Yesterday, the defendants in the consolidated In re Facebook litigation before Judge Sweet moved to dismiss the plaintiffs’ claims in their entirety. The defendants argued that the plaintiffs had failed to state a claim based on statements that mobile phone usage of Facebook “may negatively affect our revenue” when Facebook knew already that mobile usage – which did not generate ad revenue – already had impacted its revenue and would continue to do so.
What Plaintiffs apparently seek is Facebook’s quantification of how the company thought increased mobile usage and product decisions might affect future revenue growth. Thus, Plaintiffs complain that Facebook “failed to disclose that … as a result of these trends, [the company] had decreased its expected revenue for the second quarter of 2012,” and for the entire year. Compl. ¶ 201 (emphasis added). By “expected revenue,” of course, Plaintiffs mean “revenue projections.” But the SEC and courts throughout the country “have uniformly agreed that internal calculations and projections” need not be disclosed before an IPO. Derivative Op. at *23 (internal quotation omitted). The reason for this rule—that revenue projections are inherently speculative and unreliable—is illustrated by the facts of this case. The revised projections which Plaintiffs claim should have been disclosed turned out to be too conservative; Facebook’s actual results exceeded even its original projections (which were also not publicly disclosed). Plaintiffs nonetheless insist that Facebook’s projections must be “highly material” because the company provided this information to its underwriters’ analysts. Compl. ¶ 177. But even if one were to accept that dubious supposition, “[a] material omission … is actionable only if the omitted facts were … required by SEC regulations to be stated in the relevant communication.” In re Focus Media Holding Ltd. Litig., 701 F. Supp. 2d 534, 539 (S.D.N.Y. 2010). And the SEC has consistently refused to require issuers to disclose to the public all “material nonpublic information” that they share with investment professionals prior to an IPO, because such a rule would “adversely affect the capital formation process.” 70 Fed. Reg. 44722, 44760 (Aug. 3, 2005). Plaintiffs would have this Court impose—retroactively—a rule which the SEC has for decades thoughtfully rejected. This Court should decline the invitation.