegations above as if fully set forth

herein.

216. This claim is brought against the Defendants Zuckerberg, Ebersman, Spillane, the

Facebook Board, and the Underwriter Defendants pursuant to Section 11 of the Securities Act,

15 U.S.C. § 77k, on behalf of all proposed Class members who purchased or otherwise acquired

Facebook’s Class A common stock in or traceable to the IPO, and were damaged thereby.

217. At the time of the IPO, the Registration Statement, including the Prospectus,

contained untrue statements of material fact, omitted to state facts necessary to make the

statements made therein not misleading, and failed to disclose required material information, as

set forth above at paragraphs 188-202.

218. Facebook is the issuer of the Class A common stock sold pursuant to the

Registration Statement. As the issuer of the stock, Facebook is strictly liable to the members of

the Class who purchased Class A common stock in or traceable to the IPO for the materially




71

untrue statements and omissions that appeared in or were omitted from the Registration

Statement.

219. Defendant Zuckerberg and the Facebook Board were signatories of the untrue and

misleading Registration Statement, and were directors of Facebook at the time of the IPO.

220. Defendants Ebersman and Spillane were signatories of the untrue and misleading

Registration Statement.

221. Each of Defendants Zuckerberg, Ebersman, Spillane and the Facebook Board is

unable to establish an affirmative defense based on a reasonable and diligent investigation of the

statements contained in the Registration Statement. These Defendants did not make a reasonable

investigation or possess reasonable grounds to believe that the statements contained in the

Registration Statement were true and not misleading, and that there were no omissions of any

material fact. Accordingly, these Defendants acted negligently, and are liable to the members of

the Class who purchased or otherwise acquired the Class A common stock in or traceable to the

IPO.

222.

The Underwriter Defendants were underwriters of the IPO.

223. Each of the Underwriter Defendants is unable to establish an affirmative defense

based on a reasonable and diligent investigation of the statements contained in the Registration

Statement. The Underwriter Defendants did not make a reasonable investigation or possess

reasonable grounds to believe that the statements contained in the Registration Statement were

true and not misleading, and that there were no omissions of any material fact. Accordingly, the

Underwriter Defendants acted negligently, and are liable to the members of the Class who

purchased or otherwise acquired the Class A common stock in or traceable to the IPO.




72

224. Lead Plaintiffs and other members of the Class purchased Class A common stock

issued under or traceable to the Registration Statement.

225. Lead Plaintiffs and other members of the Class did not know, or in the exercise of

reasonable diligence could not have known, of the inaccurate statements and omissions

contained therein when they purchased or otherwise acquired the Class A common stock of

Facebook.

226. Lead Plaintiffs and the other members of the Class who purchased the Class A

common stock pursuant to the Registration Statement suffered substantial damages as a result of

the untrue statements and omissions of material facts in the Registration Statement, as they either

sold these shares at prices below the IPO price of $38 per share or still held shares as of the date

of the initial complaint containing claims under the Securities Act, May 22, 2012, when the

closing price of the common stock was $31 per share, which was below the IPO price of $38 per

share.

227. This claim is brought within the applicable statute of limitations.

228.

By reason of the foregoing, the Defendants named in this Count have violated

Section 11 of the Securities Act.

COUNT II

For Violations Of Section 12(a)(2) Of The Securities Act

(Against Facebook, Defendants Zuckerberg, Sandberg, and Ebersman,

and The Underwriter Defendants)

229. This claim does not sound in fraud. For the purposes of this Section 12(a)(2)

claim, Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent,

which are not elements of a claim under Section 12(a)(2) of the Securities Act. This claim is

based solely on negligence.




73

230. Lead Plaintiffs repeat and reallege the allegations above as if fully set forth

herein.

231. This claim is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C.

§ 77l(a)(2), on behalf of all members of the Class who purchased Facebook Class A common

stock in the IPO, against Defendants Facebook, Zuckerberg, Sandberg, Ebersman, and the

Underwriter Defendants.

232. Each Defendant named in this Count was a seller, offeror, and/or solicitor of sales

of the common stock offered pursuant to the Registration Statement and Prospectus.

233.

Facebook was the issuer of 180,000,000 shares in the IPO for which it received

approximately $6.8 billion in proceeds. Facebook solicited the purchase of shares by virtue of

issuing the Registration Statement, Prospectus, and roadshow video, and was motived at least in

part to serve its own financial interests.

234. Defendant Zuckerberg sold 30.2 million shares in the IPO for proceeds of

approximately $1.15 billion. Zuckerberg also solicited the purchase of shares by virtue of

signing the Registration Statement containing the Prospectus, participating extensively in the

roadshow video, and making presentations and answering investor questions at Facebook’s

roadshow meetings. In making these solicitations, Zuckerberg was motivated in part to serve

Facebook’s financial interests and his own. In addition to receiving $1.15 billion in proceeds

from the IPO, the value of Zuckerberg’s retained shares was approximately $19 billion based on

the IPO price.

