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. glades2

    From the article:

    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"

    Huh? An 11-year-old investor invests $10,000?

    May 23, 2012 at 1:32 pm | Report abuse |
    • Terran18

      IT obviously means he has been investing for 11 years.

      May 23, 2012 at 1:49 pm | Report abuse |
  2. exCONsrvt

    Anyone that thinks the game isn't rigged is a fool and as the saying goes... Anyways, I'll buy some FB stock once it drops a lot more

    May 23, 2012 at 1:33 pm | Report abuse |
  3. John Jurac

    The government (especially the IRS) were so eager to have Facebook's IPO so that they can tax the 3,500 indivduals to the hilt. The pressure to go IPO must have been analyzed, re-analyzed and the numbers and financials must have been examined under a microscope...now, "a person for facebook at a bank says the numbers are wrong." The I.Q. level of accusers and accusations, and controversy...amazing!! Facebook is not a product and it's built on information shared, that's it! IRS got their money, Zuckerburg has a retirement fund, now start doing what America has become good at...lawsuits, lawyers, and investigations, instead of preventing it from happenning in the first place! Would there have been a problem if the Facebook shares went up 20% and stayed there? Grab some common sense and stop the finger pointing. Buy something you can "tangibly' own...houses, land, rolex watches, paintings, hockey cards, comic books, etc and not into an "intangible" phase.

    May 23, 2012 at 1:33 pm | Report abuse |
  4. Your Mystic Right Side

    What part did the internet news web sites have in the inflation of Face Book. USA Today called its REQUIREMENT to use Face Book an experience enhancement. Other web sites wants the user to download some sort of plugin for use in the comment section. The run-up to the initial IPO was an orchestrated shill by banks and media alike. But there is still time to buy folks, so go out and get it, take pictures of it and post it on your wall, and above all, LIKE ITLIKE IT.

    May 23, 2012 at 1:34 pm | Report abuse |
  5. MotoJB

    Fools that bought the stock deserved to lose their money...

    May 23, 2012 at 1:34 pm | Report abuse |
  6. Tim

    Here are the facts:

    At an opening price of $38, Facebook has a P/E ratio of 100.
    There are already 900 million users on Facebook. Therefore, Facebook is unlikely to grow much further.
    Facebook's only revenue comes from advertising. It makes no useful products on its own. Its business model is questionable, and its revenue cannot be grown much further by expanding its user base.

    There are a lot of Zuckers out there!

    May 23, 2012 at 1:35 pm | Report abuse |
  7. RichWW2

    Big banks doing something shady and illegal? I'd never believe that...not in a million years...oh wait...

    May 23, 2012 at 1:35 pm | Report abuse |
  8. Anonymous010

    “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."

    Wait, an 11 year old has $10,000 from a business he created?! I think that's a bigger story than Facebook any day of the week. Bravo to that kid.

    May 23, 2012 at 1:35 pm | Report abuse |
    • Ayatollah Khomeini

      Agreed, however, boo to him for throwing his $10,000 onto a shaky bandwagon.

      May 23, 2012 at 1:44 pm | Report abuse |
    • ShoDogg

      And wow, another emotional reader with 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 2:23 pm | Report abuse |
    • Loren

      Erm, you might want to re-read that section. The quote from 'Sam Lesser' was in a separate paragraph from the info about the 11 year old investor. Hence, it is reasonable to assume that the two are NOT the same person. Certainly, when I read this I did not think they were the same person – because the paragraph break indicated to me a movement to a different person's experience. That is the way English is generally organized. If the two were the same person, I would have expected that the statement from Mr Lesser would have immediately followed, in the same paragraph. But given CNN's editing skills (or lack thereof), I guess it is possible that Sam Lesser is the 11 year old. : /

      May 23, 2012 at 5:41 pm | Report abuse |
  9. Michael

    WOW, Facebook hiding true face value. Who would've thought Wall Street would try to hide negative information from Main Street... LMAO

    May 23, 2012 at 1:35 pm | Report abuse |
  10. Recovering Republican

    Buying into an IPO on a mature company is not the best financial move an investor can make. Remember the Tech meltdown? That one hurt. Facebook is a minor burp in the market. I wish Zuck the best. He has green to burn, and if he never does anything worth mentioning again, he will still go down in history as one of the greats.

    May 23, 2012 at 1:36 pm | Report abuse |
  11. Jaina

    New pop culture phrase emerging on Wall Street.... "You bought into WHAT? Dude, you seriously got Zucked"

    May 23, 2012 at 1:37 pm | Report abuse |
  12. dugu

    A pattern developing with this company since its inception? FB will have to throw a full-page-in-your-face ad upon login get get some revenue.

    May 23, 2012 at 1:38 pm | Report abuse |
  13. Jim_34

    Says a lot about those investors who bought shares in Facebook. Made bad decisions consistently and over the long run you will end up losing money.

    May 23, 2012 at 1:38 pm | Report abuse |
  14. infonomics

    The hoodie looks more appropriate than ever....Gangsta.

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

    O my God! Thank God, am save. I wanted to invest in the same controvasial shares but a friend of my told me to wait 4 a couple of days B4 buying into those shares.

    May 23, 2012 at 1:38 pm | Report abuse |
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