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Twitter Hit With $124M Claim Days Before IPO

(CN) - Twitter duped two financial firms into helping it drum up a private market stock price "that could be reasonably relied upon" when the company goes public Nov. 15, the firms claim in a $124 million federal lawsuit.

Precedo Capital Group Inc. and Continental Advisors SA say one of the social-networking site's shareholders, nonparty GSV Asset Management, approached them with a plan to sell up to $278 million worth of Twitter stock owned by employees, contractors and others who were paid in restricted shares during the company's early days.

Twitter claimed it was trying to avoid the "pitfalls" that plagued Facebook's initial public offering, when the aftermarket stock price took a hit due to private trading of restricted stock before the IPO.

"Twitter wished to eliminate the overhang of Twitter stock that had already been issued by Twitter to employees and contractors through managed sales and by controlling the buyers and sellers by establishing only 'approved buyers' of Twitter stock," the firms claim in Manhattan Federal Court.

They say this was the reason Twitter gave them for helping it line up accredited investors who would buy private Twitter stock. Matthew Hanson of GSV Asset Management allegedly told Precedo Capital that "Twitter is controlling the secondary market because they don't want another Facebook."

Continental Advisors and GSV Asset Management embarked on an 18-day international roadshow, giving 47 presentations to high-end investors in eight countries, according to the lawsuit. Precedo Capital allegedly pitched investors and broker-dealers in New York, Chicago, Florida, Virginia and Pennsylvania.

The plaintiffs say investors offered to buy more than $50 million in stock at $19 per share -- at which point Twitter abruptly pulled the plug.

"Although Precedo Capital and Continental Advisors were prepared to close the sales transactions under the agreements with GSV Asset, GSV Asset postponed the closings and ultimately canceled the offering," the lawsuit states. "This caused plaintiffs to suffer millions of dollars of losses in commissions, fees and expenses, in addition to business reputation losses, in not completing the sale of Twitter stock to the accredited investors and institutions that subscribed and indicated for the purchase of Twitter stock."

The plaintiffs say Twitter never planned to complete the private sale, and "was apparently testing the market price for its future IPO."

"Twitter's intention was to never sell the stockholders' shares that it controlled," the lawsuit states. "Rather, Twitter, through plaintiffs, would be able to establish a private market price that could be reasonably relied upon in an IPO."

The social-networking site merely used the plaintiffs to test the waters with global investors, the firms say. The public will now be purchasing shares at an inflated price "based upon Twitter's pre-IPO fraudulent representations," according to the lawsuit.

Last week Twitter announced that it would price its shares at $17 to $20 a piece, valuing the company at about $11 billion.

"The public as a whole is injured because the IPO price of Twitter shares is not justified by standard methods of valuation, i.e., price earnings ratio and balance sheet valuations," the firms claim.

They say the microblogging service hasn't churned a profit since it was founded in 2006 by Jack Dorsey, Evan Williams and Biz Stone. Twitter's status as a relative newcomer in an unproven market "made it difficult to evaluate Twitter's future prospects and its overall market valuation," they claim.

Twitter did not immediately respond to a request for comment.

Precedo Capital and Continental Advisors want Twitter Inc. to pay $24.2 million for the alleged fraud, plus $100 million in punitive damages.

They are represented by Joseph Baratta of Baratta, Baratta & Aidala LLP in New York.

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