235. Defendant Sandberg solicited the purchase of shares by virtue of participating

extensively in the roadshow video, including making statements about Facebook’s business and

growth prospects, and making presentations and answering investor questions at Facebook’s




74

roadshow meetings. Defendant Sandberg was motivated in part to serve Facebook’s financial

interest and her own. The value of Sandberg’s Facebook shares was more than $72 million based

on Facebook’s IPO price.

236. Defendant Ebersman solicited the purchase of shares by virtue of signing the

Registration Statement containing the Prospectus, participating extensively in the roadshow

video, including making statements about Facebook’s business, and making presentations and

answering investor questions at Facebook’s roadshow meetings. Defendant Ebersman was

motivated in part to serve Facebook’s financial interest and his own. The value of Ebersman’s

Facebook shares was more than $91 million based on Facebook’s IPO price.

237.

The Underwriter Defendants transferred title to Facebook stock to Lead Plaintiffs

and other members of the Class who purchased shares in the IPO, and transferred title of

Facebook stock to other underwriters and/or broker-dealers that sold those securities as agents

for the Underwriter Defendants. The Underwriter Defendants also solicited the purchase of

Facebook stock in the IPO by the Lead Plaintiffs and other members of the Class who purchased

in the IPO by means of the Registration Statement and Prospectus, motivated at least in part by

the desire to serve the Underwriter Defendants’ own financial interest and the interests of

Facebook, including but not limited to earning commissions on the sale of Facebook stock in the

IPO.

238. The Registration Statement and Prospectus contained untrue statements of

material fact or omitted to state material facts necessary in order to make the statements, in light

of the circumstances under which they were made, not misleading, as set forth more fully above.

239. Lead Plaintiffs and other members of the Class who purchased Facebook common

stock in the IPO made such purchases pursuant to the materially untrue and misleading




75

Registration Statement and Prospectus, and did not know, or in the exercise of reasonable

diligence could not have known, of the untruths and omissions contained therein.

240. Lead Plaintiffs and the other members of the Class who purchased the common

stock in the IPO pursuant to the Registration Statement and Prospectus suffered substantial

damages as a result of the untrue statements and omissions of material facts in the Registration

Statement and Prospectus, as they either sold these shares at prices below the IPO price of $38

per share or still held shares as of the date of the initial complaint containing claims under the

Securities Act, when the price of the common stock was below the IPO price of $38 per share.

241.

Members of the Class who purchased the common stock pursuant to the

Registration Statement and Prospectus and still hold that stock have sustained substantial

damages as a result of the untrue statements of material facts and omissions contained therein,

for which they hereby elect to rescind and tender their common stock to the Defendants sued in

this Count in return for the consideration paid with interest. Those members of the Class who

have already sold their stock acquired in the IPO pursuant to the materially untrue and

misleading Registration Statement and Prospectus are entitled to damages from Defendants.

242. This claim is brought within the applicable statute of limitations.

243. By virtue of the foregoing, the Defendants named in this count violated Section

12(a)(2) of the Securities Act.

COUNT III

For Violations Of Section 15 Of The Securities Act

(Against the Individual Defendants)

244. This claim does not sound in fraud. For the purposes of this Section 15 claim,

Lead Plaintiffs do not allege that any Defendant acted with scienter or fraudulent intent, which




76

are not elements of a claim under Section 15 of the Securities Act. This claim is based solely on

negligence

245. This Count is asserted against the Individual Defendants for violations of Section

15 of the Securities Act, 15 U.S.C. § 77o, on behalf of all members of the Class who purchased

or otherwise acquired the Class A common stock issued pursuant to the Registration Statement.

246. At all relevant times, these Defendants were controlling persons of the Company

within the meaning of Section 15 of the Securities Act. Defendant Zuckerberg, at the time of the

filing of the Registration Statement and the IPO, served as Chairman of the Board of Directors

and Chief Executive Officer. At all relevant times, Defendant Zuckerberg retained a controlling

interest in Facebook and, following the IPO, controlled approximately 56% of the voting power

of the Company’s capital stock. Defendant Sandberg was COO of Facebook at the time of the

filing of the Registration Statement and the IPO. Defendant Ebersman was CFO at the time of

the filing of the Registration Statement and the IPO. Defendant Spillane was Facebook’s DOA at

the time of the filing of the Registration Statement and the IPO. The Facebook Board approved

the IPO and reviewed and approved the Registration Statement and Prospectus.

247. Defendants Zuckerberg, Sandberg, Ebersman, Spillane and the Facebook Board,

prior to and at the time of the IPO, participated in the operation and management of the

Company, and conducted and participated, directly and indirectly, in the conduct of Facebook’s

business affairs, including the IPO.

