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. HILARIOUS

    This has to be the greatest bit of consumer schadenfeude I have ever experienced. Could you imagine if this went so far that Facebook got shut down? The ramifications would be absolutely incredible (the reasons would need to be as well. I doubt anyone person could shut it down since it has become so huge, though I personally think Facebook has been lying about its user data all along. I find it hard to believe that nearly 1 billion human beings (users) are on facebook when half the people have double accounts. If it turns out there is only 600M users and he has been selling it at 900M, he is kind of screwed.

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

      Still waiting for you to close that first parenthesis.

      May 23, 2012 at 1:30 pm | Report abuse |
  2. Captain Real

    Who would invest in a company that produces nothing and destroys people's privacy?

    May 23, 2012 at 1:16 pm | Report abuse |
    • B2UX

      EXACTLY HE SELLS USER INFO HE GIVES OUT KIDS PASSWORDS TO SCHIOOLS AND COPS WITHOUT A WARRENT THIS FACEBOOK THING IS A SCAM AND NEEDS TO BE POOFED WHO KNOWS MAYBE ANONO WILL PAY HIM A VISIT....

      May 23, 2012 at 1:22 pm | Report abuse |
    • Danno

      Remember Google?

      May 23, 2012 at 1:28 pm | Report abuse |
  3. Marvin

    THERE ARE NOT 900MILLION USERS ON FACEBOOK.

    FAULTY ADVERSTISING.

    May 23, 2012 at 1:17 pm | Report abuse |
    • northcarolgranma

      interesting internet is so big how can they prove it either way

      May 23, 2012 at 1:18 pm | Report abuse |
  4. Jimbo

    Haha, if you were dumb enough to invest in Facebook you are dumb enough to lose all your money. Haha.

    May 23, 2012 at 1:17 pm | Report abuse |
  5. Laura W.

    Quick get congress and the senate working on the Facebook IPO investors bailout bill.

    May 23, 2012 at 1:18 pm | Report abuse |
    • David M

      Congress cannot get involved right away. First, they have to all get their faces on the news and put in their two cents worth about what they will do. Then we have to go through multiple 'committee hearings' with all its attendant political wrangling. After the hearings are over, something else will come along and they cycle will repeat itself.

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

    I HAVE WEBSITE FOR SALE.... $40 A SHARE...JAJAJAJAJAJAJAJAJAJAJAJ!!!!!!!!!!

    May 23, 2012 at 1:18 pm | Report abuse |
  7. charles

    You don't start your IPO with a lawsuit of misleading information!!!! Welcome to Hell!!

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

    The next step, someone will come up with some new and nasty machine code, and set all the dedicated servers on fire. 😉

    May 23, 2012 at 1:20 pm | Report abuse |
  9. victor

    Why is everyone Surprised?! he only posted on his FACEBOOK Status , DO NOT BUY STOCKS A BUST

    May 23, 2012 at 1:20 pm | Report abuse |
  10. Lean6

    When will people learn? Wasn't mortgage-backed securities, Enron, and all of that stuff enough? I mean...it's not like I don't appreciate all of the people willing to throw in their hard-earned money to keep these crooks distracted on Wall St so that they don't come after me at the gas pumps and at the supermarket, but this stuff shouldn't surprise anybody.

    May 23, 2012 at 1:20 pm | Report abuse |
  11. Seraphim0

    I would agree with you–if the fact that a lack of tangible product has nothing to do with profitability. There are companies that buy and sell mere rights to minerals that are insanely profitable, but do not sell anything tangible. FB has been blowing projections out of the water with their company value.

    This, however, changes things. The stock will take a huge hit, and we'll start seeing a change or die mentality for a time. Until no one cares again.

    May 23, 2012 at 1:20 pm | Report abuse |
  12. redwine9991

    HOW MANY FAKE ACCOUNTS ARE THERE IN FAKEBOOK?

    May 23, 2012 at 1:20 pm | Report abuse |
    • ectogestator

      How many capital letters are there in your post?

      May 23, 2012 at 1:37 pm | Report abuse |
  13. KIRK/JACKSON

    Zukey and the big owners should be forced to hold their stock for 30 days, as a show of confidence, owners sellng big is a sign that your about to be stuck with junk. martha stewart? zuk will never face any real consequences, way to wealthy for that. what a bunch of horse hockey!

    May 23, 2012 at 1:20 pm | Report abuse |
  14. B2UX

    SUE THE CRAP OUT OF HIM I HOPE HE LOOSES EVERYTHING.... HE GIVES OUT USERS PASSWORDS HAS BEEN CAUGHT IN USERS ACCOUNTS HE IS A TOOL WHO NEEDS TO BE PUT IN HIS PLACE ALL HE DID WAS STEAL TOMS IDEA AND USED PEOPLE TO DEVELOPE WHAT HE NOW CALLS HIS... A PATHITIC PERSON A SAD EXCUSE FOR A BOY....

    May 23, 2012 at 1:20 pm | Report abuse |
    • ectogestator

      ...and make him use all capital letters from now on...

      May 23, 2012 at 1:38 pm | Report abuse |
  15. Real Talk

    Its annoying seeing people post about how stupid people were for buying Facebook stocks. Its easy to say that AFTER all the information comes out. Where were you guys warning people weeks ago not to buy it? So tell us, "experts", what should we buy next? Let me guess...you guys won't say until the news comes out on it. Come on....no one knew for sure what this was going to do. Stocks are always a gamble..Stop being so self righteous.

    May 23, 2012 at 1:21 pm | Report abuse |
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