Alison Frankel

Every company considering an IPO owes a hearty thanks to U.S. District Judge Robert Sweet of Manhattan for his decision Wednesday to dismiss four shareholder derivative suits against Facebook board members. Sweet’s painstaking 70-page opinion includes holdings that are great for Facebook’s defense of a parallel securities class action over its disclosures to IPO investors, but the judge also reached precedent-setting conclusions on standing and ripeness that will help other derivative defendants ward off IPO-based claims in state court. Facebook’s lead lawyers, Andrew Clubok of Kirkland & Ellis and Richard Bernstein of Willkie Farr & Gallagher, certainly deserve credit for coming up with innovative arguments to establish valuable precedent in IPO cases.

I believe Sweet’s ruling may have application beyond IPO derivative suits, though. The decision could represent a way for defendants to address the proliferation of derivative suits that are inevitably filed in multiple state courts after M&A deals are announced.

First, a refresher on the allegations and procedural background of the Facebook derivative suits. The complaints allege that under the direction of Facebook’s board, the company failed to make adequate disclosures to IPO investors about Facebook’s revenue projections and challenges in adapting to smart device usage. (If those sound an awful lot like securities class action claims, that’s because the derivative suits parallel a securities case against Facebook that is also before Judge Sweet.) Three derivative suits were filed in state courts in California. A fourth was filed in federal court in Manhattan. Defendants removed the three California cases to federal court in San Francisco. Then, before shareholders could litigate motions to remand them to state court, the Judicial Panel on Multidistrict Litigation transferred all of the derivative litigation to Sweet in Manhattan federal court.

Facebook made a number of arguments about why the derivative suits should be dismissed, most of which Sweet agreed with. In findings that will probably turn out to be the most useful for the company, the judge said that Facebook “repeatedly made express and extensive warnings” about the challenge of increased use of mobile devices and that the company was not obligated to disclose internal revenue projections. Sweet’s conclusion about the adequacy of Facebook’s warnings will help the company’s defense in the ongoing securities class action. And according to Facebook defense lawyers Clubok and Bernstein, all IPO issuers should be relieved by Sweet’s strong language on the disclosure of internal projections, in which the judge cited “courts throughout the country” that have “uniformly agreed” such internal calculations aren’t material.

“An opposite ruling on disclosure would have changed at least two decades of IPO practice,” Bernstein told me. “It would have been a revolutionary change.”

Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd are the most successful members of the securities class action bar. Check the ISS rankings for 2011: Bernstein Litowitz is in the top slot, with $1.37 billion in settlements last year; Robbins Geller is second, with $1.14 billion. Those total dollars, though, mask the very different business models of the two firms, which are reflected in two other numbers on the ISS chart. Bernstein Litowitz settled only 13 cases in 2011, for an average settlement of about $106 million. By contrast, Robbins Geller settled 28 – more than twice as many as Bernstein Litowitz and 12 more than any other leading class action firm. Robbins Geller’s average settlement was about $49 million, less than any firm in the top 10 except Milberg. Both models work, or you wouldn’t always see Bernstein Litowitz and Robbins Geller at the top of the ISS rankings, but the firms are the yin and yang of securities class action litigation.

That’s why it’s so interesting that they’re both angling for lead counsel appointments in the two hottest cases of the year. The deadlines for lead plaintiff briefs have come and gone in the JPMorgan “London Whale” and Facebook IPO cases. There’s plenty of competition in both – though, as I predicted, less in the JPMorgan case – but the strongest leadership bids come from clients represented by Robbins Geller or Bernstein Litowitz.

Let’s look first at the JPMorgan briefs, which came in earlier this month. JPMorgan lost more than $17 billion in market capitalization when it disclosed in May that its chief investment office had lost $2 billion as a result of risky credit default swap positions taken by the so-called London Whale, derivatives trader Bruno Iksil. Shareholders have offered different theories about when the bank’s alleged deception began, but they all point to CEO Jamie Dimon calling the CDS position “a tempest in a teapot” in an April call with analysts.

Securities class action lawyers have short attention spans. It was only last week, after all, that JPMorgan Chase and its $2 billion (and counting) loss on its credit default swap hedge was the topic of the moment. Plaintiffs’ lawyers and their institutional clients were figuring out whether they bought the bank’s shares in the one-month period between CEO Jamie Dimon telling analysts that the hedge was a “tempest in a teapot” and Dimon disclosing the initial $2 billion loss. But after an initial flurry of filings and press releases about the JPMorgan case, this week has brought no additional complaints against the bank – even as the impact of JPMorgan’s hedge ripples through credit markets and regulatory debate.