248. As officers and/or directors of a company engaging in an IPO, Defendants

Zuckerberg, Sandberg, Ebersman, Spillane and the Facebook Board had a duty to disseminate

accurate and truthful information with respect to Facebook’s business, financial condition and

results of operations. These Defendants participated in the preparation and dissemination of the




77

Registration Statement and Prospectus, and otherwise participated in the process necessary to

conduct the IPO. Because of their positions of control and authority as senior officers and/or

directors of Facebook, these Defendants were able to, and did, control the contents of the

Registration Statement and Prospectus, which contained materially untrue information and failed

to disclose material facts.

249. By reason of the aforementioned conduct, the Individual Defendants are liable

under Section 15 of the Securities Act jointly and severally with and to the same extent as

Facebook is liable under Sections 11 and 12(a)(2) of the Securities Act, to Lead Plaintiffs and

members of the Class who purchased or otherwise acquired common stock issued pursuant to the

Registration Statement.

X. PRAYER FOR RELIEF

250. WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:

a. Determining that this action is a proper class action pursuant toRule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

b.

Awarding all damages and other remedies set forth in theSecurities Act in favor of Lead Plaintiffs and all members of theClass against Defendants in an amount to be proven at trial,including interest thereon;

c. Awarding Lead Plaintiffs and the Class their reasonable costs andexpenses incurred in this action, including attorneys’ fees andexpert fees; and

d. Such other and further relief as the Court may deem just and proper.

XI. JURY TRIAL DEMANDED

251. Lead Plaintiffs hereby demand a jury trial.





Dated: February 28, 2013

ew

York,

ew

York

BERNSTEIN LITOWITZ

BERGER GROSSM NN LLP

B y : ~ 6 ~

Steven B Singer

John J Rizio-Hamilton

1285 Avenue of the Americas

ew

York,

Y

10019

Tel: 212) 554-1400

Fax: 212) 554-1444

L B TON SUCH ROW LLP

By:_\_\.r

_ . V J J _ _ _

_

Thomas A. Dubbs

James W. Johnson

Louis Gottlieb

140 Broadway

ew York, Y 10005

Tel: 212) 907-0700

Fax: 212) 818-0477

Court Appointed Co Lead Counsel/or the Class

David Kessler

Darren J Check

KESSLER TOP Z MELTZER

HE KLLP

280 King ofPrussia Road

Radnor, Pennsylvania 19087

Tel: 610) 667-7706

Fax: 601) 667-7056

Additional Counsel For

ead

Plaintiff

Banyan Capital Master Fund Ltd

Steven E Fineman

Daniel P. Chip ock

LIEFF C BR SER HEIM NN

BERNSTEIN

250 Hudson Street, 8th Floor

ew

York, Y 10013

Tel: 212) 355-9500

Fax: 212) 355-9592

Additional Counsel For Named Plaintiffs

Jose

G

Galvan

and

Mary Jane Lule Galvan

78



APPENDIX A





CERTIFIC TION PURSU NT TO

THE FEDER L SECURITIES L WS

I

Jay Chaudhuri, hereby certify for the North Carolina Department of State

Treasurer

on

behalf of

the North Carolina Retirement Systems ( North Carolina DST ),

as to the claims asserted under the federal securities laws, that:

1.

I am the General Counsel and Senior Policy Advisor

of

the North Carolina

Department of State Treasurer. I have reviewed a complaint filed in this matter.

North Carolina

DST

has authorized the filing of this motion for appointment as

lead plaintiff.

2. North Carolina DST did not purchase the securities that are the subject

of

this

action at the direction

of

counsel or in order to participate in any action arising

under the federal securities laws.

3. North Carolina

DST

is willing to serve as a lead plaintiff and representative party

on behalf of the Class, including providing testimony at deposition and trial,

if

necessary. North Carolina

DST

fully understands the duties and responsibilities

of the lead plaintiff under the Private Securities Litigation Reform Act, including

the selection and retention

of

counsel and overseeing the prosecution

of

the action

for the Class.

4. The transactions

of

North Carolina DST in the Face book, Inc. securities that are

the subject

of

this action are set forth in the chart attached hereto.

5.

North Carolina

DST

has not sought to serve as a lead plaintiff or representative

party on behalf of a class in any action under the federal securities laws filed

during the three-year period preceding the date

of

this Certification.

6.

North Carolina

DST

will not accept any payment for serving as a representative

party on behalf of the Class beyond North Carolina

DST s

pro rata share of any

recovery, except such reasonable costs and expenses (including lost wages)

directly relating to the representation

of

the Class, as ordered or approved by the

Court.

I declare under penalty

of

perjury that the foregoing is true and correct. Executed

this 23rd day

of

July, 2012.

