A Bird In The Hand Is Worth … Nothing If You Can’t Really Sell It

by Orrick - Securities Litigation and Regulatory Enforcement Group
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http://blogs.orrick.com/securities-litigation/files/2012/10/iStock_000003326422XSmall-200x150.jpgA pair of investment firms recently filed suit against Twitter in the Southern District of New York, alleging that Twitter had fraudulently refused to allow them to sell its private stock in advance of its much-anticipated IPO.  If that sentence looks somewhat bizarre, it is because the allegations themselves are bizarre, at best.

In short, the plaintiff investment firms allege that a managing partner of GSV Asset Management, who was a Twitter shareholder, engaged them to market a fund that would purchase and hold nearly $300 million in private Twitter shares from the Company’s early-stage shareholders.  Plaintiffs then embarked on an “international roadshow” to line up investors in the fund.  Plaintiffs allege that, on the roadshow, “there was substantial interest in purchasing [the private] Twitter shares at $19 per share.”

According to plaintiffs, once Twitter heard that investors would purchase its private stock at $19 per share, it cancelled the transaction and, in fact, never intended to allow the private sales to occur.  Instead, plaintiffs allege, Twitter really only wanted to “determine if the $19 per share value of Twitter stock could be maintained and supported with accredited investors and institutions in the private market.”  This “test market procedure” would allegedly allow Twitter to “maintain that a private market existed at or about $19 per share” for purposes of establishing an appropriate price range in connection with an IPO.

The suit alleges common law fraud based on Twitter’s alleged misrepresentation that it “desired to sell Twitter stock” through the plaintiffs.  But plaintiffs’ allegations raise a number of obvious questions.  In the first instance, why are plaintiffs suing Twitter, rather than GSV Asset Management?  If their deal was with GSV, how could Twitter be held liable for having made a misrepresentation? The complaint alleges that Twitter “represented that it had access to and available for resale $278,000,000 of stock,” but admits that representation was made in “the course of dealings by and between Twitter and GSV Asset.”  Still other misrepresentations were allegedly made “through” representatives of GSV Asset.  The Supreme Court’s holding in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) that “[o]ne ‘makes’ a statement by stating it” does not control this common law fraud claim, but nonetheless somewhere Justice Thomas (the author of Janus) must be cringing.

Other apparent issues are cast in a similar mold, including the viability of the plaintiffs’ reliance and causation theories.  Suffice it to say, in 140 characters or less, that in the time of the blockbuster IPO this will be a case worth watching.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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