Instead, the securities class action bar has scurried this week to grab a piece of what will undoubtedly become known as In re: Facebook IPO Securities Litigation. On Tuesday Alistair Barr of Reuters reported that Morgan Stanley, the lead underwriter for Facebook’s initial public offering, told favored clients that the bank’s Internet analyst was cutting his revenue forecast for the company. Almost as soon as plaintiffs’ firms could cut and paste Barr’s story into a complaint, the shareholder class actions began piling up. By Thursday evening, at least eight suits against Facebook and its underwriters had been filed in federal court in Manhattan and San Francisco. Some big-name plaintiff firms were among the early filers, including Hagens Berman Sobol Shapiro, Girard Gibbs, Wolf Haldenstein Adler Freeman & Herz and (inevitably) Robbins Geller Rudman & Dowd.

Neither the JPMorgan nor the Facebook IPO case is a slam-dunk, by any means. Despite increasing concern about the risk of JPMorgan’s $100 billion CDS bet – and its alleged failure to disclose that risk – shareholders won’t have an easy time proving that they bought JPMorgan shares because they relied on Dimon’s “tempest in a teapot” remark. In the Facebook IPO case, meanwhile, underwriters will argue that Facebook’s uncertain revenue prospects were adequately disclosed in the IPO offering materials, and whatever additional information was conveyed to favored clients was permissible oral communication under rules the Securities and Exchange Commission adopted in 2005.

If Paul Ceglia — the onetime wood pellet salesman from upstate New York who hired Mark Zuckerberg as a computer programmer before Zuckerberg founded Facebook — thought he’d wring a quick settlement out of his claim to own a piece of Facebook by virtue of a two-page contract Zuckerberg signed in 2003, boy did he think wrong. Facebook’s long-awaited motion to dismiss, finally filed Monday in federal court in Buffalo, asserts that Ceglia was out for an easy score based on a doctored version of the 2003 contract. But it’s not easy to put one over on Zuckerberg or his lawyers at Gibson, Dunn & Crutcher. Facebook’s 74-page dismissal motion is a virtual compendium of the tiny mistakes (alleged) frausters can make and the ways determined defendants can find them out.

I should say upfront that Ceglia’s lawyers at Boland Legal and Milberg dispute Facebook’s assertion that Ceglia is a con man. Milberg is a recent addition to Ceglia’s ever-changing legal roster, but Team Ceglia has intimated that if anyone has manipulated the evidence in this case, it’s Zuckerberg, a legendary computer whiz. Here’s the official comment from Ceglia’s lawyers on Monday’s motion to dismiss:

We have made a preliminary review of Facebook’s motion, which attempts to have this matter ended before Facebook has to provide any discovery and before going to a jury. The Federal Rules of Evidence say a jury should weigh the evidence in this case, including experts’ declarations in Mr. Ceglia’s favor about the authenticity of his contract with Mr. Zuckerberg. Mr. Ceglia deserves his day in court, where the jury will resolve this dispute over the ownership of Facebook.

Buried on page 93 of Facebook’s Securities and Exchange Commission registration for its $5 billion initial public offering is a very interesting disclosure.

“The Enforcement Division of the Securities and Exchange Commission has been conducting an inquiry into secondary transactions involving the sale of private company securities as well as the number of our stockholders of record,” the disclosure said. “In connection with this inquiry, we have received both formal and informal requests for information from the staff of the SEC and we have been fully cooperating with the staff. We have provided all information requested and there are no requests for documents or information that remain outstanding. We believe that we have been in compliance with the provisions of the federal securities laws relating to these matters.”

The fact of that paragraph alone is news. The New York Times reported in Dec. 2010 that the SEC was looking into the red-hot secondary market for trading in the privately-held shares of Facebook, Zynga, LinkedIn, Twitter, and some other Internet darlings. The leading market-maker for such trading, SecondMarket, confirmed last January that it had received a voluntary request for information from the SEC (which has never confirmed the investigation). But Facebook is the first company to offer any hard facts about what the agency is probing.