JaYihfilldhUri

General Counsel Senior Policy Advisor

North arolina Department o State Treasurer

on

behalfo h North arolina Retirement Systems




North Carolina Retirement Systems

Transactions in Facebook Inc. FB)

Transaction Date Shares Price

Purchase 5/17/2012 67,600 38.0000

Purchase 5/17/2012 618,137 38.0000

ale

5/18/2012

29,900) 41.3016

ale

5/18/2012

4,100) 39.6854

ale

5/18/2012

18,000) 42.0000

ale 5/18/2012

15,600) 40.3683




CERTIFIC TION

I

George Hopkins, as Executive Director of Arkansas Teacher Retirement System

( Arkansas Teacher ), hereby certify as follows:

1

I am fully authorized to enter into and execute this Certification on behalf of

Arkansas Teacher. I have reviewed a complaint filed against Facebook, Inc. ( Facebook ) alleging

violations of the federal securities laws;

2 Arkansas Teacher did not purchase securities of Facebook at the direction of counsel

or in order to participate in any private action under the federal securities laws;

3

Arkansas Teacher is willing to serve as a lead plaintiff

or

representative party

in

this

matter, including providing testimony at deposition and trial,

if

necessary;

4 Arkansas Teacher's transactions in the Facebook securities that are the subject of this

action are reflected in Exhibit A, attached hereto;

5 Arkansas Teacher sought to serve as a lead plaintiff

in

the following class actions

under the federal securities laws during the last three years preceding the date of this certification:

In

MGl d

Mirage

Sec111ities

LJtigatio11,

No.

2:09-cv-1558 (D. Nev.)

JJ S1111p01ver C01p. Sec111ities

LJtigation,

No. 3:09-cv-5473 (N.D. Cal.)

City of1\1011roe FiJJJployees' Retimmnt S)•stem

v.

Hartfard

Financial

Sen1ites

Gm11p,

Inc.,

No.

1:10-cv-2835 (S.D.N.Y.)

In

1r

Go dma// Sachs Gmnp, JJc.

Secmities LJtigation,

No. 1:10-cv-3461 (S.D.N.Y.)

ArkaHsas

Teacher Retimvmt

.5)ste111 v.1Wo11sr111fo Co.,

No.

4:10-cv-1380 (E.D. Mo.)

Km'flnl

v.

Colinthian

Colleges,

Inc., No. 2:10-cv-6523 (C.D. Cal.)

In

Beckn1an

Co11lte1;

Inc.

Sec111ities LJtigation,

No.

8:10-cv-1327 (C.D. Cal.)

In

re

Gentiva Sec111ities

LJtigation,

No.

2:10-cv-5064 (E.D.N.Y.)

Pe1111ylva11ia

Public School Emplo)'ees' Retim11e11 .5)ste1J1 v. Bank ofA11mica

C01p.,

No.

1 11-cv-733 (S.D.N.Y.)

Ga111111e/ v. He1Ji/et1-Packard, No. 8:11-cv-1404 (C.D. Cal.)

In rn Netflix,

Inc.

Secmities LJtigatio11,

No.

3:12-cv-225 (N.D. Cal.)

Hoppa11gh

v.

K12

Inc.,

No. 1:12-cv-103 (E.D. Va.)

S111ith

v.

JPM01;gan Chase Co., No. 12-cv-3852 (S.D.N.Y.)




6. Arkansas Teacher is currently serving as a lead plaintiff in the following class actions

filed under the federal securities laws during the last three years:

In MGM Mirage Sec111ities IJtigatio11, No. 2:09-cv-1558 D. Nev.)

I11

S1111poJ11er

Co1p.

Sec111ities

IJtigation, No. 3:09-cv-5473 N.D. Cal.

In Go/dma11 Sachs G1m;p, Inc. Secmities Utigation, No. 1:10-cv-3461 S.D.N.Y.)

Arkansas Teacher Retim11e11t

S stm1

/ , 1VI011sa11to Co., No. 4:10-cv-1380 E.D. ~ M o .

Ga1J1111e/ v.

I-Ieivlett-Packard,

No. 8:11-cv-1404 C.D. Cal.

In Netflix Inc. Sec11rities Litigation, No. 3:12-cv-225 N.D.

Cal.

I-Iopprmgh v. K 2 Inc., No. 1:12-cv-103 E.D. Va.)

7. Beyond its pro rata share o any recovery, Arkansas Teacher will not accept payment

for serving as a lead plaintiff on behalf o the Class, except the reimbursement o such reasonable

costs and expenses including lost wages

as

ordered or approved by the Court.

I declare under

n ~ ~

o perjury, under the laws o the United States, that the foregoing is

true and correct this :J day

o

July, 2012.

