NEW YORK -- Twitter Inc. was sued for $124 million Wednesday by two companies that said the social media darling defrauded it into pushing forward with a doomed private sale of its shares to stoke investor interest for its initial public offering.
In a lawsuit filed in U.S. District Court in Manhattan, Precedo Capital Group and Continental Advisors accused Twitter of using the aborted sale as a means to give the money-losing company a $10 billion market valuation and higher IPO price.
"Twitter never intended to complete the offering on behalf of Twitter stockholders, in the private market, thereby causing substantial damages to the plaintiffs in the loss of commissions, fees and expenses, as well as through their business reputation," the lawsuit said.
The financial firms seek $24.2 million of compensatory damages, $100 million of punitive damages, and other remedies.
Jim Prosser, a spokesman for Twitter, didn't immediately respond to a request for comment.
The lawsuit comes as anticipation builds for Twitter's IPO, widely considered the most highly awaited since Facebook Inc. (FB) went public in May 2012.
Last week, the San Francisco-based company said it would offer its shares at between $17 and $20 each, valuing the company at up to about $11 billion.
Like many Silicon Valley start-up companies, Twitter has paid employees and contractors using private stock.
According to the lawsuit, it was worried about repeating some problems afflicting Facebook's $16 billion offering. %VIRTUAL-article-sponsoredlinks%In particular, the lawsuit said Twitter sought to avoid the potential for excess supply of company shares by controlling the buyers and sellers of those shares in the private market.
Precedo, an Arizona-based broker dealer, and Continental, a Luxembourg financial adviser, said they were contacted by GSV Asset Management, an approved buyer of Twitter stock, about marketing a fund that could only purchase Twitter shares.
GSV allegedly had negotiated an agreement with Twitter in which it would arrange the sale of up to $278 million of shares owned by employees and others, in blocks of $50 million.
Precedo and Continental said they lined up commitments for the first $50 million block, and set up road shows in the United States, Europe and Asia where GSV managing partner Matthew Hanson disclosed material non-public information about Twitter.
But they said Twitter eventually blocked the sale after learning that Precedo and Continental had attracted investors willing to pay $19 a share, considerably above the $17 or less offered in other private market transactions.
The firms now say Twitter "never intended" to allow the private stock sales to go forward.
"Twitter's intention was to induce Precedo Capital and Continental Advisors to create an artificial private market wherein Twitter could maintain that a private market existed at or about $19 per share for the Twitter stock," they said.
The case is Precedo Capital Group Inc. v. Twitter Inc., U.S. District Court, Southern District of New York, No. 13-07678.
If You Only Know 5 Things About Investing, Make It These
Twitter Hit with $124 Million Lawsuit Over Private Stock Sale
Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.
The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.
Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?
If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.