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.

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. fekt

    What happened is very obvious and was the day it happened. Recall the night before it went public the thurs were initial purchases originally occured. CNN ran an article on how many small mom and pot type traders were unable to get stock unlike the big IPO's and investment firms i.e. big money richie rich's. Next day it comes available. Thanks to all the hype and some fast trading early in the day the big money are able to raise the value of the stock. Finally the mom and pop's can get in on it around the time it peaks. Woops, now it's worth nothng good thing we got out while it peaked. Have fun with your worthless stock we knew the day we got it was gonna be worthless. Wall Street is a con. That's all it's ever been. No better than 3 card monte. Bankers have an old saying and they all know it and have said it for many many years. The only way to make money off of the poor is to keep them poor. Thanks for playing. Vote Romney, he loves this game.

    May 23, 2012 at 3:55 pm | Report abuse |
  2. Money over Matter

    I am waiting for some conservative LOSER to blame this on the President!

    May 23, 2012 at 3:56 pm | Report abuse |
    • Kanagi

      Go back and read there are plenty of examples.

      May 23, 2012 at 4:19 pm | Report abuse |
  3. Ernesto P

    Facebook (FB) doesn't manufacture any products nor does it provide an essential service to mankind. As such, it is what we used to call a novelty; what keeps FB going is people's curiosity about other people, and the fact that it costs nothing. We could easily do without it, and nobody would care, because modern society has other means of communicating the same information. The challenge to FB is to integrate its particular form of social media into the very fabric of life. To use the technology to provide an essential service. Until it does so, its survival will always be in jeopardy.

    May 23, 2012 at 3:56 pm | Report abuse |
    • 2cents4free

      I'd say communication is a service. A service doesn't have to be essential to be worth something.

      May 23, 2012 at 4:09 pm | Report abuse |
  4. Jeff Frank (R-Ohio) "Right Wing Insanity"

    FB is gonna do this. FB is gonna do that. Typical Republicans. Typical Jews.
    I never seen a flash mob that could agree on anything financial. Plumb stupid.
    First get a job. Then develop a portfolio with a trust worthy investment company, that have trained investors that can help you make a little gain without losing your shirt in a variety of good investments. Average people like you and me cannot do this. If you do not have the patience to invest wisely, you probably should be ripped off by some fly by night outfit like Zuckerbergs'.

    May 23, 2012 at 3:56 pm | Report abuse |
  5. Bill Davis

    Hey the press does the same thing with Obama every day so what is the problem.....

    May 23, 2012 at 3:57 pm | Report abuse |
  6. The Big Ragu

    Facebook value = worthless

    May 23, 2012 at 3:58 pm | Report abuse |
  7. BuyHigh SellLow

    Yes dear, the market really is a ruthless ponzi scheme and if you don't have the stomach for it, you should probably stay out...

    May 23, 2012 at 4:00 pm | Report abuse |
  8. Q-Sandwich

    Did we imagine that facebook was something other than a greedy corporate leach on society? They are like every other corporation. They will swindle and exploit anything and anyone for profit. And now we finally have proof. Nice knowing you, facebook.

    May 23, 2012 at 4:00 pm | Report abuse |
  9. David in NC

    No threat of any kind has been reported that I know of. The women handed a note to a flight attenant saying that she had a device implanted into her body. Not a crime that I know of.

    May 23, 2012 at 4:01 pm | Report abuse |
  10. ryanmcapple

    What I said to begin with when Facebook was going to enter its IPO... WEEKS BEFORE:
    "Hundreds of people will invest in the stock and immediately after sell it."

    Look at the stock and what happened within the first hours of day 1.

    May 23, 2012 at 4:01 pm | Report abuse |
  11. Worthless Stock

    side note: Can anyone tell me why he looks more and more like a James Bond super-villian everytime he appears in public? Doesn't he have handlers or stylists or something to make him look less evil?

    May 23, 2012 at 4:02 pm | Report abuse |
  12. ynoT

    Insider Trading...Is this not the same thing that Martha Stewart went to prison for?

    May 23, 2012 at 4:02 pm | Report abuse |
    • Frank

      No she went to prison for lying to a federal investigator.

      May 23, 2012 at 4:08 pm | Report abuse |
  13. hoodinki

    Clowns in a Circus stumbling and falling all over themselves and making me laugh.

    May 23, 2012 at 4:03 pm | Report abuse |
  14. Kanagi

    Now that has to be the stupidest thing posted and with the number of idiots posting on here that is quite an accomplishment.

    May 23, 2012 at 4:04 pm | Report abuse |
  15. Kanagi

    I take that back. That was the stupidest thing posted.

    May 23, 2012 at 4:05 pm | Report abuse |
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