- 2 -

George opkins

Exec tive Director of

Arkansas Teacher

Retimm11t S)ste111




EXHIBIT A

TRANSACTIONS IN FACEBOOK

INC

Transaction Type

Trade

Date

Shares

Price Per

Share

Cost

/

Proceeds

Purchase

05/17/12

246,849.00 38.00

( 9,380,262.00)

Sale

05/18/12

-104,320.00 40.07

4,179,664.26




CERTlFICATION

PURSUANT

TO

THE

FEDERAL SECURITIES LAWS

l, Becky Van Wyk, on

behalf

of

the

Fresno County Employees' Retirement

Association ( FCERA ), hereby certify, as

to the

claims asserted under

the

federal

securities laws, that:

1

I

am the Assistant Retirement Administrator ofFCERA.

I

have reviewed a

complaint filed in thjs matter.

FCERA

has authorized the filing

of

this motion for

appointment

as

lead plaintiff.

2. FCERA did not purchase the securities

that

are the subject

of

this action at the

direction of counsel or in order

to

participate

n

any action arising under the

federal securities laws.

3. FCERA is willing

to

serve

as

a lead pla inti ff and representative party

on behalf

of

the Class, including providing testimony

at

deposition and trial,

if

necessary.

FCERA fully understands the duties and responsibilities

of

he lead plaintiff under

the

Private Securities Litigation Reform Act, including the selection and retention

of

counsel and overseeing the prosecution

of the

action for the Class.

4. FCERA s transactions in the Facebook, Inc. securities that are

the

subject of this

action are set forth in the chart attached hereto.

5. FCERA has sought to serve and

was

appointed as a lead plaintiff on

behalf

of a

class in the following actions under

the

federal securities laws filed dur ing the

three-

year

period preceding the date of his Certification:

Mallen

v

Alphatec Holdings, Inc.,

t

al., Case No . 10-cv-1673 (S.D.N.Y.)

Steamfitters Local 449 Pension Fund v Central European Distribution Corporation,

Case

No. 11

-cv-6247 (D.N.J.)

6. FCERA has served

as

a representative party on

behalfof

a class

n

the following

actions under the federal securities laws filed during the three-year period

preceding

the

date of this Certification:

The Fresno County Employees Retirement Association

v

Countrywide Financial

Corporation, t al., Case

No.

11-cv-811 (C.D. Cal.)

In re Toyota Motor Corporation Securities Litigation,

Case No. 1O-cv-

922

(C.D. Cal.)




7

FCERA has sought to serve s a lead plaintiff and representative party on behalf

of a class in the following action under the federal securities laws filed during the

three-year period preceding the date of this Certification, but either withdrew its

motjon for lead plaintiff

or

was

not

appointed lead plaintiff:

In re P pie Securities Litigation, Case No. I 0-md-2185 (S.D. Tex)

8 FCERA will not accept any payment for serving as a representative party on

behalfof the Class beyond FCERA s pro rata share of any recovery, except such

reasonable costs and expenses (including lost wages) directly relating to the

representation of the Class, as ordered or approved by the Court.

I

e c l ~

under penalty

of

perjury that the foregoing is true and correct.

this J..i :. day of June, 2012.

J

Executed

Fresno County Employees Retirement Association




Fresno County Employees Retirement Auociation

Transactions

in

Facebook Inc. (FB)

Transaction

Date

Sharp

Price

Purchase 7/2012 37,800 38.0000

Purchase 5/17/20L2

58,100

8.0000

Sa le

5/18/20L2 (7,900)

40.0188

Sale

512212012 (13,200)

3 1.8080




BANYAN CAm.ALMAS'IU. J.i'VND

LT.D. S

CBR'i'DlcATIONlN

SllPPOlO'·orrrsMOTION

FOR

APPOINTMENT AS LEAD

PLA.lN'111FAND

AP.PD.OVAL·OPL&U>

P.L.AINT.IFli S

SELEC170N OF

COVNSA

B3DYM

CapJtd

Master-

Fund

Ltd.

(''3anyan

or

,ftliu\itl' )

deelJres

has:

1.

ll .ym dJd M t pnrchast the· ~ t h a t i1 the aubject of thia

actlotl.

at tht

dfrootlon of

Plaintifrs CQUDSel

ot in ordor mMY private

aotion 'lllldet the federal

s.ecmities laws.

2.

Ban1an

ia

will.mg

to serw as

a

~ v e party

on

beJlaJf of

the. ClaaA..

inchWintZ pmviding teStilDD lY

• depositif>n and trlal, i fnecessary

..

3.

~ . Schedule A

to

thla ate

Ptabmft'a

tranllllCliolJ1 . in

~ o ~ 'lne.

( PAcebock ') (.NASDAQ:

.F.8) cOJl\mon

sbate8

during tbaOm

Perlcd.

4. 8enyaA has toll power aao .

mabo'dty

tJ;J

hrm&

d to 'eCOVet> l.>r IoHes

~ s

m Wt of

Jts

m'VOltme.ntm acebook.

s. Banyan 1 - .lUllJ teviovled the tBcts - allegations ofa otnpbdnt filed

iJl

ibis

~ n and ha& authorized t;fte :6Jir.lg of a

mot:io.11

ibt

app&intment as

Jaad pWntttfon its behn1f ill

$isadion..

