In re Facebook, Inc.

• Decision Date: 12 December 2013
• Docket Number: MDL No. 12–2389.
• Citation: 986 F.Supp.2d 487
• Parties: In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.
• Court: U.S. District Court — Southern District of New York

986 F.Supp.2d 487

In re FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION.

MDL No. 12–2389.

United States District Court, S.D. New York.

Dec. 12, 2013.

Bernstein Litowitz Berger & Grossman LLP by Max W. Berger, Esq., Steven B. Singer, Esq., John J. Rizio–Hamilton, Esq., Catherine E. McCaw, Esq., Labaton Sucharow LLP, by Thomas A. Dubbs, Esq., James W. Johnson, Esq., Louis Gottlieb, Esq., Thomas G. Hoffman, Jr., Esq., New York, NY, Attorneys for Co–Lead Plaintiffs and the Class.

Kessler Topaz Meltzer & Check LLP by David Kessler, Esq., Darren J. Check, Esq., Radnor, PA, for Co–Lead Plaintiff Banyan Capital Master Fund.

Lieff Cabraser Heimann & Bernstein by Steven E. Fineman, Esq. Daniel P. Chiplock, Esq., New York, NY, for Named Plaintiffs Jose G. Galvan and Mary Jane Lule Galvan.

Kirland & Ellis LLP by Andrew B. Clubok, Esq., Brant W. Bishop, Esq., Willkie Farr & Gallagher LLP by Tariq Mundiya, Esq., Todd G. Cosenza, Esq., Sameer Advani, Esq., New York, NY, Kirland & Ellis LLP by Susan E. Engel, Esq., Kellen S. Dwyer, Esq., Bob Allen, Esq., Willkie Farr & Gallagher LLP by Richard D. Bernstein, Esq., Elizabeth J. Bower, Esq., Washington, DC, Attorneys for Facebook, Inc. and Individual Facebook Defendants.

Davis Polk & Wardwell LLP by James P. Rouhandeh, Esq., Charles S. Duggan, Esq., Andrew Ditchfield, Esq., New York, NY, Attorneys for Underwriter Defendants.

OPINION & ORDER

SWEET, District Judge.

Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”), entered on October 4, 2012, 41 actions stemming from the May 18, 2012 initial public offering (“IPO”) of Facebook, Inc. (“Facebook” or the “Company”) are presently before this Court.

The instant motion relates to Plaintiffs 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; and the Named Plaintiffs' Jose G. Galvan and Mary Jane Lule Galvan (collectively, “Lead Plaintiffs” or “Plaintiffs”) consolidated class action complaint (the “Consolidated Class Action Complaint” or “CAC”) alleging federal securities claims (the “Securities Actions”) against the Defendants Facebook, certain Facebook directors and officers (the “Individual Defendants”),¹ and underwriters of the initial public offering (“IPO”) of Facebook (the “Underwriter Defendants”) ² (collectively, “Defendants” or “Facebook Defendants”). The Defendants have moved to dismiss the Class Action Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) for failure to state a claim. Based on the conclusions set forth below, Defendants' motion to dismiss is denied.

I. Prior Proceedings

On September 20, 2012, the MDL Panel held a hearing to determine whether the pending 41 filed actions should be transferred to the Southern District of New York. On October 4, 2012, the MDL Panel issued a transfer order, finding that the “Southern District of New York is an appropriate transferee district for pretrial proceedings in this litigation,” reasoning that “[m]uch of the relevant discovery will be located in New York....” In re Facebook, IPO Secs. & Derivative Litig., 899 F.Supp.2d 1374, 1376–77 (U.S.Jud.Pan.Mult.Lit.2012). The cases were assigned to this Court for coordination or consolidation of the pretrial proceedings. Id.

