MANHATTAN (CN) — There was nothing unfair about “lock-up agreements” that earned $100 million for major banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley during Facebook’s ill-fated initial public offering from 2012, the Second Circuit ruled Thursday.
On May 18, 2012, one of the largest IPOs in history served as the prelude for a tremendous amount of litigation.
Facebook offered 421 million shares of common stock at $38 per share, and the market’s high hopes as trading peaked at $45 ended with disappointment — and extensive lawyering — as the stock tanked at $31 at the end of the day.
Leading one of these cases, shareholder Robert Lowinger accused Facebook, Mark Zuckerberg and the banks that underwrote the IPO of downgrading earnings expectations before the offering but sharing the bad news only with “certain preferred investors.”
Among the dozens of financial institutions and bankers as defendants, only three are involved in the appeal together with Facebook: Morgan Stanley, JPMorgan Chase and Goldman Sachs.
The shareholders took the case to the Second Circuit after U.S. District Judge Robert Sweet dismissed the lawsuit in 2014, finding that the “lock-up agreements” — as they are known — did not make the underwriters beneficial owners of the aggregated shares under securities law.
On appeal, the Securities and Exchange Commission boosted the banks’ position by advising the appellate court that “lock-up agreements” do not implicate the Exchange Act’s ban on insiders making short-swing profits.
There is an exception to this rule for good-faith underwriting of IPOs, a rule that the banks argued is necessary for any offering to take place.
The Second Circuit unanimously adopted that reasoning Thursday in a 20-page opinion.
“As parties to lock-up agreements, the underwriters are not acting as investors seeking to buy low and sell high,” Circuit Judge Ralph Winter wrote for the court.
“Rather, they are conduits for the distribution of securities in an offering to the public in which their participation begins and ends with the offering,” he continued. “A central role of the standard lock-up agreement is to limit the investment decisions of large shareholders in order to bring about an orderly, and successful, offering.”
The judges found that these agreements help the markets, rather than making them unfair.
“Far from being nefarious, these actions benefit existing shareholders and new public investors,” Winter wrote.
Such agreements suit the goals of regulating IPOs to enhance accurate pricing and stabilization by underwriters, Winter said.
“Achieving that purpose requires assurances of control over the disposition of blocs of shares owned by large pre-IPO investors, and lock-up agreements provide that control,” he wrote.
Attorneys for the banks and the plaintiffs did not immediately respond to email and telephone requests for comment.
Facebook’s lawyer Andrew Clubok, a partner at Kirkland & Ellis, declined to comment..