Lowinger v. Morgan Stanley & Co. Llc.

841 F.3d 122 (2nd Cir. 2016)

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Nature of the Case

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Facts

Facebook's IPO was underwritten by a syndicate of thirty-three financial firms (collectively, 'Underwriters'), including the three Lead Underwriters. Goldman was a Lead Underwriter, and some Goldman subsidiaries owned Facebook shares. Each of the Shareholders who, in the aggregate, owned more than ten percent of Facebook's common stock entered into lock-up agreements with the Lead Underwriters in order to 'induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering.' The Shareholders would not sell or otherwise dispose of Facebook stock for periods ranging from 91 days to 211 days after the date of the Prospectus without the consent of D as agent for the Lead Underwriters. The agreements were disclosed in Facebook's Prospectus and Registration Statement. The Registration Statement and Prospectus alerted investors that the Underwriters might 'over-allot.' Such sales allow underwriters to stabilize fluctuating share prices during an offering by increasing the supply of shares after the offering price has been determined. Underwriters generally hedge this extra allotment by establishing a short position on oversold shares while simultaneously holding the shares long. Underwriters are thus protected against upward or downward movements in the stock's price. The Facebook IPO permitted the Underwriters to cover this short position either by purchasing the requisite additional shares directly from Facebook and the Shareholders at a fixed price (per the terms of a so-called 'over-allotment option,' or 'Green Shoe') or by purchasing shares directly from the open market once secondary trading had commenced. The Lead Underwriters were necessarily granted access to nonpublic financial information concerning Facebook. In March and April 2012, Facebook shared its internal forecasts with the Lead Underwriters for both the second quarter of 2012 and for fiscal year 2012. These forecasts estimated revenue between $1.1 and $1.2 billion and approximately $5 billion, respectively. That information was 'incorporated into materials used by the Underwriters to market the Facebook IPO to investors in a road show commenced on May 7, 2012.' On May 7, Ps allege Facebook revised its revenue estimates downward for the second quarter to the low end of the $1.1 to $1.2 billion range and projected the 2012 fiscal year estimate to be 3% to 3.5% lower than the previously forecasted $5 billion. On May 9, Facebook amended its Registration Statement to advise potential investors of its revised estimates. On May 17 and 18, 2012, the Underwriters sold 484,418,657 shares of Facebook common stock to the public at prices ranging from $38.00 to $42.05 per share. Facebook received $37.582 for each share sold and the Underwriters received discounts and commissions amounting to $0.418 per share. Over 310 million of these shares were sold by the Lead Underwriters, which generated $129,000,000 in discounts and commissions. Ps contend that the amendment to the Registration Statement did not adequately disclose the revised estimates. After trading closed on May 18, 2012, the investors become aware that the Underwriters had already cut their estimates for Facebook ahead of the IPO. Facebook's stock price declined to '$34.03 on extremely high volume reflecting a decline of more than 10%' from the IPO price. The decline continued and on May 22, Facebook's stock closed at $31 per share -- 18.42% below the IPO price -- on high trading volume. The Underwriters declined to exercise their Green Shoe option to cover their short positions, choosing instead to purchase the over-allotted shares directly on the secondary market, at prices lower than the Green Shoe fixed price of $38.00 per share. The Underwriters 'made a profit of about $100 million with the bulk of that profit [having been] made on' May 21. P demanded that Ds disgorge their profits calculated under Section 16(b) by subtracting the sales prices of May 17 from the purchase prices during the following four days. Facebook declined to bring suit. P filed this complaint. The district court granted Ds' motion to dismiss because P's Section 13(d) group allegation was based entirely on the lock-up agreements which was insufficient to state a claim under Section 16(b). The lock-up agreements were 'insufficient to establish a Section 16(b) group.' Ps appealed.