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. Tommie

    Why did they go public? Not worth it.

    May 23, 2012 at 3:04 pm | Report abuse |
  2. tab

    more money...more problems.

    May 23, 2012 at 3:05 pm | Report abuse |
  3. MikeB

    Anyone else want to be ambitious, start a business, and role the dice with government regulations?
    No wonder the U.S.A. is in decline. It's becoming impossible to navigate through the bureaucracy.

    May 23, 2012 at 3:05 pm | Report abuse |
    • Ronald Hussein Reagan

      Are you blaming this on regulations? Good REpublican thinking. Greed and dishonesty are good regulations are bad.

      May 23, 2012 at 3:13 pm | Report abuse |
    • Kanagi

      Yea that's the moral of the story. You are the Zuckerberg of idiots.

      May 23, 2012 at 3:58 pm | Report abuse |
  4. Aaron

    Its FACEBOOK you can't seriously think about that as a real money making investment. Investors are plain stupid if they thought a venture with FACEBOOK would be profitable at all. sounds like a JP Morgan gamble again.

    May 23, 2012 at 3:06 pm | Report abuse |
  5. Trevor

    There were plenty of us on the sidelines saying that you'd have to be an idiot to buy FB for $38. People shouldn't be surprised, this is a company without a plan for monetization.

    May 23, 2012 at 3:06 pm | Report abuse |
  6. LilaSpeak

    @lila – Funny. Last I heard phone companies and utility companies, well they... provided PHONE and UTILITY services. Thanks for advising us "they only collect data like FB." What branch of JP MORE-GONE do you work for?

    May 23, 2012 at 3:06 pm | Report abuse |
    • Lila

      The do collect, look up AT&T, Direct TV and your local services. They are all doing it.

      May 23, 2012 at 3:12 pm | Report abuse |
  7. Fredbook

    Are people really surprised about FB IPO? Last time a company that sold nothing / hyped everything was valued so high it's name was Enron.

    May 23, 2012 at 3:06 pm | Report abuse |
  8. Jeff

    People who complain that Mr Zuckerman who is Jewish and greedy would stop. I know many greedy Christians.

    May 23, 2012 at 3:07 pm | Report abuse |
  9. Robert

    Sounds like MZ maybe should have completed college and learned a couple things about business along the way. Too bad, too, 'cause Harvard just happens to have a prestigous business school. What a waste.

    May 23, 2012 at 3:07 pm | Report abuse |
  10. TownC

    CNN seems to be celebrating and rejoicing in an American companies difficulties. This is a tragedy not something to laugh at. I wonder how many Americans are now out of work or soon will be because of this..

    May 23, 2012 at 3:08 pm | Report abuse |
  11. veronicabolger

    Are these not the same liberal types that want us to pay more taxes and tell us about GREEDY Wall Street?

    May 23, 2012 at 3:08 pm | Report abuse |
  12. LaughingOutLoud

    Mike K. – Look up provisional patents from June 2003 and tell everyone "they created the idea." In reality, they stole the idea and tried to cover it up by claiming "they stole the idea from a pair of twins." It's a scam. WAKE UP. The patent application owner lives in poverty... and you'll soon be paying for a crap implementation... we all lose.

    May 23, 2012 at 3:09 pm | Report abuse |
  13. Dakota2000

    Yeh... didn't anyone see the movie. The guy came off as a real snake...

    May 23, 2012 at 3:09 pm | Report abuse |
  14. Red Pison

    Facebook deserves to fail. It had its time in the limelight, but they sold out...and sold everyone else's personal information to the highest bidder.

    May 23, 2012 at 3:09 pm | Report abuse |
  15. Zuck You

    So this greedy Ginger gets engaged. I wonder what wifey-to-be thinks about this clown's shady business ethics.

    May 23, 2012 at 3:11 pm | Report abuse |
    • krozar

      He's already married and it was probably her idea.

      May 23, 2012 at 3:16 pm | Report abuse |
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