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. Tina

    I wish there was a "like" button on this site.

    May 23, 2012 at 1:39 pm | Report abuse |
  2. Mr President

    This isn't much different to the share price trajectory of RealD, the 3D cinema company who IPO'd at $14 a share back in August 2010. Their shares went to $36 by May 2011 (a market cap of around $1.6 Bn) allowing them to issue more shares at $26 in February 2011 on the back of an announcement with Samsung for 3D TVs. The founders and largest private shareholders like Shamrock Ventures, sold out to the tune of tens/hundreds of millions of dollars at these prices and then lo and behold, by September of 2011 they announced the Samsung deal wasn't happening and their stock cratered to just over $7 by the end of the year (wiping about $1.2Bn off the value of the company in about 8 months). Today they have a strong short position and while their price has recovered to around $11 ($600m market cap), its still well below the IPO price and their management team's credibility with the Street is pretty much shot

    May 23, 2012 at 1:39 pm | Report abuse |
    • ectogestator

      "different to" is not English. "different from" is English.

      May 23, 2012 at 1:55 pm | Report abuse |
  3. Bella111

    Crooks, crooks everywhere!!! To be in stock/banking business..... is it a requirement to be dishonest and a thief?

    May 23, 2012 at 1:39 pm | Report abuse |
  4. Capiers

    Greed is the cause for the downfall of humanity. If we the people simply stop spending our money on things we don't need; exert some self control, we can take back control.

    May 23, 2012 at 1:41 pm | Report abuse |
    • ectogestator

      what about chaos? won't they resist us getting control back? Chief? 99? Anyone?

      May 23, 2012 at 1:56 pm | Report abuse |
  5. iceload9

    I think we should do away with pension plans and social security so we can invest in Wall St where they self regulate so there can't be any cheating. We all know how this will end. Meetings, congress, accusations and then it will disappear and the insiders walk away with no face peoples money.

    May 23, 2012 at 1:41 pm | Report abuse |
    • D

      100%

      May 23, 2012 at 1:47 pm | Report abuse |
    • Deephaven

      That's exactly what GWB wanted to do.

      May 23, 2012 at 2:01 pm | Report abuse |
  6. twistypurple

    "How many more times...treat me the way that you do..."

    why do people even deal with the stock market...
    a stockbrokers' license is a license to steal

    May 23, 2012 at 1:42 pm | Report abuse |
  7. Phaser

    Wait did I read this right?

    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.

    Seem a story about a little boy being an investor is a better angle! Wow. Great writing.

    May 23, 2012 at 1:42 pm | Report abuse |
    • ShoDogg

      And terrible reading comprehension skills. If the article didn't explicitly state an eleven year old boy, stop implicating that it did. Contextually it's understood that a person can be / has been a Wall St. investor for eleven years. There can be an eleven year old anything, so grow a brain by reading and paying attention to what is literally written.

      May 23, 2012 at 2:18 pm | Report abuse |
  8. Jim456

    Thats is when companies and shareholders get greedy. Stay away from both

    May 23, 2012 at 1:42 pm | Report abuse |
  9. Weirdracin

    Facebook is a big farce in terms of investment. Its 15% actual profit making biz and 85% Virtual advertisement profit. As and investor, I would not buy into something that's based off such a big chunk of virtual ads. Not only that, they have no watchdog to review their actions of how they operate their database that is maintained to keep track of the ads being seen or clicked.
    As an advertiser, I would want real data on who seen it, but that would go against facebooks terms to not disclose people info. So they charge the advertiser a fee to list their ads for a certain amount of time, they also charge per time its seen and then they charge when its been clicked and redirected to the advertisers. This tracking info saved in their database can be Altered by them and they have no watchdog to check that. So with Virtual data Manipulation. they can bump up the numbers to charge the clients to pad their profits and how are the clients to check? If all advertisers left facebook like GM did, it would only be worth 15%!
    A bit of a quote from one of my favorite anime GiTS, "Didn't place any value on electronic media, something that can be re-written.".
    Not to mention the supposed members on Facebook are inflated. Full of multiple accounts, account for peoples pets(*like Zuck's dog), dead people, past charities and de-funked biz. Not all of them are on constantly. Facebook could have employees or outside sources using Bot programs to run thru fake accounts to also give false data.
    You cant base the company off such a big 85% of NOTHING!!

    May 23, 2012 at 1:43 pm | Report abuse |
  10. twistypurple

    whether they overvalued the stock or not, that's still up for the individual investor to deal with

    the main problem is that long after they placed an order to buy the stock they still do not have their shares...so they can't dump them and that's one reason why FB is still so high and still has so far to fall

    May 23, 2012 at 1:44 pm | Report abuse |
  11. jerrycc

    Why? Only idiots are on facebook not people who actually invest money. My wife stayed on it all the time cheated of course and ruined my family. I hope they all go broke.

    May 23, 2012 at 1:44 pm | Report abuse |
  12. Mike Fischer

    All you have to do is look at Nancy Pelosi et.al to know whether the info was shared improperly. If our elected officials did not buy-in, you know – – they knew.

    May 23, 2012 at 1:45 pm | Report abuse |
    • Kanagi

      Typical Republican response. No mention of John Boehner or Eric Cantor?

      May 23, 2012 at 3:36 pm | Report abuse |
  13. Casey

    When is the divorce scheduled for?

    May 23, 2012 at 1:45 pm | Report abuse |
  14. jop

    Great Deceiver..... STEALING PEOPLE MILLIONS AND BANKRUPT THEM.

    May 23, 2012 at 1:45 pm | Report abuse |
  15. goingfast

    this is abigger scam than the sale sale if the iraqi dinar

    May 23, 2012 at 1:45 pm | Report abuse |
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