Facebook Inc and lead underwriter Morgan Stanley were sued by shareholders who claimed they hid the social networking company's weakened growth forecasts ahead of its US$16 billion (S$20.44 billion) initial public offering.
The lawsuit came as Facebook and the banks that took it public face questions about the IPO, which culminated in a May 18 stock market debut plagued by technical glitches.
Facebook shares fell 18.4 per cent from their US$38 IPO price in their first three trading days. They were up US$1.08, or 3.5 per cent, at US$32.08 in Wednesday afternoon trading.
The lawsuit claimed that the defendants, including Facebook Chief Executive Mark Zuckerberg, Goldman Sachs Group Inc and JPMorgan Chase & Co, concealed "a severe and pronounced reduction" in revenue growth forecasts resulting from greater use of Facebook's app or website through mobile devices.
It also accused Facebook of telling its bank underwriters to "materially lower" their forecasts for the company. The lawsuit said the underwriters disclosed the lowered forecasts to "preferred" investors only, instead of all investors.
"The main underwriters in the middle of the road show reduced their estimates and didn't tell everyone," said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. "I don't think any investor in Facebook wouldn't have wanted to know that information."
Andrew Noyes, a Facebook spokesman, said: "We believe the lawsuit is without merit and will defend ourselves vigorously."
Morgan Stanley had no comment. It said on Tuesday that Facebook IPO procedures complied with all applicable regulations and were the same as in any initial offering.