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. Bill

    People need to grow a pair and accept responsiblity for THIER actions....When you invest in any sort of stock you are taking a chance that either a) your going to make some money or b) your going to lose some money....The people that are sueing are just upset because they invested in something and it didn't make them as money as they had hoped....Thats life, deal with it!

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

      I think the charges is that there was critical information purposely, and possibly illegally, withheld from them. You can't make an informed decision if critical information is withheld from you.

      May 23, 2012 at 2:52 pm | Report abuse |
  2. Lliam1306

    As I said before, "Mark Z should have sold it and walked away. Regulators and the courts will tear it apart for him."

    May 23, 2012 at 2:36 pm | Report abuse |
  3. Gary Wolf

    Hahaha. Frankly, I am overjoyed. All the comments from bloggers that they will get rich while the naysayers were nothing but penniless haters. Choke on your greed! This stock was is and will be worthless. When the public offering came out I canceled my Facebook page. I am ecstatic!!!

    May 23, 2012 at 2:38 pm | Report abuse |
  4. Chris

    sooooooo...i don't have a great financial mind or an ivy league education, but.....errrrr...ahhhh....you buy a stock in a company that doesn't really produce anything and get upset when your profit ends up being as virtual as the company stock you bought? Have we all become that gullible as to buy air? i don't get it...sorry. I'm sure some "genius" will come back with the perfect explanation of how this system works and how I'm an idiot for not understanding it....BUT, I also didn't buy into this garbage, so I guess I didn't do too bad..lol

    May 23, 2012 at 2:39 pm | Report abuse |
  5. jason

    i have a feeling you don't like what you see in the mirror

    May 23, 2012 at 2:39 pm | Report abuse |
  6. please

    please donate to facebook to recover from a bad IPO

    May 23, 2012 at 2:39 pm | Report abuse |
  7. Frank

    So let's buy stock in a company that in 5 years will be what AOL is today. Makes sense to me. Hey, it's not like social media is changing every 5 minutes.

    May 23, 2012 at 2:40 pm | Report abuse |
  8. macbil

    Well...the first thing Romney will do when he gets elected is ask Bain Capital to acquire Facebook, load it up with debt, take away stock options, take away health plan, fire most employees (including Zuckerberg), and then let it go bankrupt after it takes a HUGE fee. Then we wouldn't have any of these problems about stock prices, or what Morgan Stanley did or did not do. Mitt Romney for President...campaign slogan: "Let the rich guys do whatever they want."

    May 23, 2012 at 2:40 pm | Report abuse |
  9. AJ

    Going to guess there's a glaring typo up there, unless I'm to believe that an eleven-year-old investor has his own business and $10,000 to invest in stocks with.

    May 23, 2012 at 2:40 pm | Report abuse |
  10. What else is new???

    Wall Street is full of greedy corrupt criminals? NO! Say it's not so!

    May 23, 2012 at 2:40 pm | Report abuse |
  11. Smeagel4T

    Greed leading to immoral and unethical behavior? Who would have thought! What with Wall Street being such a bastion of morality and the GOP's worship of Mammon.

    May 23, 2012 at 2:40 pm | Report abuse |
  12. Gary Wolf

    The stock market is for suckers. It is fixed. It is rigged. Fools. Lambs to the slaughter. There is no get rich quick scheme out there, my gullible friends, unless you are a crook. Stock brokers are crooks. 😉

    May 23, 2012 at 2:41 pm | Report abuse |
  13. Cara

    Hmmmm....this should prove interesting. Can't wait to see how his fate compares to that of Martha....will the "good ol' boys" just slap his hand and scold him? Let him off with a fine? Anyone care to make a wager? 🙂

    May 23, 2012 at 2:42 pm | Report abuse |
  14. linda operle

    If someone doesn't step in and ONCE AGAIN lower the boom on these criminals (the banks) we will see another financial crisis that will make 2008 look like kids play. Of course the bonus's keep flowing to the criminal masterminds. Oh and the Rep's want the government regulations out of the way so Wall Street an continue to rob us blind.

    May 23, 2012 at 2:42 pm | Report abuse |
    • NO way

      And lets not forget the insider trading in Congress itself.

      May 23, 2012 at 2:46 pm | Report abuse |
    • ModernMan

      Amen!!!

      May 23, 2012 at 2:49 pm | Report abuse |
  15. jim

    Not for him and his friends. He sold 30+million shares. Probably didn't help the value of the stock. Why would he do that you should ask.

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