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.

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. 11YearOldInvestor

    LOL, 11 year old investor? He can't even have a facebook account

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

    Will there be DOJ indictments against FB's investment banks? Isn't that illegal? Probably no indictments, probably bonuses for their executives. It figures, it's their way.

    May 23, 2012 at 2:15 pm | Report abuse |
  3. BJJSchecter

    He's really going to need that hoodie now.

    May 23, 2012 at 2:15 pm | Report abuse |
  4. Job

    Wonder what would happen if we all decided to get off Facebook, like "My Space".

    May 23, 2012 at 2:16 pm | Report abuse |
  5. BiG_Weasel

    And FB will lose, since there was insider information that has now come to light. You know what that means? Good 'ol Zuck will loose his fortune and have to sell off FB to the highest bidder.‎...and the highest bidder will try and monetize the business, which *will* mean subscription fees. My prediction- you heard it here first.

    May 23, 2012 at 2:17 pm | Report abuse |
    • David

      That's about as likely as you becoming the 2012 President.

      May 23, 2012 at 2:19 pm | Report abuse |
    • jojo the monkey boy

      lose not loose

      May 23, 2012 at 2:20 pm | Report abuse |
    • Satan

      I've been researching them more often than I used to. I got rid of my FB account back in 2010 because it was just became stupid to me. I realize 900 million people are on FB still, but that doesn't mean it's a good product. It equally could mean that 900 million people are just mindless, catatonic sheep...which is actually the reality. Facebook will likely continue to drop off a cliff because no one wants to own a piece of it.

      May 23, 2012 at 2:22 pm | Report abuse |
    • Alex

      I hope you're right.

      May 23, 2012 at 2:26 pm | Report abuse |
  6. Caffeinated Opinion

    You don't get to be a billionaire running a huge company out of luck.. . you have to kick ass everyday try your hardest and then be taken over by a secret government agency to use the infrastructure to spy on the population.

    May 23, 2012 at 2:17 pm | Report abuse |
  7. Ron K.

    Greed kills! The investors are a bunch of suckers on this one. FB is still laughing all the way to the bank.

    May 23, 2012 at 2:17 pm | Report abuse |
  8. Lela

    I bought two shares last Friday, and I did not know until Monday if I got them or not... and by then, I had already lost money. I want my money back... or I am going to sue.

    May 23, 2012 at 2:20 pm | Report abuse |
  9. Scott

    How is this Zuck's fault? Greed and corruption in Big Business and our Goverment seem to be the culprits here. Problem is, most of them will skate....

    America, land of the not so free, home of the 1%.

    May 23, 2012 at 2:21 pm | Report abuse |
  10. Yours Truly

    What do expect from someone who stole the idea for FB to begin with...suckers!!!!

    May 23, 2012 at 2:21 pm | Report abuse |
  11. David

    This isn't a Facebook issue, it's stock market rigging. It could've been any company.

    May 23, 2012 at 2:22 pm | Report abuse |
  12. David

    I have little investment experience outside of my 401k, if that even counts, but I and many other non-investors have already commented pre-IPO that FB would be a bad investment... not a surprise the stock tanked... those who did invest have no common sense.

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

    Oh, no! Wall Street and/or Mark Zuckerberg weren't completely open and honest with everyone?

    I'm shocked!

    Shocked, I tell you!

    How could this have possibly happened?

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

    This what you get when you buy into something that offers nothing, has no actual product to sell, and just another con-man trying to get something for nothing.

    May 23, 2012 at 2:24 pm | Report abuse |
  15. Effed

    The big question is: Did certain privileged customers receive information about the Facebook offering that you as an individual investor might not have? The answer to the "Big Question" is always: Yes... of course... always... duh!

    May 23, 2012 at 2:24 pm | Report abuse |
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