Oh, Zuck: Facebook's bumpy start just got a little worse
May 23rd, 2012
11:55 AM ET

Oh, Zuck: Facebook's bumpy start just got a little worse

To say its been a rough ride for Facebook's IPO would be an understatement.

And as the social media giant edges toward the close of its first week of trading, questions are swirling about the company's valuation, its profitability and now allegations that full details of the stock's likely value were shared with only a select group of people.

Did some people get a heads-up Facebook's IPO wasn't what it seemed?

Regulators are now looking into the possibility that Facebook's Wall Street investment banks may have tipped off some clients that Facebook wasn't necessarily a great buy or worth the hype it was receiving, according to reports Wednesday from Reuters and several other news organizations.

“Facebook changed the numbers – they didn’t forecast their business right and they changed their numbers and told analysts,” a person at one of Facebook’s banks told Reuters.

Overheard on CNN.com 'I saw this one coming from a mile away'

The big question is: Did certain privileged customers receive information about the Facebook offering that you as an individual investor might not have?

Rick Ketchum, head of the Financial Industry Regulatory Authority, an independent regulatory body, acknowledged in an article from Reuters that a Morgan Stanley analyst reduced his revenue projections for Facebook shortly before the offering and shared the information with institutional investors.

And now Facebook shareholders have filed a lawsuit against the social network, CEO Mark Zuckerberg and a number of banks, alleging that crucial information was concealed ahead of Facebook's IPO. The lawsuit, filed in the U.S. District Court in Manhattan on Wednesday morning, charges the defendants with failing to disclose in the critical days leading up to Friday's initial public offering "a severe and pronounced reduction."

Facebook  defended themselves on Wednesday saying they "believe the lawsuit is without merit and will defend ourselves vigorously."

The report, and now the lawsuit, raises questions about whether Morgan Stanley, one of the underwriter companies that handled Facebook's IPO, or other banks knowingly offered certain investors privileged information that should have been made public. Other underwriters targeted by the lawsuit include Barclays Capital, Goldman Sachs, JPMorgan Chase and Merrill Lynch, a unit of Bank of America.

It is possible that Morgan Stanley may have signed off on a price that was too high or agreed to sell too many shares in the deal, CNNMoney.com reports. Then, Morgan Stanley analysts are alleged to have told certain people they had a negative assessment of the social network's offering.

"If true, the allegations are a matter of regulatory concern to FINRA and the [Securities and Exchange Commission]," Ketchum said in a statement via a spokeswoman.

The New York Times reported Morgan Stanley did more than just quietly share a negative outlook; they actually "held conference calls to update their banks' analysts on business."

"Analysts at Morgan Stanley and other firms soon started advising clients to dial back their expectations," the article says. "One prospective buyer was told that second-quarter revenue could be 5 percent lower than the bank’s earlier estimates."

Sallie Krawcheck, Bank of America's former head of wealth management, took to Twitter to share her outrage about the allegations.

A glitch leaves investors not knowing if they have Facebook stock

Facebook's debut on the market was hindered by early confusion when trading was delayed by two hours after what Nasdaq called a "technical error."

"People didn't know where their orders stood, and it became a big guessing game," one trader, who had put in an order to buy Facebook shares ahead of the opening bell, told CNNMoney.com. "Nasdaq couldn't handle it - they blew it."

The trader said he didn't receive a report of how many shares he bought and how much he paid for them until three hours after his order was executed. Typically, that report is transmitted instantaneously, he said.

Facebook IPO: What went wrong?

Others were left even further in the dark. A frustrated 11-year-old investor, who in many ways represents the most basic frustration for individual investors, told the New York Post that three days after the public debut, he had absolutely no idea if he even had gotten shares of the company. 

“They are holding my money hostage,” said Sam Lesser, who had put in a $10,000 Facebook order from money he made in a small business he created. "It’s really disappointing, because we could have made money on this."

To prevent a repeat of Facebook's botched opening, Nasdaq has changed its process to no longer accept order modifications once the final calculation has begun.

Stock disappointing many - unless you're a flipper

If you bought Facebook hoping it would be a steady earner in the early days, you were certainly out of luck.

While the Facebook IPO was one of the most highly anticipated IPOs in recent memory, setting a record for first-day trading volume, it's also been quite a disappointment so far.

The stock is still down about 15 and has yet to post a truly positive trading session. On Friday the stock had a minute gain, but other than that, it hasn't done much to impress early investors.

That is, of course, unless you're someone looking to trade minute-by-minute or hour-by-hour in order to turn a real quick profit.

