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. Gary Golden

    It does not take rocket science, 1 billion income, 75 billion value come on no business is worth 75 times value. I am not even an investor, Facebook is a good company if you are going to invest you should have to be responsible for your investments.

    May 23, 2012 at 12:27 pm | Report abuse |
    • claybigsby

      if investors are getting false information regarding the IPO, then how can they be responsible? Clearly you are not an investor.

      May 23, 2012 at 12:36 pm | Report abuse |
  2. jimbo

    I agree with most. I don't invest at all and even I knew this wasn't going to do much and would start higher than it should due to hype. Seriously, anyone who has been on FB knows that there isn't much in the way there to actually give it monetary value.

    May 23, 2012 at 12:28 pm | Report abuse |
  3. Greenspam

    Rumor is that Zuckberg's wife is already filing for divorce. She claimed that he's no longer the man she married. She married a well liked man with tens of billions, but now he's a well hated man with just a few billions.

    May 23, 2012 at 12:30 pm | Report abuse |
  4. QS

    Ahhh....watch how bad this makes me feel! LOL!

    May 23, 2012 at 12:30 pm | Report abuse |
  5. Posted On Facebook

    All I know is that it was posted on his social media page for everyone to see in plaine sight. 🙂

    May 23, 2012 at 12:30 pm | Report abuse |
  6. tiddingwright

    Zuck this guy, he stole the social networking idea from others and now is stealing investors money. The sooner this arrogant skell is banished the better.

    May 23, 2012 at 12:30 pm | Report abuse |
    • musings

      Karma? It looks like he may lose a lawsuit and have to disgorge some of his profits.

      May 23, 2012 at 3:10 pm | Report abuse |
  7. Peter

    Boo hoo hoo.

    May 23, 2012 at 12:30 pm | Report abuse |
  8. Charles

    Good thing Facebook now hows $ billions to defend itself from the lawsuits. This is essentially the shareholders suing themselves.

    May 23, 2012 at 12:30 pm | Report abuse |
  9. Blanca Vinje

    Today is settlement day for FB. the SEC should freeze that money and then return it to all the investors. I do believe this company is way overvalued. FB should pay at least a fraction of the billions they racked up to all the FB users, after all, the users are the ones that made that company.

    May 23, 2012 at 12:30 pm | Report abuse |
    • musings

      That'd be the day!

      May 23, 2012 at 3:12 pm | Report abuse |
  10. Bobby

    What a bunch of babies. When you make a bad investment decision, just sue everyone?

    May 23, 2012 at 12:31 pm | Report abuse |
    • JoMama

      That's the American way now Bobby, no ownership of responsibility. You make a choice and you live with that decision, period. But the message being forced on people now is, "you make a decision and if it doesn't work out, then it can't possibly be your fault. You must've received misinformation. So sue". Pathetic and sad.

      May 23, 2012 at 12:41 pm | Report abuse |
    • JenniferK8

      Exactly! And let's face it. No jury will believe Facebook FAILED to share information.

      May 23, 2012 at 2:49 pm | Report abuse |
  11. john

    Stocks are like lottery. Can´t sue lottery for not winning. Who still trades stock after the 2008 disaster is nuts. Start making money with honest work, not with speculation. In speculations there will always be loosers and suckers. After 2008 it should be forbidden for stockholders to sue, period. You gamble, you suffer the conscuences.

    May 23, 2012 at 12:31 pm | Report abuse |
    • lkjlkj

      The thing is, there's a difference between a broker warning its clients and an underwriter, who knows the most about the company, simultaneously hawking the stock and telling large investors to hold off. That underwriter is in a unique position to manipulate the market. In this case, it sounds like the underwriter threw the small investors under the bus.

      May 23, 2012 at 3:05 pm | Report abuse |
  12. Rats-Missed again

    I should have shorted this stock after the first day close, but didn't. Silly me......Boy, am I glad I have no way of EVER getting in on IPOs.......

    May 23, 2012 at 12:32 pm | Report abuse |
  13. Kalamazood

    This is, like, so totally not fun anymore. Getting sued like totally sucks!

    May 23, 2012 at 12:32 pm | Report abuse |
    • john

      Right on, like totally dude, like so not groovy. Pfffft, ... aaahhhh!

      May 23, 2012 at 12:45 pm | Report abuse |
  14. Robb1371


    May 23, 2012 at 12:32 pm | Report abuse |
  15. Jim in PA

    Dear small investors, here is a newsflash: Wall Street doesn't work for you. They are the con man, you are the mark. The primary function of investment banks is to transfer your money to the inside investors. Stop thinking you are one of them; you aren't.

    May 23, 2012 at 12:33 pm | Report abuse |
    • CR3W

      Exactly right. I feel the same way when middle/lower class people recite the GOP party line about the so-called "tax and spend" ideological battlefield. As if the GOP ever gave a damn about the middle class, OR, offered tax benefits to the lower wage earners that even closely resembled the huge tax advantages of the top 1%. But they are quite brilliant and scamming good hearted Americans on social platforms as a means to obtain and abuse power. And the beat goes on. And on....

      May 23, 2012 at 2:33 pm | Report abuse |
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