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. Bruce

    Forget the IPO; the big story is an 11-year-old investor. I want to know about this one. CNN, can you do a story on this kid? Did you avoid the name because it's a minor?

    Or maybe you just need a proof reader?

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

      Like most other organizations, they need to hire professional editors.

      May 23, 2012 at 2:58 pm | Report abuse |
  2. Evan

    This is the first time in quite a while where I've observed that a company targeted to the average American has used its powerful social influence to fleece their "flock" of gullible sheep.

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

    They'd be better off going after FB's potential bogus # of "users" .... they keep touting "900 MILLION USERS" but how many of those aren't users at all, or are company FB pages, group FB pages, etc ... What actually defines a "USER" ??? Hmmmmmm If 20% aren't truly users, that'd be enough ammo for some sort of lawsuit I'd imagine?

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

    Like he cares? 28 yrs old and worth 16 billion dollars. Please people. He could give a rats butt what you, I, nor anyone else thinks of him. His life, no mater what, is one of greatness. Everything first class and above. Things you and I only dream about and you think he cares about this article? Oh and I am waiting for the: Money can't buy you happiness crowd. Yeah, ok...

    May 23, 2012 at 2:53 pm | Report abuse |
    • steve harnack

      And he'll be using these people's own money to keep them tied up in court until they die of old age.

      May 23, 2012 at 3:10 pm | Report abuse |
  5. ted

    I knew that Facebook was and still is overpriced without any disclosures.

    May 23, 2012 at 2:55 pm | Report abuse |
  6. Killa Banker

    Big banks and Wall street screwing people over is news? Stock Brokers and Investment Bankers are financial terrorists and should be killed.

    May 23, 2012 at 2:55 pm | Report abuse |
  7. ted

    I knew that Facebook was overpriced without any disclosures.

    May 23, 2012 at 2:56 pm | Report abuse |
  8. Mike

    I know, I know...I'm politicizing the situation, but I can't help noting that this is emblematic of what a Romney-America would look like. The wealthy work the system to increase access to more wealth, blocking out the rest of us. I don't care if they make more money. I think they should be rewarded for hard work and innovation, but they have no right to dismantle the elements of society that give everyone a fair shot at getting rewarded for their own hard work – healthcare, education, and access to information that is supposed to be public.

    May 23, 2012 at 2:58 pm | Report abuse |
  9. Sam

    Can anyone say Congressional payback for ending status as an American Citizen to prevent from paying taxes? Issue with start last Friday, then this...I'm not sold on Facebook, but living in DC, I see this type of thing all too often!

    May 23, 2012 at 2:58 pm | Report abuse |
  10. Illuminated Genius

    The Facebook flop occured because a lot of people think Facebook is over rated and produces nothing in reality as a company. I think what needs to be done now is that the SEC should be putting those who illegally had insider information on Facebook stocks to be thrown in Jail. The security and exchange commission should take into consideration those who made illegal investments from insider trading on the stock before other investors had access to the information. If Facebook is to rebound they have to clear up their mistakes, law suits and get their act together as a company.

    May 23, 2012 at 3:00 pm | Report abuse |
  11. Che

    Throw every last one of them in prison and toss the key deep in the sea. My suggestion.

    May 23, 2012 at 3:00 pm | Report abuse |
  12. Lila

    FB doesn't make anything, it collects data. Many sites, phone and utility companies do the same, it doesn't make their companies worth billions. Even $5 would have way too much.

    May 23, 2012 at 3:02 pm | Report abuse |
  13. Chris

    People were jumping on this thinking it was going to be like Apple stock...whoops.

    May 23, 2012 at 3:03 pm | Report abuse |
    • Joeblk

      It should rebound...

      May 23, 2012 at 3:08 pm | Report abuse |
  14. What a Surprise

    This is why I use mutual funds and I don't put all of my money into one basket. What a mess...in less than a week of trading! Can't say I'm shocked!

    May 23, 2012 at 3:04 pm | Report abuse |
    • Che

      Yes, mutual funds are the way to go, well unless of course your an INSIDER!

      May 23, 2012 at 3:15 pm | Report abuse |
  15. mc-fine

    Everyone is now shouting "I knew it was over priced" like they already forgot about Linked in and its ridiculous 693:1 PE ratio. Its all perception. If you sell it like its a sure thing people will buy. Regardless of how silly the business model.

    May 23, 2012 at 3:04 pm | Report abuse |
    • Lila

      I'm not a big fan of social media, but at least linkedin is specialized. They can sell products and services to help people find jobs.

      May 23, 2012 at 3:10 pm | Report abuse |
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