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.

‚ÄúFacebook changed the numbers ‚Äď they didn‚Äôt forecast their business right and they changed their numbers and told analysts,‚ÄĚ a person at one of Facebook‚Äôs 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. 

‚ÄúThey are holding my money hostage,‚ÄĚ said¬†Sam Lesser,¬†who had put in a¬†$10,000 Facebook order from money he made in a small business he created. "It‚Äôs 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. jpip

    Hold up, maybe I read this wrong, but did this article say that an 11 year-old investor put $10,000 from a small business he created into FB stock?!?!

    May 23, 2012 at 2:06 pm | Report abuse |
  2. SoulCatcher

    Insider trading = bad mojo.

    May 23, 2012 at 2:06 pm | Report abuse |
  3. Arran Webb

    Are we expecting investment bankers to not steal from society? Get real. It is their job to steal from society.

    May 23, 2012 at 2:07 pm | Report abuse |
  4. marathonman72

    The entire thing is indicative of how Wall Street works. Giving value to the vacuum of space, or in this case the empty ramblings of peoples daily lives.

    May 23, 2012 at 2:07 pm | Report abuse |
  5. Andrew

    If you invested in Facebook, you're an idiot and should have never been messing with the stock market to begin with. OF COURSE this IPO would tank, everyone knew this for MONTHS. Seriously, if an 11 year old thinks its a good investment, there is a problem there.

    May 23, 2012 at 2:07 pm | Report abuse |
    • Rbnlegnd

      When you get stock tips from your shoeshine boy, it's time to get out of the market. How'd this 11 year old make enough money to "invest" in facebook? If he wanted to bet on the ponies, he's too young, but he's legal for stocks.

      May 23, 2012 at 2:19 pm | Report abuse |
  6. Scholar

    Greed; funky accounting; no ethics; this is the problem with wall street in conjunction with crooked politicians and bought regulators that look the other way. The US stock market was one of the last safe bastions where people from around the world used to invest. No more. No trust in thieves of wall street. Just like a third world country.

    May 23, 2012 at 2:09 pm | Report abuse |
  7. The Riddler

    Hmmm. NasDaq had trouble with the opening. Stock is down 18%. Some folks didn't know whether they purchased stock or not. Could it be that NasDaq let those that got the word that the stock wasn't as valuable as anticipated ditch their purchases?

    May 23, 2012 at 2:09 pm | Report abuse |
    • Rob

      I ended with Facebook stock hat I did not want due to crappy transaction management of my cancel orders. Mark, please buy my stock back at the price I was forced to pay, $40/share.

      May 23, 2012 at 2:18 pm | Report abuse |
  8. tell it like it is

    And reform @ wall street is one thing big investors dont want , lets see maybe it will make them more transparent . And give the middle class a chance to see the crooks they are. This country needs to get back to a hand shake and a good is all you need to do bissness

    May 23, 2012 at 2:09 pm | Report abuse |
  9. dowdotica

    Got Greed! to bad its not like buying something at target, you know? you don't like it, you take it back! can you say screw job deluxe!!!!

    May 23, 2012 at 2:10 pm | Report abuse |
  10. Bill

    Mark did nothing wrong, the bank who handled the IPO is to blame. A few people replying without investigating the real facts. People didn't agree on google stock but look at that company now.

    May 23, 2012 at 2:11 pm | Report abuse |
  11. That Zucks.....

    After co-founder Eduardo Saverin's decision to jump away from taxation by revoking his US chieftainship you had better believe this entire deal was under major Fed scrutiny Again, people are being ripped off by the skimmers at the top of the income pool and regulation without teeth will allow them to walk away into the golden sunset. The fleecing of middle class America began when Reagan "released the bull" in the 80's and today we have politicians running on deregulating Wall Street even more. Wake up America and stop being fooled by social issues in elections......it's nothing but a distraction. Vote for legislators that actually believe in Wall Street regulation and enforcement!

    May 23, 2012 at 2:11 pm | Report abuse |
  12. tim

    why is an 11 year old buying/selling stocks?

    May 23, 2012 at 2:11 pm | Report abuse |
    • sharon

      I think he means he's been investing for 11 years.

      May 23, 2012 at 2:28 pm | Report abuse |
  13. Helder

    Stock market = ponzi scheme.

    May 23, 2012 at 2:11 pm | Report abuse |
    • shaun

      obviously you don't know now a ponzi scheme works

      May 23, 2012 at 2:15 pm | Report abuse |
    • JC

      I was totally thinking that the other day!

      Basically its a circle of money...there really is nothing being created by it except a way to move the same money around...I wonder if more and more people will see this

      May 23, 2012 at 2:25 pm | Report abuse |
  14. shaun

    "A frustrated 11-year-old investor"

    ...How did an 11 year-old get $10,000?

    May 23, 2012 at 2:12 pm | Report abuse |
  15. t

    Let's face it, none of us who bought stock were in it for the long haul. We just wanted to ride the quick wave up before the floor dropped out.

    Facebook's value will never increase substantially, if anything it'll go down

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