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. Byrd

    I don't care how much money they might control, Morgan Stanley is a criminal organization that the world would better do without. That goes for quite a few more on Wall Street as well.

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

      I think the Credit Card companies are much more criminal...legalized loan sharking basically is much worse than investment houses

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

    Funny. From the start everyone knew that Facebook produced nothing (no product), and only generated income from advertisements. Everyone knew that FB was solely a social network and nothing else. Yet people flocked to buy stock and now they complain about it losing value. What did they expect? Did they honestly believe that like APPLE it's stock would immediately gain value? Anyone with any common sense would have waited a month or two instead of jumping on the speculation bandwagon. Naive is to mild a word. Gullible is more like it.

    May 23, 2012 at 2:25 pm | Report abuse |
    • Gem

      Haaa haa, ya - funny as can be.

      May 23, 2012 at 2:27 pm | Report abuse |
    • MIke


      May 23, 2012 at 2:34 pm | Report abuse |
    • musings

      This isn't a case of "let the buyer beware," it is a case of strict liability and deliberate deception in order to milk the retail investors. Laws were violated. This was an attempt to cash in on a well-orchestrated false impression – much like the horse race in the movie The Sting where a false environment was created.

      When my mutual fund wades in and loses money on this, just because the particular group managing it did not belong to the right gang, then it has standing to sue, as do individual investors.

      I don't want ill-gotten gains to go to the parties in this who society who can trick people the best. The downfall will take with it far too much that I value, as we can see is already happening. Non-productive and frankly criminal types will, as in Russia, be able to acquire all the assets of this society.

      I am not cynical about capitalism, but this isn't capitalism that ripped people off, it is organized crime.

      May 23, 2012 at 2:36 pm | Report abuse |
    • Pleth

      You must not have read the article. People are not upset that they did not buy good stock, they are upset because they placed an order for $10k worth with the intention of selling it moments later when it peaked around $43.00 to make a few grand. Since NASDAQ botched it, people did not know that their initial order was even processed. When they did find out, the price began to free fall and they were unable to sell at a premium. Next, you have "corporate" investors who were told by the banks that the value really isn't what the analysts thought. This is illegal. It's called insider trading. Brokers and banks cannot "select" who should be privy to the information. It is all or no one. I would sue, too had I invested.

      May 23, 2012 at 2:40 pm | Report abuse |
    • Byrd

      The fact that you think everyone should have known is not the issue. The issue is that NASDAQ, MS and FB knowingly pushed a worthless IPO on the world and only told its best friends exactly how many days they thought it would take to completely tank. And that's the time those particular clients, and not the average investor, know they have to work whatever underhanded manipulations they can possibly manage.

      100 Billion they said it was worth and you see oo criminality in that? Please.

      May 23, 2012 at 2:44 pm | Report abuse |
    • Stephen

      100% correct.

      May 23, 2012 at 2:44 pm | Report abuse |
  3. Grumpster

    I saw this one coming a mile away and didn't buy one share. I don't need shares of virtual farm animals.

    May 23, 2012 at 2:25 pm | Report abuse |
  4. David

    This is classic sell high (FB is peaking right now). Obviously only downhill from here.

    May 23, 2012 at 2:26 pm | Report abuse |
  5. George

    Here's the unfortunate aspect of ALL of this: those people who bought the stock out of a genuine desire to own a piece of a digital success story will be left with a loss.
    These class action lawsuits will place pressure on FB's earnings and negatively impact their financials.
    I fear that as the dust settles on this we may see future earnings "adjusted" "due to accounting changes".
    If Groupon's IPO and its aftermath is any indication, it's going to be a bumpy ride for investors and employee shareholders.

    May 23, 2012 at 2:28 pm | Report abuse |
  6. RC

    Maybe I'm not understanding. The investmenent houses warned clients that the stock wasn't very good. Isn't that what they are supposed to do? As opposed to lying about it to line their pockets? What's the problem?

    May 23, 2012 at 2:29 pm | Report abuse |
    • mike

      insider information

      May 23, 2012 at 2:32 pm | Report abuse |
    • NYKnows

      The problem appears to be (remember it's all alleged) insider trading. The investment firm hired to guide the IPO and therefore with special knowledge appeared to warn big customers that the opening price of the stock would be too high, therefore sparing these special customers from investing money and losing it. That's illegal, the firm should have warned EVERYONE in a press release or said nothing to anyone, leaving all at equal risk. Martha Stewart went to jail for insider trading, so it will be interesting to see, if this is in fact proven, who takes the fall.

      May 23, 2012 at 2:38 pm | Report abuse |
  7. aonyi

    aha! its going to be another enron fiasco! woooo i cant wait ^_^

    May 23, 2012 at 2:29 pm | Report abuse |
  8. mike

    wow, banks don't tell the whole truth. what a suprise.

    May 23, 2012 at 2:31 pm | Report abuse |
  9. YourAllFools

    Only a fool would have thought FB would be worth $38/share with no tangible product. FB, Z, and all those invested will loose with this greed train.

    May 23, 2012 at 2:31 pm | Report abuse |
  10. Dave V

    Lets See, Where have I heard the names Morgan Stanley, Barclays, Goldman Sachs, JP Morgan, Merrill Lyncy, and BofA
    oh yeah i remember during the financial meltdown.....all are criminal organizations. is it any surprise that a select few know the real deal.....Only a select few have known the real deal for years

    May 23, 2012 at 2:32 pm | Report abuse |

    I'm all for the FB guy who left states to save on his tax bill, hope he gets to enjoy it by spending it whatever way he wishes
    He made a bundle not off of those who enjoyed the service, many who by the way skip taxes on their incomes in every way they can, but instead he made it by the gteed of those trying to profit off his work.

    May 23, 2012 at 2:32 pm | Report abuse |
  12. Please fire me

    The Oxford English Dictionary has added a new word for 2012, "zuckers" They did not give a definition for this new word because it's meaning is too obvious.

    May 23, 2012 at 2:32 pm | Report abuse |
    • Grammar Hammer

      "Its", you moron.

      May 23, 2012 at 2:43 pm | Report abuse |
    • Terry

      Classic except the general retail investors became "Zuckers" due to a rigged game of this IPO.

      May 23, 2012 at 2:44 pm | Report abuse |

    Prediction: FB stock at under $1 BB (delisted penny stock) within a year or two.

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

    It's time-consuming only if YOU let it be time-consuming.

    May 23, 2012 at 2:34 pm | Report abuse |
  15. Rich Griffith

    It is simply unbelievable!! This is the highest profile IPO in 20 years and the crooks on Wall Street STILL try to manipulate the entire deal – with NO concern over ramifications. This simply MUST STOP! The truth is, Wall Street is an unbelievably corrupt group and our Government sits by and does absolutely nothing! It really is TIME FOR A CHANGE!

    May 23, 2012 at 2:35 pm | Report abuse |
    • dad

      Why would we try to stop this... there are more pressing issues that are in the news every day. Gay people want to get married.Get your prioritizes right and stay to the big issues.

      May 23, 2012 at 2:42 pm | Report abuse |
    • pastmorm

      How is it our governments fault? And most people are harping about how they want LESS government involvement in our day to day lives. You only get one or the other. Not both.

      May 23, 2012 at 2:44 pm | Report abuse |
    • Rpuente

      The REPUBLICAN PARTY did EVERYTHING in its power to unravel the Regulatory Policy that was proposed to control this type of trading.... GOOD OLE Boys are continuening to RUIN This Country AMERICA Better wake up.

      May 23, 2012 at 2:52 pm | Report abuse |
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