Opposing law firms have alleged that there is a conflict of interest for North Carolina, as prominent state figure Erskine Bowles sits on Facebook’s board of directors. Bowles is listed as a defendant in the lawsuit.
“You have a glaring conflict of interest here,” said David Rosenfeld, a partner with law firm Robbins Geller Rudman & Dowd, which is leading the charge against North Carolina.
Bowles was UNC-system president from 2006 to 2010 and served as the Democratic chairman of President Barack Obama’s 2010 bipartisan commission on reducing the debt.
Bowles is now a board member for both Facebook and Morgan Stanley, one of the lead underwriters for Facebook’s IPO. His wife, Crandall, sits on the board of JPMorgan Chase, another underwriter.
Crandall helped raise money for Cowell, who is running for re-election in November.
“These are not disconnected entities,” Rosenfeld said. “These are people who have a real relationship. These are people who know each other well.”
Repeated attempts to reach Bowles were unsuccessful.
Cowell said in a statement that all defendants should be held accountable.
“Cowell chose to prosecute this case rather than standing on the sidelines, and she specifically approved filing suit against Mr. Bowles,” said Julia Vail, spokeswoman for Cowell, in an email.
“These facts demonstrate there is no conflict of interest.”
Rosenfeld, who is representing individual clients who allegedly lost about $1.5 million from Facebook’s investment, said if the court decides to hear his motion, the attorneys will make their arguments in front of the court.
If not, the court will review the class action suit as it stands.
Rosenfeld said he expects the process to take between two and four months.
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The retirement fund
North Carolina’s pension fund, which stands at about $74.5 billion, gives retirement benefits to state employees.
The $4 million loss isn’t significant, Vail said.
“The loss is approximately one half of one hundredth of one percent of the pension fund,” she said.
The fund benefits UNC-system employees, but Joni Worthington, spokeswoman for the system, said she doesn’t expect the loss to harm the viability of the fund.
It’s not unusual for pension fund managers to invest in an initial public offering, despite the risks attached, said Michael Gayed, chief investment strategist at Pension Partners, an investment portfolio management firm.
Facebook is a risky choice since it’s a “hot stock,” but if it is just one stock out of hundreds, Gayed said a loss wouldn’t hurt the fund.
In a diversified portfolio, the gains of a strong stock outweigh any losses, he said.
Vail said it’s the state’s policy not to comment on the holdings or future plans of the investment managers.
Legalities of the case
In its motion to be lead plaintiff, North Carolina claimed that Facebook misrepresented its financial condition by not disclosing a decline in its revenue growth, except to “favored investors.”
Rosenfeld said this was a clear violation of the law: “We know for a fact that this information was available.”
A lawyer from New York law firm Bernstein Litowitz Berger & Grossmann, which represents North Carolina, did not respond to an interview request Friday.
But Michael Pachter, a Facebook analyst with Wedbush Securities, said companies aren’t required to give forward-looking statements.
“If management did not articulate their strategy, then buyer beware,” he said.
Pachter, who was not familiar with the lawsuit, does not own any Facebook stock.
Rosenfeld said Facebook should have decreased estimates for its projected revenue, especially because the company isn’t making money from the mobile device niche.
“Too many people are accessing Facebook from their mobile devices, which they don’t have a revenue stream yet,” he said.
But Pachter called that argument a “slam dunk loser.”
“It’s pretty blatantly obvious to any average person that they don’t deliver as many ads on the phone.”
Pachter said Facebook’s IPO had some serious mistakes, mainly the high amount of shares sold.
If Facebook truly didn’t disclose important information, Pachter said that could be considered fraud.
But based on his knowledge of Facebook’s IPO, Pachter said he didn’t think the company acted illegally.
“You don’t win a lawsuit just because you lost money in the investment,” he said.
Contact the desk editor at state@dailytarheel.com.
