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U.S. judge dismisses case against Twitter alleging pre-IPO fraud

A portrait of the Twitter logo in Ventura, California December 21, 2013. REUTERS/Eric Thayer
A portrait of the Twitter logo in Ventura, California December 21, 2013. REUTERS/Eric Thayer

By Jonathan Stempel

NEW YORK (Reuters) - Twitter Inc has won the dismissal of an unusual lawsuit accusing the social media company of fraudulently arranging a private stock sale it never intended to complete, with a goal of stoking interest in its November 2013 initial public offering.

U.S. District Judge Shira Scheindlin in Manhattan said Precedo Capital Group Inc and Continental Advisors SA failed to show that Twitter was responsible for the cancellation of a secondary market offering they had been arranging with another firm, GSV Asset Management Inc.

Filed one week before Twitter went public, the $124 million lawsuit accused the company of using GSV as its agent to arrange the aborted offering as a means to raise more money in its eagerly awaited IPO and justify a $10 billion market valuation.

Noting the plaintiffs dealt directly with GSV and never with Twitter, however, Scheindlin said the complaint "does not plausibly allege that Twitter granted GSV Asset express authority to act as its agent for any purpose.

"Moreover," she added, "the complaint does not allege that Twitter secretly limited that authority contrary to the standard practice in the securities industry."

Scheindlin dismissed the case with prejudice, meaning it cannot be brought again.

Joseph Baratta, a partner at Baratta, Baratta & Aidala representing the plaintiffs, did not immediately respond to requests for comment.

Twitter did not immediately respond to similar requests. The San Francisco-based company has said the lawsuit lacked merit.

The lawsuit claimed Twitter had been seeking to avoid repeating problems that afflicted Facebook Inc's 2012 IPO, and sidestep the potential for an excess supply of its shares by controlling transactions in the private market.

Precedo, a broker dealer licensed in Arizona, and Continental, a Luxembourg financial adviser, claimed GSV offered to provide up to $278 million of Twitter shares that they could market to other investors.

But they said that, after the marketing process began, Twitter caused GSV to cancel the offering on October 5, 2013, upon learning that investors were willing to pay $19 per share, above the $17 or less offered in other private transactions.

The firms said Twitter cost them fees and reputational damage and sought $24.2 million of compensatory damages plus $100 million of punitive damages. GSV was not a defendant.

Twitter priced its IPO at $26 per share on November 6, 2013, then valuing the company at $14.1 billion.

Twitter shares were up $1.10, or 2.4 percent, at $46.11 in Monday afternoon trading on the New York Stock Exchange.

The case is Precedo Capital Group Inc v. Twitter Inc, U.S. District Court, Southern District of New York, No. 13-07678.

(Reporting by Jonathan Stempel in New York. Editing by Andre Grenon)

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