LAS VEGAS (CN) – Misrepresentations about Facebook’s video advertising revenues cost shareholders $4 billion in one day while enriching its executives, four investors say in a federal class action.
Plaintiffs Aurangzeb Nagy, Robert Vannah, George Kleanthis and Zanetta Kleanthis say in their lawsuit filed Tuesday in Nevada that they are among those who held common shares in Facebook from April 1, 2015, through Nov. 16.
The investors say Facebook founder and CEO Mark Zuckerberg and the social media giant's other officers concealed a defect in their advertising metrics used to measure revenue from videos.
As a result, "shareholders purchased or held Facebook stock believing that the company had the ability to sustain growth in paid advertising and could successfully execute its paid advertising plan and related metrics,” according to the complaint.
"All the while, however, defendants knew that significant errors with the Facebook metrics were inflating and misrepresenting the volume and duration of Facebook ad views, and that the eventual discosure of such errors would result in plunging ad sales," the investors say in their complaint.
They say Facebook promoted its advertising metrics as an important tool for measuring the success of paid ads, but had no independent verification of its results.
On May 4, 2014, Facebook's "business page touted the 'video metrics' as providing advertisers with information 'like video views, unique views, the average duration of the video view and audience retention,'" the investors say
Facebook also promoted the new video ad metrics as "'designed to help you learn what's resonating with people and determine how to more effectively create and promote your videos on Facebook,'" according to the lawsuit.
The investors say that on April 17, 2015, Facebook started analyzing data from its advertising metrics and discovered it had miscalculated several that measured the performance of ad content.
Soon after learning of the miscalculations and before notifying the public, the investors say Zuckerberg and the other Facebook executives "began to sell of Facebook stock in unprecedented quantities."
It wasn't until Sept. 23 of this year – nearly 18 months after discovering the miscalculations – that Facebook publicly acknowledged the error in its paid video-advertising metric, which caused inflated revenue projections for video advertising, the investors say.
Facebook downplayed the effect of its error and did not disclose other known errors or alert investors of their potential impact on Facebook's revenue, according to the complaint.
Meanwhile, Zuckerberg sold millions of Facebook shares while other defendant Facebook officers and executives sold tens of thousands of Facebook shares "while in possession of adverse undisclosed information about the company,” the investors say in their lawsuit.
Zuckerberg and the other officers "possessed the power and authority to control and did control the contents of Facebook's public reports, press releases and presentations to securities analysts, money and portfolio managers, and institutional investors." But they intentionally concealed "adverse facts" while continuing to make "positive representations," which they knew were "materially false and/or misleading," the investors say.
Facebook reported more advertising metrics errors in October, and on Nov. 3 announced it expected a significant decrease in ad revenue for the next year and would take on more debt, according to the lawsuit.
On Nov. 3, Facebook shares trading under the FB symbol closed at $120, down from $127.17 a day earlier, according to NASDAQ. The investors say the $7 drop represents a $4 billion decline in value.
Facebook shares closed at $120.84 on Wednesday.
The investors say the market did not realize the problem's full extent until Nov. 16, when Facebook’s stock price closed at $116.24. After the decline, Facebook initiated its first shares buy-back program, according to the lawsuit.
Facebook generates 97 percent of its annual revenues from advertisers. During the last three months of 2015, Facebook generated $5.8 billion in revenues and $1.6 billion in profits from its advertising revenue, the investors say.
They seek general, special and punitive damages plus interest, costs and class certification, on violations of the Exchange Act.
Named as defendants are Zuckerberg, Facebook, CFO David Wehner, COO Sharon Sandburg, Chief Product Officer Christopher Cox, Chief Technology Officer Michael Todd Schroepfer, Chief Accounting Officer Jas Athwal, vice president and general counsel Colin Stretch, director Jan Koum, and vice president David Fischer.
Facebook did not immediately respond to an email request for comment Wednesday morning.
Las Vegas attorney Robert Eglet of the Eglet Prince law firm filed the complaint and was not immediately available for comment by telephone Wednesday morning.
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