.

.

6. Jlmay.m

~

to actively J:®nitor

ad

vigorously

PJJm:lC this

action for tho

bedt Of thf; Class.

7. . Bariy$l will

ea.dea.vo.r

tri fidr

aDd

adtqu.ato and lV(d:

direotlJr with Class tounSeI to easore that

the a r g e s t ~

1br

the Cl48& eomiskmt

witbgaod

.

. faithatd

J u d g n u m t

i i

obtained.

.

.

8. Banyan ooujht to serve ('btit wu o t ~

as

~ party b a

class

aCltUm

filed --the

federal

sec:lttiriel

~

dudng

t11e· tbda yeata priut to the date Of

this

. ~ in

Josq1h

e ~ ~

st

al v. Jon S.

Cf» (ine.

t al. No..· 11-cv

..

786fi..VM

(S.D.N.Y.).

9. Banyaa

will not accept

any ~ iO.r: acrving

u

~ _ cm

J;dtalf of

thB CJess °'yood FJa.inlifrs

pro tata

W

of

any

reoove:ry, except aeJi Nl8CllllbJD.




coats

md m ~ lOst; waga) dln ;ctly :rdating to the rcp:esentotion

o tile

ClAss l l

f;)IdemiOtappmved by thl Court.

10.

Wo

R o s ~

Ntmson

and Alan. · 1 ~ s Dh flttol s ut

.

BQym

and am

aud:l>rimd to

make

legal

decirdwi

on

bdalt

Gf

Bu-yan.

We

•

aDfiim:ked

to

s i t J l t b i s ~ o n B a n y a • t o d c d f . W a r e . a J a o ~ t o m a k e t h c ~ f O l

forth

heteio.. . . .

We deomre Wlderpenalty

f ~

t ld

h e ~

ia Ct;11e am

corteet.

BANYAN CAPJTALMASTERIUm LTD.

lbls.i.LJ.:v..t

: r ~

,2012. / ti

.....

By:

h e c i l t e d t h i s ~ y o f

:fu\..Y 20J2..

~ B e n e d k i t

~

~ N J d

AJao l llmcr

Dimctor

2




SCBJIDULIA

Sseritf

BuvN

11*

QM@ ,

r&1s

Com Set

Buy

512JJ2012

~ 8

35.79

OmlStt

Buy

sn:JJ'JJJl'l

195,474.

32.19-

ComstK

Sell

512lfl012 446. 70 · 34.19

ComSik

Sell

5122f2012

24,039

$31..6.1




CERTIFICATIONQ ·PROPOSED LEAD PLAINTIFF

We,

Jose G.

and

Mary Jane Lu1e Galvan, certi fy that:

1. We

have reviewed the·

facts

and

allegations

of

he

complaint

filed.in

this

action.

2.

We did not acquire the common stock that are

the-subject of this

action atthe direction of

plaintiff's

counsel

odn

order to

participate in this

private

action or any

other

litigation

under

.the federal securitieslaws. . ·

··

3.

We

are

willliig

to serve

as a Lead

Plaintiff either

individually

or as

part

of

a group.

We

understand th t

a Lead Plaintiff is .a .representative party who

acts on behalf of other

class

members :in

directing the action, and whose duties

may include

providing testimony at

_deposition

and _trial · i

necessary.

4. We

represent.and

warrant

that we

are

authorizedto execute-this Certification on

behalf of

the

purchasers

of

the

common

stock described

herein

(ineluding,

as

the case may be, u r s e l v ~

any o - o ~ e r s any_ o r p o ~ a t i q n s

or

t h ~ r . e n t i t i e s and/or·any

beneficial

owners).

5.

We

will

not.accept

any

payments for·serving

as

a

representative

partY

on behalf

of

the

class

beyond

the

·purchaser s

pro

rata

share

of any

recovery, except

such e a ~ o n a b l e costs and

expenses

(ineluding.lostwages) directly relating to-the.representationof he class s ordered,

or approved by the court. ·

. .

6. We understand·tb.at this

is

not

a claim

form and that

our

ability

to share

in

any

recovery

as

a

member

of the class is. unaffected by our decision to setye as a representative party or Lead

Plaintiff.

7. We have listed all our relevant transactions involving common

stock

of Facebookt Inc.

that are

the subject

of this

actioP.

in the attached

sclledule.

