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. plcleve

    Morgan Stanley, JP Morgan Chase, Goldman Sachs – always the same list of thieves, lying and playing with other people's money. when there's a profit – its theirs to keep. When there's a loss – the taxpaying class takes the hit. Is our government ever really going to stand up to them? No – they run the government. The checks and balances of the US system is so out of whack.

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

    These banks are completely out of control. In the days of Enron, insider trading allegations of this magnitude at least resulted in worldwide scandal. But now it seems like everyone expects and accepts this kind of behavior. JPMorgan Chase tried to blow its own global investment bubble, Goldman's ex-CEO is facing criminal prosecution, and now we find out Morgan Stanley misrepresented FB's stock and witheld information from investors. That's 3 weeks in a row that Federal felonies by 3 different Wall St investment giants have been a top news story. This has got to stop. I don't care if we do it the Kucinich way of putting them on a short leash or my preferred Ron Paul way of letting them drown in their own incompetence – but we have to stop pretending the existing regulations serve anyone other than the banks. Voters will be amazed at how quickly the government will turn on the banks if this becomes common knowledge.

    May 23, 2012 at 4:05 pm | Report abuse |
  3. guesswho22

    this was one big farce by Zuckerberg and Wall Street for a few wealthy banks and himself who were poised to trick the public and other investors into buying something that MZ knew was going to be worthless within the next two years. Why? He wasn't going to invest in moving the platform to mobile devices. Its to difficult to do all at once. Do you think these banks and company gurus are going to invest their money in developing a mobile platform when by the time they did achieve that goal, their social medium would have been replaced by the next big thing. Remember MySpace that started it all? Its virtually worthless now.

    May 23, 2012 at 4:06 pm | Report abuse |
    • MaryInBoise

      It's just another sad example of all these people with dollar signs in their eyes hoping to get rich quick, and failing to see (once again) that, as the old cliche goes, the emperor has no clothes.

      May 23, 2012 at 4:22 pm | Report abuse |
  4. dale zalewski

    I tried to imagine myself in Zuckerberg's shoes and found myself crying all the way to the bank.

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

    If you are going to shout, and least don't distort the truth.

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

    This belongs under this story because....?

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

    This Zucks!

    May 23, 2012 at 4:08 pm | Report abuse |
  8. john matthew


    May 23, 2012 at 4:09 pm | Report abuse |
  9. www.twitter.com/hlmelsaid

    Wrong,unrealy revenue,expectations.

    May 23, 2012 at 4:11 pm | Report abuse |
  10. jelway

    Who needs to learn how to spell? "Innuendo!!!"

    May 23, 2012 at 4:12 pm | Report abuse |
    • xavi

      I sure as zuck don't.

      May 23, 2012 at 4:20 pm | Report abuse |
  11. P. Rob

    You didnt need someone to tell you facebook was a bad investment. this is what happens when ppl know something is bad, but buy anyway knowing everyone else will drive the price up for you...but what...they didnt drive the price up and the greedy investors are mad they lost money. I guess most americans knew fb was crap...live with it

    May 23, 2012 at 4:13 pm | Report abuse |
  12. Green1955

    Can only laugh at those who foolishly dumped money into this completely speculative company that produces nothing. Did you not learn from the dot.com bubble burst. FB will be trading in the teens very soon. Would not be suprised if the stock goes into the single digits. LOL!!!!

    May 23, 2012 at 4:13 pm | Report abuse |
  13. P. Rob

    Tee reason it may not sell off right away is those same investors dont want to take the loss, like those nimrods who invested in silver...

    May 23, 2012 at 4:14 pm | Report abuse |
  14. Ray Glover

    Just seems like, what we have here is greedy people upset because they got out-greeded by somebody else. What, there isn't unlimited something for nothing!?? I thought this was America. Hey, let's sue! There, that's better.

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

    This is what happens when people, who know nothing about stocks, dump their life savings, trying to make a quick buck. Now, they're trying to sue to get their money back. Sorry, but it doesn't work that way. Here's a little tip: diversity, diversity, diversity.

    May 23, 2012 at 4:19 pm | Report abuse |
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