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. Charles

    What's a FINRA?

    May 23, 2012 at 1:46 pm | Report abuse |
  2. Steven Pants

    So you mean the exact same way every other tech IPO in history has started off? Gee, thanks media!

    May 23, 2012 at 1:47 pm | Report abuse |
  3. PDX James

    Capiers, if I followed your advice, I would never have been able to read your advice. Ironic, eh? 🙂

    May 23, 2012 at 1:47 pm | Report abuse |
  4. Really?

    Looks like olde Zuckie shafted even more people. The brothers were right that he stole their idea and concepts.

    May 23, 2012 at 1:49 pm | Report abuse |
    • Ladislav Nemec Big Bear California

      One does have much to do with other. Who really cares? The 'founders' of Facebook are now billionaires and nothing is going to change it. Billion here, billion there. Small change for them.

      I am on Facebook but, so far, I did not find it useful at all. I have been sending private emails for more than a decade and I can even call people by phone. Facebook, of course, brings a lot of advertising, the real purpose of its existence.

      Smart Zucke, good luck to him and many children with his wonderful wife. He has arrived.

      May 23, 2012 at 2:02 pm | Report abuse |
  5. B.Russell

    Soooooo. You didn't learn from the last crash eh? ZUCKERS!!!!!!!! hahahahahah. You lose! NEVER EVER trust anyone with your money. You will lose.

    May 23, 2012 at 1:50 pm | Report abuse |
  6. YoYoMan

    I'm sure Obama will have something to say about this too!

    May 23, 2012 at 1:50 pm | Report abuse |
    • GOP RIP

      blah, blah, blah

      May 23, 2012 at 1:56 pm | Report abuse |
    • Ladislav Nemec Big Bear California

      Hopefully not. He is not Bill Clinton, after all. I voted for Clinton but never listened to his endless speeches. Obama is better but not by much...

      May 23, 2012 at 2:03 pm | Report abuse |
  7. Mr. Hand

    "investment banks may have tipped off some clients that Facebook wasn't necessarily a great buy" – uh, this was common sense to anyone with a brain. Oh, and past results are not an indicator of future performance. Don't play in the market if you can't deal with losing money sometimes. It's not a guarantee people. You can't blame the banks for your own stupidity.

    May 23, 2012 at 1:51 pm | Report abuse |
    • Ladislav Nemec Big Bear California

      You can blame anyone, this is a free country. The money, however, is frequently gone forever.

      May 23, 2012 at 2:05 pm | Report abuse |
  8. Southern Guy

    The stock market is like Vegas – don't gamble more than you can afford to lose. That being said, Morgan Stanley should lose millions and millions and millions of dollars if they did warn some investors and not others. And if Facebook gave false information, they should be smacked, HARD. I'm neither a Zuckerberg hater nor lover – I wouldn't want his life, with or without money. But if he didn't do anything wrong, then I hope he wins.

    May 23, 2012 at 1:51 pm | Report abuse |
  9. us_1776

    *** Faceplant ***


    May 23, 2012 at 1:51 pm | Report abuse |
  10. garyM

    Trading delays and IPO manipulations are so standard with Wall Street that it's impossible not to get burned nowadays – forget about turning a profit. As it stands right now, based on the negative outlook and preferential shareholder disclosure rumors, I'm not willing to pay more than $5 a share.

    May 23, 2012 at 1:52 pm | Report abuse |
  11. Get Over Yourself

    Investment banks advise their clients. If you aren't a client, don't expect to get the benefit of their advice. Duh. It's not illegal to be stupid and it's not the obligation of those in the know to make you smarter. Really? You didn't know FB was mostly on a non-ad format (iPhones)? Really?

    May 23, 2012 at 1:52 pm | Report abuse |
    • TomGI

      Their investment banks are being investigated for giving inside info to a select group of top tier investors. THAT is illegal and subject to prosecution.

      May 23, 2012 at 2:51 pm | Report abuse |
  12. SS

    Funny thing is, we have the power to take facebook down. This is one company we can take down collectively. Just deactivate. Mass day of deactivation!!

    I wonder if we could make a facebook group on that? 😛

    May 23, 2012 at 1:54 pm | Report abuse |
    • GOP RIP

      Do you spend your days thinking ways to take people down?

      May 23, 2012 at 2:01 pm | Report abuse |
  13. michelle

    OH, ZUCK? now that's funny...i feel so sorry for those poor new billionaires

    May 23, 2012 at 1:54 pm | Report abuse |
  14. momo0828

    smoke and mirrors

    May 23, 2012 at 1:54 pm | Report abuse |
  15. lolol

    s u c k e r s !!!! you got ($)uckerberged

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