"It's a day trader's paradise right now," Douglas DePietro, managing director for sales trading and trading execution at Evercore Partners, told CNNMoney.com. "There's high volatility and high volume."

soundoff (772 Responses)
  1. ©bobcat (in a hat)©

    Wow, talk about people losing Face(book)

    May 23, 2012 at 12:03 pm | Report abuse | Reply
  2. tez07

    Sorry Mark, try as you will, you cannot click on the "Undo" button and take back the IPO

    May 23, 2012 at 12:13 pm | Report abuse | Reply
    • Z666

      No Mulligan? Why?

      May 23, 2012 at 12:20 pm | Report abuse |
  3. Snake

    Shocking news!

    EVERYONE – if you bothered to ask your investment advisor – KNEW FB was overvalued. EVERYONE. I don't even invest but my boss spoke to *his* advisor...and told to stay on the sidelines.

    Secret info? Hardly. It's called "COMMON SENSE".

    May 23, 2012 at 12:13 pm | Report abuse | Reply
    • Jennifer

      This is a joke. They are going to go after MSSB for this? Any chump with half a brain knew FB was overvalued. More overregulated chimps win government with nothing to do.

      May 23, 2012 at 12:22 pm | Report abuse |
    • elripor

      Is this really surprising? Seems like the risk was known buy those with any idea what's happening in the world.

      You have to consider, how is FaceBook worth so much? And the answer is, it's not.

      May 23, 2012 at 12:25 pm | Report abuse |
  4. Kraut

    If it's too good to be true...

    May 23, 2012 at 12:13 pm | Report abuse | Reply
  5. Rodney Skinner

    Did any of you watch the movie. This guy has been pulling fast ones his whole life. It was a simple math equation to figure out their is no way Facebook matched its valuation. It didn't even squeek out a billion a year before cost.

    May 23, 2012 at 12:16 pm | Report abuse | Reply
    • upside down

      No, but I did see "The Avengers." And I sleep better at night knowing these guys are watching over us.

      May 23, 2012 at 12:29 pm | Report abuse |
  6. Kingofthenet

    That's NOT insider Trading, it's having a Broker that can cut thru the hype.

    May 23, 2012 at 12:17 pm | Report abuse | Reply
  7. PEDO BEAR

    Zuckerberg: In order to ensure our security and continuing stability, Facebook will be reorganized into an IPO, for a safe and secure social network which I assure you will last for ten thousand years.

    [Wall Street fills with enormous applause]

    Padme': So this is how Facebook dies... with thunderous applause.

    May 23, 2012 at 12:18 pm | Report abuse | Reply
    • Dac77

      Sharp, very cool.

      May 23, 2012 at 1:43 pm | Report abuse |
  8. Fiona

    Two stars for the headline.

    I'm not a sophisticated investor, but even I had concluded FB was not a buy. They waited too long to do the IPO. They priced shares too high. They are not adequately monetized and seem to be running on excitement and a kind of Andy Hardy "hey, that's a great idea" energy, rather than developing a real, long term plan.

    May 23, 2012 at 12:21 pm | Report abuse | Reply
  9. mbaDude

    The investment bankers did not need a tip, actually private investors that did any work at all did not need a tip to know Facebook IPO was priced very very high.
    Apple P/E 13 ; revenue growing at record rates
    Google P/E 18, 10x revenue and growing faster than facebook.
    Facebook (at IPO) P/E >100 ; Growth slowing, negative cashflow.

    May 23, 2012 at 12:23 pm | Report abuse | Reply
  10. jp

    No surprise here – although did it really take rocket science to realize FB was over-valued? I would struggle to put my own $$ into a company with no real tangible assets.

    May 23, 2012 at 12:23 pm | Report abuse | Reply
  11. Rosa Birmingham, AL

    What, how can they sue, they took a risk and lost, tough. Ever heard of buyer beware.

    May 23, 2012 at 12:23 pm | Report abuse | Reply
  12. ouch

    At least Mark Z. married a doctor; he can always be Mr. Mom.

    May 23, 2012 at 12:24 pm | Report abuse | Reply
  13. BiteMe

    lol, only four days after the IPO and people are already lining up in droves to sue the pants off Zuckerberg.

    Now we watch as the colossal giant known as "Facebook" falls into obscurity just like all the other social networks.

    May 23, 2012 at 12:25 pm | Report abuse | Reply
  14. flipp

    This is your Facebook IPO El Capitan!!! Abandonship.... abandoship....

    there is no value here, only HYPE.

    May 23, 2012 at 12:26 pm | Report abuse | Reply
  15. except

    lol...clearly a bail out is needed...lol

    May 23, 2012 at 12:27 pm | Report abuse | Reply
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