8. During the th:r:eeyears

prior

to the date

of his

Certification, we

have

not sought

to

serve and

we have.not

served

s a r e p r e s e n ~ t i v e _ p a r t y f o r a class in an action.filed

under

the federal

securities

laws except

if any):. ·

. We dedare·under pe:rialty

.of

perjury,

under the laWs

of

United States, that the information

herein.is accurate. · · · ·

J1J<i,cuted

this 1 dayof ::r.,

L· :\ . , 2 · · · ·

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C



1

I N THE UNI TED STATES COURT OF APPEALS

FOR THE SECOND CI RCUI T

_____________________________) )GAYE J ONES, HOLLY )McCONNAUGHEY, Der i vat i vel y on)Behal f of Facebook I nc. , ) ) Pl ai nt i f f s - Appel l ant s) ) vs. ) Case No. 14- 632- cv )MARC L. ANDREESSEN, et al . , ) ) Def endant s- Appel l ees. ) _____________________________) )( Capt i on cont i nued on next )page. ) ) _____________________________)

APRI L 27, 2015 ORAL ARGUMENT

TRANSCRI BED BY:

PATRI CI A L. HUBBARD, CSR #3400 J ob No. 39198



450 Seventh Avenue - Ste 500, New York, NY 10123 1.800.642.1099

DAVID FELDMAN WORLDWIDE, INC.

2

1

2 I N THE UNI TED STATES COURT OF APPEALS

3 FOR THE SECOND CI RCUI T

4 _____________________________ )

5 ( Cont i nued Capt i on. ) ) _____________________________)

6 ROBERT CROCI TTO, Der i vat i vel y)on Behal f of Facebook I nc. , )

7 ) Pl ai nt i f f - Appel l ant , )

8 ) vs. ) Case No. 14- 1309- cv

9 )MARK E. ZUCKERBERG, et al . , )

10 ) Nomi nal )

11 Def endant s- Appel l ee ) _____________________________)

12 LI DI A LEVY, on behal f of )her sel f and al l ot her s )

13 si mi l ar l y s i t uat ed, ) )

14 Pl ai nt i f f - Appel l ant - ) Case Nos. 14- 1445- cv Cr oss- Appel l ee, ) 14- 1515- cv

15 ) 14- 1784- cv

vs. ) 14- 1788- cv16 )MARC L. ANDREESSEN, et al . , )

17 ) Def endant - Appel l ee- )

18 Cr oss- Appel l ant . ) _____________________________)

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25





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5 TRANSCRI PTI ON OF APRI L 27, 2015

6 ORAL ARGUMENT by PATRI CI A L.

7 HUBBARD, CSR #3400, a Cer t i f i ed

8 Shor t hand Repor t er i n and f or t he

9 St at e of Cal i f or ni a.

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4

1 APPEARANCES OF COUNSEL:

2 For t he Appel l ee: LYDI A LEVY

3 SCOTT & SCOTT, LLP

4 12434 Cedar Road Sui t e 12

5 Cl evel and Hei ght s, Ohi o 44106 216. 229. 6088

6 BY: GEOFFREY M. J OHNSON, ESQ. gj ohnson@scot t - scot t . com

7

8 For t he Appel l ee: GAYE J ONES

9 ROBBI NS GELLER RUDMAN & DOWD, LLP Post Montgomer y Center

10 One Mont gomer y St r eet Sui t e 1800

11 San Franci sco, Cal i f or ni a 94104 BY: ANDREW LOVE, ESQ.

12 al ove@r gr dl aw. com

13 For t he Appel l ee: ROBERT CROCI TTO

14 GLANCY PRONGAY & MURRAY, LLP

15 122 East 42nd St r eet

Sui t e 292016 New Yor k, New Yor k 10168 212. 682. 5340

17 BY: GREGORY B. LI NKH, ESQ. gl i nkh@gl ancyl aw. com

18

19 For t he Appel l ant : FACEBOOK

20 KI RKLAND & ELLI S, LLP 601 Lexi ngt on Avenue

21 New Yor k, New Yor k 10022

212. 446. 480022 BY: ANDREW CLUBOK, ESQ. andr ew. cl ubok@ki r kl and. com

23

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5

1 APPEARANCES: ( Cont i nued)

2 DENNI S J ACOBS, J UDGE

3 ROSEMARY POOLER, J UDGE

4 PETER HALL, J UDGE

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35

1 anyway.

2 And as - - as Appel l ees poi nt out , whi l e

3 t he pr oposed si ze and pr i ce of an I PO wi l l of t en

4 f l uctuat e, i t shoul dn' t be i ncreasi ng whi l e at t he

5 same t i me t here i s mater i al bad news.

6 Thi s conduct was t he subj ect of t he

7 secur i t i es di sput e - - deci si on. As you know, t he

8 secur i t i es deci si on was - - t he cl ai ms wer e - - I di d

9 a mot i on t o di smi ss. I t was deni ed. Di scover y i s

10 under way. Cl ass cer t has been br i ef ed and wi l l be

11 heard next month.

12 Now, t hi s conduct i s al so exacer bat ed by

13 t he magni t ude of t he sal es t hat Zucker ber g, Br eyer

14 and - -

15 J UDGE J ACOBS: Looki ng at t he

16 di scl osure, and I mean i f you want t o go t o t he

17 mer i t s, i t basi cal l y says t hat somet hi ng i s

18 happeni ng. Even as we speak somet hi ng i s happeni ng.

