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. oyvavoy

    Look how CNN/Media wants us to sympathies with the guy "Oh;zuck". the guy steals his idea for a business then cheat people for billions of dollars out of their hard earned money.

    Unbelievable,

    May 23, 2012 at 1:13 pm | Report abuse |
  2. billybob

    well things have changed since the 1950's that is for sure, but to be completely honest Facebook has some decent ratios in the mix, unlike idiot companies like groupon, facebook actually turns a profit. In essence the IPO was a success for facebook, they didn't leave anything on the table – give it some time and we will be able to make a better judgement as to how successful or not the IPO was.

    May 23, 2012 at 1:13 pm | Report abuse |
    • apd

      The IPO was a success for early investors and the FB founders. I remember reading as recently as a few months ago that FB "could be" worth 15 billion and even then, everyone thought that was outrageous. Fast forward a few months, and FB was opened at a valuation of more than 100 billion. Major news media spread the propaganda. Lots of hedge funds got involved and they had to turn a quick profit. They achieved that.

      If you can get this stock at $10, sure, that might be a good investment. But maybe not. Who's to say that FB wouldn't turn into a penny stock? It is a company that is solely promoted by the CNN propaganda machine for whatever reason. Propaganda can get you only this far.

      I won't be buying FB. That's for sure.

      May 23, 2012 at 1:26 pm | Report abuse |
  3. Captain Real

    Look at the names of those involved. Same banks that screwed everyone but the 1%. In a perfect world, FB would go down the toilet with these banks.

    May 23, 2012 at 1:13 pm | Report abuse |
  4. redwine9991

    THAT IS WHAT HAPPENS WHEN YOU BUY AIR.

    May 23, 2012 at 1:13 pm | Report abuse |
  5. Jimbo

    Haven't there been numerous articles about how Facebook stock would be a waste of money and not a good investment, I thought this was common knowledge. Who are these morons that thought it was a good idea and now want to sue?

    May 23, 2012 at 1:13 pm | Report abuse |
  6. danielwalldammit

    I'm just about to throw my profile away myself. I can no longer make heads or tails of it and I am tired of finding out after the fact of the various things it tracks.

    May 23, 2012 at 1:14 pm | Report abuse |
  7. twinnie

    Anyone who was around in 2000-2001 during the dot com BUST, knows that this was a smoke a mirrors deal. And the media hyping it up for billions of dollars was laughable. Whoever invested in it, hello suckers!

    May 23, 2012 at 1:15 pm | Report abuse |
  8. Logic

    Anyone with an ounce of financial sense should have known not to touch this IPO with a ten foot pole. Anyone who jumped in at the start was being foolish or greedy or both. The only people making money are the IPO seller (Zuck) or anyone who shorted it. The whole Facebook business model stinks to high heaven. No one should be surprised learn something fishy is going on here.

    May 23, 2012 at 1:15 pm | Report abuse |
  9. Dakota2000

    The SEC needs to fry a few people. If they can throw dear martha stewart in prison, Zucky and company need to spend some time behind bars. But no, he is too wealthy and beyond the reach of the SEC. So sorry america you lose again.

    May 23, 2012 at 1:15 pm | Report abuse |
    • ectogestator

      What did America lose, exaclty?

      How are you defining "america" in your post?

      Does anyone pay you for whatever it is you do? Sorry, them, you lose again.

      May 23, 2012 at 1:34 pm | Report abuse |
  10. David M

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

    Translation: "We lied our butts off big time but we'll keep denying it. Besides, it's only the little people who got hurt. As long as we got our millions, we don't care."

    May 23, 2012 at 1:15 pm | Report abuse |
  11. mickey1313

    That is the way o ur fascist government works, it takes people with a vested interest in non regulation, and makes three three regulations. It is the same for food regulation.

    May 23, 2012 at 1:15 pm | Report abuse |
  12. Mike

    Not surprising. Zuck would cheat his mom for a dime.

    May 23, 2012 at 1:15 pm | Report abuse |
    • Hardtalk

      AND that's exactly the problem!!! Some people in Facebook became billionaires. Now there are millions of Americans whose envy won't let them sleep. Let's destroy Facebook. Right!

      May 23, 2012 at 1:21 pm | Report abuse |
  13. KIRK/JACKSON

    Pay no attention to the man behind the curtain! the sad thing is, all the rich involved will come out ahead somehow, the rest? who cares.Wake up and smell it boys, aaaahhhhh, the souless win again, seems like chase bank is'nt afraid of the S.E.C. make a billion, pay a hundred million in fines, and thats bussiness boys and girls

    May 23, 2012 at 1:16 pm | Report abuse |
  14. Byteme

    I put in a buy order last Friday morning of $38 per share, but it didn't go through, because the price shot up to $45 per share. By the end of the day, it dropped back down to $38.23. I'm glad I wasn't able to buy any FB stock. It's been tanking ever since.
    GOOGLE, it's not!

    May 23, 2012 at 1:16 pm | Report abuse |
    • Jimbo

      The fact that it even crossed your mind to buy facebook stock says alot....

      May 23, 2012 at 1:19 pm | Report abuse |
  15. Jeff Frank (R-Ohio) "Right Wing Insanity"

    Anybody want to buy a pet rock.

    May 23, 2012 at 1:16 pm | Report abuse |
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