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. mat

    no flag option here for antisematics like u

    May 23, 2012 at 2:43 pm | Report abuse |
  2. Ede Lm

    Sounds like Morgan Stanely did their jobs........why are the headlines trying to make it sound otherwise??????

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

      Because Morgan Stanley was the underwriter. That makes what they did both insider trading and fraud.

      May 23, 2012 at 2:48 pm | Report abuse |
  3. NO way

    Go figure. Another way wall street and the 1% has finally come to light to some people that are oblivious and refuse to see. Insider trading big banks and investment firms tipping off their wealthiestt investors to hold back. The same big banks and everything. And still some people don't think there should be regulation. You can expect this nonsense to continue if Romney gets elected and the same Congress that blocks everything for the 99% to benefit the 1%.

    May 23, 2012 at 2:43 pm | Report abuse |
  4. hockeytonk

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

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

      he's been trading for 11 years, he isn't 11 years old.

      May 23, 2012 at 2:52 pm | Report abuse |
  5. Set up

    This is what happens when you wear a hoodie to Wall Street. The old bankers thought they were disrespected when Zuckerberg did not wear a suit and tie.

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

    I really hate this dude. And I hated the movie "The Social Network" as well. It bored me to tears.

    May 23, 2012 at 2:45 pm | Report abuse |
  7. pozin

    So smart people do stupid stuff too eh. Whoda thunk it.

    May 23, 2012 at 2:46 pm | Report abuse |
  8. Friend Me

    Where the hell is the "Like" button here?!

    May 23, 2012 at 2:47 pm | Report abuse |
  9. David

    I'm a pretty smart individual. I have a colege degree and have a good job. I also have friends that are high school dropouts, I don't just based on intelligence. However, everyone I know couldn't comprehend WHY anyone would purchase Facebook shares at that price, or almost any price. Even my high school dropout friends recongnized NO REVENUE (or very little). We seem to tell ourseleves in this country that if you are SMART, you get rich. Well, it WAS the rich that bought into this. And to be honest, my highschool dropout friends were MUCH SMARTER than ANY of these rich morons that threw their moeny away. Why couldn't they see something my highschool dropout friends saw clear as day?

    May 23, 2012 at 2:47 pm | Report abuse |
  10. capnmike

    Loads of us are QUITTING FACEBOOK because of this stupid "Timeline" format that they are forcing us to use...and blocking the ads also, so we will see how these fatcats like it when we hit them in the wallet.

    May 23, 2012 at 2:48 pm | Report abuse |
  11. Rodeoguy

    If crimes were committed, they should be punished. But let me say that I had no inside information and I knew that FB was over valued and people were going to lose money. It only takes a little common sense. And now those loosers (aka crybabies) are going to sue.

    May 23, 2012 at 2:48 pm | Report abuse |
  12. Jason M.

    Such a waste of time. If it is proven that the banks did anything illegal, nothing will happen to them. They've already ruined the economy and what did the government do to punish them? Give them a buyout. The justice system is a joke when it comes to big money and power. Our politicos are all in the banks pocket. There's no other reason these pompus criminals can get caught doing these acts and constantly get away with it.

    May 23, 2012 at 2:49 pm | Report abuse |
  13. Mahesh

    A 11 year old made $10,000 from small business. That should have been the main news.

    May 23, 2012 at 2:50 pm | Report abuse |
  14. Darryl Phillips

    Wouldn't it be amazing if something like Facebook was the lynch pin that destroyed the financial world?

    May 23, 2012 at 2:51 pm | Report abuse |
  15. cjboxer77

    What I want to know about is this 11 year old investor who made $10k with a start up...

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