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. john

    well..when the CEO shows up on Wallstreet in a hoodie....the wolves will see a big opportunity..

    May 23, 2012 at 3:19 pm | Report abuse |
  2. ZoeyKay

    If ypu play with snakes, you're eventually going to get bit.

    May 23, 2012 at 3:20 pm | Report abuse |
  3. Michele

    I want to speak to the "11-year-old investor." That boy is a genius!

    May 23, 2012 at 3:21 pm | Report abuse |
  4. Serenity

    "A frustrated 11-year-old investor, who in many ways represents the most basic frustration for individual investors,..." Awful writing, or lack of proofing. I am assuming 11 year-olds don't invest in the stock market. I got the gist of what was being conveyed, but come one....

    May 23, 2012 at 3:21 pm | Report abuse |
    • Yeah

      Come one, come all...?

      May 23, 2012 at 3:27 pm | Report abuse |
    • Michelle

      "...but come one..." Looks like lack of proofing happens even to perfect people.

      May 23, 2012 at 3:29 pm | Report abuse |
    • Pelegrim

      It appears the 11-year-old is writing for CNN.

      May 23, 2012 at 3:31 pm | Report abuse |
    • Dave

      I started investing at the age of 10... and I made money in the 1987 crash at the age of 12 when I was already analyzing profit and loss statements, long term debt and stock price history. Yes, its possible.

      May 23, 2012 at 3:33 pm | Report abuse |
    • peter chrzanowski

      There is only one word for Facebook and its' overinflated value going public. It's called " GREED " and I hope this is only the beginning of their problems . The empire is just getting a taste of the Karma which it deserves !

      May 23, 2012 at 3:40 pm | Report abuse |
    • CNN reporter

      Way to be critical of other people’s writing when you can’t even write. Maybe you should proof read your stuff.

      May 23, 2012 at 3:40 pm | Report abuse |
  5. designsby patty

    Couldn't have sais it better. I love the ability to share and keep up with family and friends around the country but as an older user, am very cautious. As a free service it is great. Make money by charging? I don't know how many social users would pay to use it.

    May 23, 2012 at 3:32 pm | Report abuse |
  6. Jason

    I kept myself clear of FB stock....why? It ain't worth $20/share. I might consider it a good buy at $5/share. The EPS and P/E were WAY out of whack at IPO to make it a smart investment. No need for some "insider" to tell me that.

    May 23, 2012 at 3:34 pm | Report abuse |
    • Vinny

      People thought Google stock was worth no more than $14/share. Wait...is that....yes it is...it's sitting at over $600/share. Safe bets are not the ones that yield the most money. I bet FB is sitting closer to $100/share a year from now.

      May 23, 2012 at 3:38 pm | Report abuse |
  7. krozar

    Oh boo hoo. All of these traders were in it as a race to screw the other guy.

    May 23, 2012 at 3:35 pm | Report abuse |
  8. Me

    Some times you can feel very happy you don't have any money to invest

    May 23, 2012 at 3:35 pm | Report abuse |
  9. David in NC

    Greed at its' finest hour. This was like going to Vegas and rolling the dice. Some win and some lose. I even heard that one individual has put all of his life savings into this, how stupid.

    May 23, 2012 at 3:35 pm | Report abuse |
  10. Vinny

    I wasn't aware he was in law enforcement...or the district attorney. I guess the duties of the President have changed as of late. That, or you are a moron.

    May 23, 2012 at 3:36 pm | Report abuse |
  11. NoTags

    I've been playing the market for over 40 years. One thing I learned a long time ago is; "If it's obvious to the public, it's obviously wrong". Anyone who bought the FB "dog" IPO needs their head examined. 100 times earning was way too much for FB.

    Even crazier, I couldn't believe some of the pundits online and on TV were predicting a quick run up of FB to the $70-$90 range. Anyway you slice it or dice it, FB is a $10-$12 stock.

    May 23, 2012 at 3:38 pm | Report abuse |
  12. BOB

    Off topic and totally inaccurate while shouting at us. Way to go. Now go away.

    May 23, 2012 at 3:39 pm | Report abuse |
  13. x277

    Since when was it the President's (any President) job to charge people with crimes. Nice try though. Thanks for playing!

    May 23, 2012 at 3:40 pm | Report abuse |
  14. owtdorsmn

    when will people take responsability for themselves. If they knew inside secrets than they are at fault. If they didn't then how is facebook at fault. You wanted to invest and win the lottery just like everyone else. Now dont cry because you didn't win. Tech stocks can be maginalized, calculated, or assumed. Especially facebook. what do they sell again, oh ya advertising. Please you are all stupid if you invest in such stupidity. Ohh. No lets go sue. give me a break. Can we pass legislation that doesn't let nimrods sue.

    May 23, 2012 at 3:41 pm | Report abuse |
  15. Jeff Frank (R-Ohio) "Right Wing Insanity"

    There's the 10% that get it and really do care. Then there's 90% that don't get it, and are self serving hate mongers

    May 23, 2012 at 3:42 pm | Report abuse |
    • Kanagi

      Good to know that you are in the 90%

      May 23, 2012 at 4:07 pm | Report abuse |
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