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Twitter Already Facing Two Possible Lawsuits Over the IPO

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By William Peacock, Esq. on November 07, 2013 10:56 AM

Hey, at least they didn't crash the stock market, like Facebook did.

In fact, Twitter's stock prices are booming. We covered the morning's hype on our In House blog, including the spike from the IPO offering at $26, opening at over $45, and peaking at around $50 per share. Pretty insane for a company that is losing money, even with all of those reasons for optimism.

The optimism may have been misplaced. And Twitter may be following Facebook in a different way: to the courtroom.

Information Gap

Facebook's IPO was plagued with a stock market glitch and an immediate stock price crash. Neither has happened here, but it's what caused that crash that might be a reason for concern amongst interested Twitter investors.

The Atlantic has a great recap of the full story behind Facebook's selective disclosures, last-minute revenue projection slashing, and the laws that restrict what can be said by underwriting institutions in the days leading up to the IPO. The short version is this: analysts of the underwriters can pick up the phone, but they can't publish information publicly. Wall Street finds out about the revenue revisions, but Main Street doesn't.

For Facebook, that led to a lot of major Wall Street investors "shorting" the stock, or betting for it to fail, which led to the shares' plummeting value. It also led to a bunch of class-action lawsuits and a $5 million payout to the State of Massachusetts.

What does this have to do with Twitter?

The Wall Street Journal is reporting that the information gap is striking again, with analysts involved in the underwriting process projecting Twitter's 2015 revenue to be about 28 percent lower than independent analysts' projections. As we noted earlier, the company was expected to turn a profit in 2015. Now, some analysts cited by the Journal are couching expectations by projecting profit in the "latter half of 2015 at the earliest."

Pumping Interest Before the IPO

Last week, the social media company was sued by two New York financial firms, which claimed that Twitter arranged with them to have a private sell-off of stock, but once they obtained commitments from private buyers at above the company's asking price, Twitter pulled out and took the IPO route instead. According to Reuters, they argue that the private-to-public switch was done to pump up interest in the company's stock before it went public, and that Twitter never intended to go through with the private stock sale.

Precedo Capital Group Inc. and Continental Advisors SA are jointly seeking $24.2 million in compensatory damages and $100 million in punitive damages.

No Effect, So Far

Despite the information gap, slashed expectations, and the pending lawsuit, the stock had a quick bump and is twittering around $46, a bit above its opening price.

Did you jump on the Twitter IPO bandwagon? Have any predictions to share? Join the discussion on Facebook at FindLaw for Legal Professionals.

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