Twitter IPO speedbump: Sued for $124 million over allegations of an ‘artificial private market’

Updated 1:05 PM PST with a comment from Twitter

Precedo Capital Group Inc. and Continental Advisors SA have sued Twitter for $124 million over allegations that the social network improperly used a failed private sale of its shares to pump up investor interest.

Twitter is, of course, preparing for an initial public offering, offering 70 million shares at between $17 to $20, which will value the still-young company at about $11 billion. The two financial firms, however, say that Twitter tried to create a private sale, apparently with them, in an effort to drive interest in — and presumably, the value of — its stock.

“Twitter never intended to complete the private sale of Twitter stock,” the filing says. “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.”

That would value the company at about $10 billion, and set a pre-IPO expectation of value.

Continental Advisors is a corporate capital group with ties to European institutional investors, according to its website, that is based in Luxumbourg (or Torino, Italy, according to its LinkedIn page) and has raised over $500 million since inception in 1998. Precedo Capital Group appears to be based in Scotsdale, AZ, but has very little on its website but an email address for information.

Twitter has long seen its stock bought and sold on secondary markets such as SecondMarket and SharesPost as employees, frustrated by the long seven-year journey to IPO, have attempted to sell their shares privately. This allegation, however, is something quite different: That Twitter itself attempted to perform a private offering.

This is not welcome news for Twitter, whether grounded in fact or not. Twitter’s entire plan with its IPO was to avoid the controversial, troubled path to becoming a public company that Facebook took.

I talked to Twitter representatives about this lawsuit, and received the following comment.

“We’ve never had a relationship with these plaintiffs. Their claim is completely without merit.”