On Thursday, the Buffalo federal court judge overseeing Paul Ceglia’s claim to own half of Facebook — by virtue of a 2003 contract he claims CEO Mark Zuckerberg signed as a Harvard undergraduate — is expected to enter an order directing Ceglia to return from Ireland to produce crucial undisclosed computer evidence, and to answer Facebook’s withering questions about the authenticity of the contract and his own failures to comply with previous court directives.

For Facebook’s lawyers at Gibson, Dunn & Crutcher, this order, which follows a three-hour hearing Wednesday, is the latest success in a string of rulings that express the judge’s concern with the evidence offered by Ceglia, an upstate New York wood-pellet salesman who decamped to Ireland in the face of Facebook’s relentless attacks. Facebook’s lead lawyer, Orin Snyder of Gibson, said that when Ceglia finally produces the evidence ordered Thursday, his purported two-page contract with Zuckerberg will be indisputably exposed as a fraud.

But Ceglia’s latest lawyer — who joined the case about two weeks ago, after four other firms resigned over the last year — told me in a long interview Wednesday evening that he and Ceglia have turned the tables on Facebook and Gibson Dunn. In the face of sanctions motions by Facebook, California solo Dean Boland filed retorts accusing Facebook and Gibson Dunn of tampering with the original contract between Ceglia and Zuckerberg, who did some coding work for Ceglia before founding Facebook, and with Zuckerberg’s Harvard email account. Facebook and Gibson have argued, very persuasively, that the Harvard email records prove Ceglia fabricated a series of emails between him and Zuckerberg to bolster his false account of their contract.

Note to disgruntled employees: you can’t be fired for complaining about your job on Facebook. That’s the upshot of the first ruling to address employees’ use of social media by a National Labor Relations Board judge. Last week, in a case called Hispanics United of Buffalo, administrative law judge Arthur Amchan said HUB violated the National Labor Relations Act when it fired five employees who commiserated about their jobs on Facebook. Judge Amchan’s ruling endorsed the NLRB’s stance that employees are protected from retribution for job-related postings. “Discussions about the workplace are protected whether they occur at the watercooler or the virtual watercooler,” said Laura Lawless Robertson of Greenberg Traurig, who sent out an alert about the NLRB administrative law judge’s ruling Friday.

The HUB Facebook posts came in response to an October 2010 Facebook warning from one HUB employee that a co-worker was complaining about people in the housing division. “[She] feels that we don’t help our clients enough at HUB,” the warning said. “I [have] about had it! My fellow coworkers how do u feel?”

At least seven HUB employees posted responses, some of which were pretty angry. “Tell her to come do [my] fucking job,” one post said in part. “This is just dum.”

It’s been more than 15 years since e-mail began to enliven (or blight, depending on your perspective) the discovery process. By now — despite some notable fiascos (see, for instance, here and here) — we’ve got well-established case law to guide lawyers and their clients in e-mail production. Too bad that’s yesterday’s means of communication. Today it’s all about Twitter, Facebook, and Google+, whatever that is. So to celebrate establishing a Twitter account for On the Case (@AlisonFrankel), I figured I’d look at the e-discovery frontier of social media.

The news isn’t very good. What little consideration the courts have given to social media discovery has been in the context of postings by individuals, not corporations. And all signals indicate that social media data is broadly discoverable. As Gibson, Dunn & Crutcher explains in its just-published e-discovery report, courts continue to find that when you post to Facebook, Twitter, or their equivalents, you give up the expectation of privacy, even if you’ve sent private messages or set up restrictions on who can see your profile. Judges are increasingly likely to order litigants to provide access to their social media accounts and to preserve their posts. In May, for instance, a Pennsylvania state court judge ruled that a personal injury plaintiff had to turn over even his private Facebook posts to the defense.

It’s no giant leap from that kind of ruling to a looming problem for businesses. As corporations venture into social media to promote their brands and reach out to clients and customers, they have to be prepared to face the same discovery demands. In late July, a Symantec flash poll of 1,225 information tech executives reported that “social media incidents” — such as employees posting confidential corporate information – cost businesses an average of $4.3 million, of which more than $650,000 was attributed to litigation costs. That’s just the beginning, though, according to Symantec, which says corporations face increasing risk of scrutiny for their social media posts. E-discovery of such posts is a certainty, according to Symantec. (Caveat emptor: Symantec has an ulterior motive for predicting social media e-discovery doom. On Monday the company introduced a new version of its e-mail archiving software that includes social media archiving as well.)