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. RCBinTN

    Oh, this is gonna be fun!!

    May 23, 2012 at 12:33 pm | Report abuse |
  2. BillR

    Surprise NO!! I said this before they went public, The big boys will invest price will go up. and they will dump. Walk away with billions 1 day buy and sell deal.

    May 23, 2012 at 12:33 pm | Report abuse |
  3. Peregrine

    I bought it for entertainment value. I assumed there would be a lot of controversy, news, lawsuits, etc.

    May 23, 2012 at 12:34 pm | Report abuse |
    • JC

      Sure you did...

      I mean..who buys a stock for entertainment? What a crock

      May 23, 2012 at 12:37 pm | Report abuse |
    • Gezellig

      Lots of people buy stocks for fun. Good grief, there are board games (Monopoly) based on markets. If making money is not as fun as spending it, you may be doing it wrong.

      May 23, 2012 at 5:16 pm | Report abuse |
  4. Obama 2012

    Obama 2012

    May 23, 2012 at 12:35 pm | Report abuse |
  5. Nate

    Goldman Sachs, Morgan Stanley, Merrill Lynch, Chase, Barclay's...all lying to everyone except their high-end clients? Honestly, who is surprised?

    May 23, 2012 at 12:35 pm | Report abuse |
  6. Just the Cats

    Just another example of greed from the (supposedly) most intelligent species on this planet. Humans just never learn. My cat is smarter than these fools.

    May 23, 2012 at 12:35 pm | Report abuse |
  7. Su Lynn

    Everyone seems to forget that the stock market is about gambling! Listen to all the crybabys whining! Same BS, different day!

    May 23, 2012 at 12:36 pm | Report abuse |
    • Jim in PA

      This isn't even legitmate gambling. This is the dealer (investment bank) telling the guy to your left what cards are coming up next in the deck. The word you are struggling to find isn't "gambling", it's "conspiracy."

      May 23, 2012 at 12:38 pm | Report abuse |
  8. buffalo

    My! My! How quickly "regulators" jumped on this one. However, Morgan-Stanley and all the other "old guard" are allowed to run rampant, throwing billions of investor dollars down the toilet and regulators just can't seem to see any "wrongdoing". Looks like the "Big Boys" dont want Marky in their "secret club".

    May 23, 2012 at 12:36 pm | Report abuse |
  9. JC

    What a shock! The company that that keeps lying about privacy issues and covering things up is now responsible for possible fraud. All on the back of one of the worst financial times this country has seen. I hope the SEC does their homework this time!

    May 23, 2012 at 12:36 pm | Report abuse |
  10. digitalclips

    People who bought after the IPO wanted to flip mostly so they learned a lesson ... risk is risk. Everyone was warning this was over hyped but greed just blinds some people.

    May 23, 2012 at 12:36 pm | Report abuse |
  11. Posted On Facebook

    So I guess the world Wide Web has poked zuckerburg ...

    May 23, 2012 at 12:36 pm | Report abuse |
  12. Reggie

    The game is beyond "rigged" – it is inherently corrupt!

    May 23, 2012 at 12:37 pm | Report abuse |
    • wendles

      its a gambling casino plain and simple.....the public is a pawn...we're betting against the" house.."..I believe this is how it goes....I'm not a gambler so I don't know how the intricate web the "house" makes is woven so the public is the "sucker"

      May 23, 2012 at 12:43 pm | Report abuse |
  13. Obamamnesty

    Ahhhhhhhhh Duhhhhhh Didn't a couple of owners sell off millions of shares for CASH today. Zucked made a cool $1,3 billion cash on that selloff and the other owner made $633 million cold cash. Smart smart move if true.

    May 23, 2012 at 12:37 pm | Report abuse |
    • CHowChow

      umm...technically that would be illegal...secondly if they sold off their shares, they would have no ownership rights to the company...that's what a public stock offering is...it's securing cash from investors in exchange for a stake in your company...if he sold off all his shares, he'd no longer own the company...I suggest you stop spreading rumors.

      May 23, 2012 at 3:31 pm | Report abuse |
  14. David Kuklinski

    I see that the 1% is still doing what's best for small investors and the average American. Oh wait...

    May 23, 2012 at 12:37 pm | Report abuse |
  15. oh snap

    Facebook will defend themselves in court with the Billions they made off of their investors.

    May 23, 2012 at 12:37 pm | Report abuse |
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