19 Ther e i s - - t her e i s an i ncrease - - t her e i s an

20 i ncr ease i n t he number of act i ve dai l y user s t hat ' s

21 i ncr easi ng more r api dl y t han i ncr easi ng t he number

22 of ads. That ' s not good.

23 MR. LI NKH: Wel l , t hat was - - t hat was

24 t he key on - - one of t he key i ssues t hat was

25 di scussed i n t he secur i t i es opi ni on.





36

1 And, yes, t her e was - - i t was di scl osed

2 t hat t here was somethi ng goi ng on wi t h mobi l e

3 adver t i si ng. I t was not di scl osed - -

4 J UDGE J ACOBS: Somet hi ng bad was goi ng

5 on wi t h mobi l e adver t i si ng.

6 MR. LI NKH: Wel l , somet hi ng bad was

7 goi ng on. But t hey di dn' t make t hat f ur t her l eap

8 t hat t he r evenues wer e act ual l y decreasi ng. And

9 t hat was t he subj ect t hat was t he vi ol at i on of i t em

10 303 - -

11 J UDGE J ACOBS: Woul dn' t somebody assume

12 t hat i f you have mor e adver t i si ng, you' r e get t i ng

13 mor e r evenue; and i f you have l ess adver t i si ng,

14 you' r e get t i ng l ess r evenue?

15 MR. LI NKH: Wel l , I mean you - -

16 J UDGE J ACOBS: Thi s i s not bei ng wr i t t en

17 f or i di ot s .

18 MR. LI NKH: Wel l , you can assume t hat .

19 But under r egul at e - - I guess i t em 303 of

20 Regul at i on SK, you act ual l y have t o di scl ose t hat

21 t her e i s mat er i al - - you know, a mat er i al decr ease

22 i n r evenues i f t her e' s a chance t hat t her e wi l l be a

23 mat er i al decr ease i n r evenues.

24 And t hat was t he i ssue t hat was - - t hat

25 was t he i ssue t hat was bef or e t he - - bef or e J udge



D



1

Evidence For Class Members Evidence For Investors Excluded By

The District Court And Plaintiffs’

Counsel

KKR: “KKR purchased shares in

Facebook’s IPO . . . with my knowledgethat . . . Facebook had determined that a

shift to mobile usage had been having,

and was expected in the future to

continue having, a negative impact on

Facebook revenues for 2nd Quarter and

full year 2012.” (A-26)

Blue Ridge: “When Blue Ridge made

this decision [to buy Facebookshares] . . . Blue Ridge further

understood that Facebook had

determined that these trends had

negatively impacted and would continue

to negatively impact revenue growth

(act as “headwinds” as we called it)

unless and until Facebook could

monetize the mobile usage of its site.”

(A-91)

Waddell: “At the time of the initial

public offering, the Company [Waddell]

was aware that Facebook Inc. had

recently revised its revenue projections

for 2012 due to increased use of

Facebook on mobile devices which was

negatively impacting revenues more

than had been previously expected.”

(A-81)

Columbia: “Columbia had been

informed prior to Columbia’s purchase

of shares in Facebook’s IPO [that]

(a) Facebook had revised its internal

revenue numbers to project decreased

growth for 2012 and (b) Facebook had

made those revisions based on the shift

to mobile devices and related product

decisions.” (A-1552)

UBS: “I recommended that UBS

purchase shares with the knowledge that

Facebook’s revenue projections had

been revised downward due to the

impact that the shift to mobile usage

was already having on Facebook’s

revenues.” (A-86)

Capital Research: “When the funds

purchased these shares, CRGI

understood that (a) Facebook had

revised its internal forecast of future

revenue to project decreased revenue

growth for 2012, and (b) the revised

forecast reflected the expected impact of

growing user migration to mobile

devices and certain product changes.”

(A-6)



Evidence For Class Members Evidence For Investors Excluded By

The District Court And Plaintiffs’

Counsel

Winslow: “After speaking with

Ms. Herman, I had conversations withanalysts and portfolio managers from at

least two dozen institutional investors,

including for example, Justin Kelly at

Winslow Capital Management . . . I

remember being careful in my calls with

each of these individuals, and with the

other potential investors with whom I

spoke, to ensure that they knew that

Facebook had revised its projections as

Turner: “After speaking with

Ms. Herman, I had conversations withanalysts and portfolio managers from at

least two dozen institutional investors,

including for example . . . Christopher

Bagini of Turner Investments. I

remember being careful in my calls with

each of these individuals, and with the

other potential investors with whom I

spoke, to ensure that they knew that

Facebook had revised its projections as

in re Facebook - petition to appeal class cert ruling.pdf

Documents

Transcript of in re Facebook - petition to appeal class cert ruling.pdf