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.

[tweet https://twitter.com/SallieKrawcheck/status/205090084373008384%5D

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. jimielee

    I usually delete the advertising on Facebook. Just find it to be uninteresting annoying junk.

    May 23, 2012 at 1:21 pm | Report abuse |
  2. Jim_34

    Didn't need inside info to know that Facebook was overvalued.

    May 23, 2012 at 1:22 pm | Report abuse |
  3. Jim

    What fool would invest in a stupid website that as it is annoys the hell out of me. Facebook produces nothing. I have noticed quite a few people losing their jobs over it for things they have posted. Zuckerburg is a big wimp that got lucky.

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

      Well, Facebook is such a simple concept, he really isn't like some genius. He just got lucky. Im not really envious of him, I just think that he acts he invented the Atom bomb or something. I mean, its just a website where you can connect to old friends. If Facebook wasn't here, Id simply go back to Myspace. I connected with all the friends I have now on Facebook, when I was on Myspace. If you think about it, Myspace is a lot more entertaining because you can create your own website. I say we boycott Facebook and go back to Myspace.

      May 23, 2012 at 1:28 pm | Report abuse |
  4. ML

    I find it amusing that so may here speak about MZ like he is one of their buddies because they use his product or he is part of theeir generation. "Zuck this and Zuck that". He is just like any other opportunist who stumbled onto something worth monetizing. It's the American way...suck as many people in for as much as you can while the going is good. No doubt the bad news on the horizon was covered up. The trick once investments banks have priced the IPO is to hope nothing screws up with projections in the mean time. If it does, tell your buddies because you need them on the next IPO and lie to the rest! Nothing here is different...this IPO is just more visible.

    May 23, 2012 at 1:22 pm | Report abuse |
  5. look around

    islam prohibits usury. no wonder the jews and the muslims are at each other's throat.

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

    Why so serious, boys and girls? It is rich on rich crime.

    May 23, 2012 at 1:23 pm | Report abuse |
  7. Planet Caravan

    So being a billionaire wasn't enough for Zuckerberg, he wanted to be a mega-billionaire.

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


    May 23, 2012 at 1:24 pm | Report abuse |
    • ectogestator

      Would the price drop to 99 billion dollars if you stopped using all caps? How about if you used the letter "h" correclty, instead of the letter "j" incorreclty? What woud the price be then?

      May 23, 2012 at 1:44 pm | Report abuse |
  9. AHahn

    "I learned something today. We thought we could make money on the Internet. But, while the Internet is new and exciting for creative people, it hasn't matured as a distribution mechanism to the extent that one should trade real and immediate opportunities for income for the promise of future online revenue. It will be a few years before digital distribution of media on the Internet can be monetized to the extent that necessitates content producers to forego their fair value in more traditional media." – Kyle Broflovski

    May 23, 2012 at 1:26 pm | Report abuse |
    • Z


      May 23, 2012 at 1:30 pm | Report abuse |
    • jboHDrider

      Don't you wonder when one of the crooks at JP MOrgain will actually go to jail? How many illiegal activities can they be involved in and remain a vialbe buisiness. I can't beleive anyone invests in this immoral company and I truely hope folks get smart, take their money out and cause this evil company to go bankrupt, like they have helped so many others do.

      May 23, 2012 at 1:37 pm | Report abuse |
  10. Mazzata

    Between the banksters and the scammers, the market's a joke.

    May 23, 2012 at 1:26 pm | Report abuse |
  11. Z

    How could you not see the FB valuation was so incredibly overinflated???? If you've invested, I'm assuming you invested off the hype alone. Any rational investor, somebody who's actually plugged in to the goings-on of this once cultural "phenomenon," would've told you FB has plateaued, it's over-saturated. Get out NOW!

    May 23, 2012 at 1:26 pm | Report abuse |
  12. rhombid1125

    A couple of observations about this kid, He married his girlfriend the day after he made billions. The wedding took place in California, and under California matrimonial law– which happens to be the only state in the country were spouses pay alimony just on the money made after the marriage. In other words as a doctor she will make a good salary–on the other hand, as result of the stock drop he has lost a lot of money since his marriage. If they were to divorce today, she would have to pay him alimony.

    His biographical movie was also a lie. I saw the movie, and there was no mention of him ever having a long time girlfriend at Harvard University. "Greed and Ego"

    May 23, 2012 at 1:26 pm | Report abuse |
  13. columbus

    Of course they oversold it, like a snake oil salesman with a crowd of customers waving money in his face, "there's plenty for all !!!!!"

    May 23, 2012 at 1:27 pm | Report abuse |
  14. Dakota2000

    This is how I explain economics to my 6 year old; The entire economy is designed to take money from the working class and transfer it to the 1%. The government encourages this action.

    (1) Mortgage- Government subsidies mortgages yet where does that lost tax revenue to to? banks. The government funnels trillions of dollars in revenue directly into their pockets for producing nothing. Further on a 30 year mortgage you end up paying for your house a couple of times over depending on interest rates. And the bankers didn't have to work a day in their lives.

    (2) 401K: The bankers make money if stocks go up and down. You are forced to save in a 401 K because, guess what? The government subsidies this investment by making it non-taxable while the money grows.

    (3) Buy products you don't need: 24 hours a day commercials from the time your a 2 months old. Buy Buy Buy.

    (4) Go to school to learn to be a corporate employee: Out of the box thinking is frowned upon. The purpose of school is to teach you to sit still behind a desk. It takes most people 12 years to learn to do this because it is so unnatural. 12 years of teachers telling you what you can't do. Are there any lessons in school on starting and running your own business? Almost zero. This is not part of the master plan of governments. Of course other people do not learn to sit behind a desk and they become criminals or target employees.

    I could go on. But the rich are not rich by chance. They are rich because the entire playing field is at a 45 degree slant with uncle sam holding up his end of the 'deal"

    (ooh no.... that that my boss walking down the hall.. later... )

    May 23, 2012 at 1:27 pm | Report abuse |
    • ectogestator

      You would be rich too if you stopped giving away this awesome insight for free on the internet, and started charging what it's worth.

      May 23, 2012 at 1:47 pm | Report abuse |
  15. JeffinIL

    The case against Facebook appears to be without merit. The case against the companies only giving pertinent information to their buddies may have some traction.

    May 23, 2012 at 1:27 pm | Report abuse |
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