Of the 41 actions presently before the Court due to the MDL Panel's transfer order, 30 of these actions allege violations of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) against movants and various underwriter defendants. On December 6, 2012, this Court issued an opinion, In re Facebook, IPO Sec. & Derivative Litig., 288 F.R.D. 26 (S.D.N.Y.2012) (the “December 6, 2012 Opinion”), which consolidated the actions alleging violations of the Securities Act and Exchange Act into the Securities Actions and Lead Plaintiffs were appointed.³ The class actions against the NASDAQ OMX Group Inc. and The NASDAQ Stock Market LLC (collectively “NASDAQ”) alleging federal securities (the “NASDAQ Securities Actions”) and negligence claims (the “NASDAQ Negligence Actions”) (collectively, the NASDAQ Actions”) were also consolidated. The cases alleging derivative claims (the “Derivative Actions”) are currently not consolidated, with individual plaintiffs in the Derivative Actions having brought forth separate actions.

Lead Plaintiffs for the Securities Actions filed the Consolidated Class Action Complaint on February 28, 2013. The CAC alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act.

The Defendants filed the instant motion to dismiss the Securities Actions on April 30, 2013. Oral arguments were held, and the motion was marked fully submitted, on October 8, 2013.

II. Allegations of the Consolidated Class Action Complaint

Alleged facts and prior proceedings underlying this opinion are set out in the December 6, 2012 Opinion. Accordingly, only facts relevant to this motion will be provided below. Because this is a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the following facts, which this Court assumes to be true, are drawn from the CAC. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (“[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true.”).

The CAC refers to the events surrounding and arising out of Facebook's May 18, 2012 IPO.⁴ Facebook is a worldwide online social networking company that (i) builds tools that enable users to connect, share, discover and communicate with each other; (ii) enables developers to build social applications of Facebook or to integrate their websites with Facebook; and (iii) offers products that enable advertisers and marketers to engage with its users. Facebook is currently the world's largest social network. (CAC ¶ 84.) As of March 31, 2012, Facebook reported that 901 million “active users” accessed its website each month, nearly half the people who use the Internet and approximately 13% of the world's population. ( Id.) 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 space on its network to companies that want to reach Facebook's user base via advertisements displayed to Facebook members. The Company's advertising revenue accounted for 98%, 95% and 85% of the Company's revenues in 2009, 2010, and 2011 respectively. ( Id. 191.)

In 2011, Facebook began to explore engaging in an IPO to compete with other rival cash-rich technology companies. The Company's shares were traded on private exchanges, but accessing the public markets through an IPO would provide the Company with large amounts of cash, create a highly liquid market for its stock and had the potential to significantly increase the Company's value, among other benefits. ( Id. ¶ 85.)

On February 1, 2012, Facebook publicly filed its initial registration statement with the SEC ⁵ (the “Feb. 1 Registration Statement”). ⁶ (CAC ¶ 89.) The Feb. 1 Registration Statement contained historical data about Facebook's performance and a description of risks associated with the company. 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.” Feb. 1 Registration Statement, at 79. It further stated that the Company has consistently “experienced rapid growth in the number of users and their engagement.” Id., at 1. Facebook's advertising and total revenue grew from approximately $153 million to $3.2 billion from 2007 to 2011, a growth of more than twenty times in four years. (CAC ¶ 92.) During this time period, Facebook's annual revenue grew from $153 million to more than $3.7 billion. ( Id.)

Facebook ascribed its financial results to several factors. 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. (CAC ¶ 95.) A second factor was the Company's “product decisions,” decisions Facebook made concerning the design and features of its website, the type of advertising it displayed and the price of the advertisements. (CAC ¶ 96.)

The usage of Facebook on mobile devices was critical to Facebook's financial performance for several reasons. First, Facebook's mobile market was extremely large: 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, the Company's mobile users were growing more rapidly than the rest of the Company's user base. Facebook anticipated the growth rate of its mobile users to exceed the growth rate of their overall member base for the foreseeable future. Third, while Facebook showed large volumes of advertising to users who accessed its website through desktop computers, it did not yet show advertising to its mobile users. Mobile users were, at that time, an unmonetized resource and an important factor for Facebook's future growth. (CAC ¶ 94.) The Feb. 1 Registration Statement 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. Feb. 1 Registration Statement, at 4.

The Feb. 1 Registration Statement also included warnings of risk factors to potential investors. These warnings included specific disclosures on the impact of mobile usage and that Facebook's ability to...