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. bezerkur

    Hmm I wonder how my MySpace is doing. Lmao. suckers. Capitalism never fails to disappoint the masses.

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

    You fools didn't even know what the word "greed" and "fair" meant until Obama told you.

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

      wow another idiot from...

      May 23, 2012 at 4:21 pm | Report abuse |
    • Paqrat137

      Knew it: this is all Obama's fault. I just knew it

      May 23, 2012 at 4:21 pm | Report abuse |
  3. Paqrat137

    Hey, can I invest in this kid Lesser's business? AT least he showed a profit of at least $10K and he's only 11-years old!

    May 23, 2012 at 4:20 pm | Report abuse |
  4. Sabrina

    The big businesses who bought into fb helped to inflate the actual value and caused overextensions in sales and expectations. Fb knew that its stock would not be worth the anticipated #’s in the future, thus, staying mum on this information and inadvertently raised the risk for non-informed investors.

    May 23, 2012 at 4:22 pm | Report abuse |
  5. LB Colorado

    Money makes people do crazy things. It will make you sell your children if your not careful. Just glad I didn't have the access in money, because, I would have jumped on this. Talk about unanswered prayers.

    May 23, 2012 at 4:22 pm | Report abuse |
  6. Begin American Spring

    oh, maybe they already did. i think they can just kill us now.

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

    LOL well said my man

    May 23, 2012 at 4:24 pm | Report abuse |
  8. John-117

    Serves him right. I'm sick of him getting credit for inventing the social network, there were social networks years before facebook. Before that was myspace, before myspace was friendster. I'm also tired of facebook having a major change every year. Simply changing things doesn't make it better. I hope facebook goes down the toilet and google+ takes over. The only problem I see with google+ is the whole circle thing. You can add people to circles without their approval and you can add random email address. The whole thing is confusing. When google+ stops telling me to add emails without google+ accounts into my circle, then I'll switch.

    May 23, 2012 at 4:24 pm | Report abuse |
  9. Thunder

    Looks like this boy's honeymoon is going to be with Bubba, in Jail

    May 23, 2012 at 4:26 pm | Report abuse |
  10. Doesn't add up

    why the heck are they allowing an 11 yr old to invest? LOL... j/k I know what it meant, but I did have to re read it twice.

    May 23, 2012 at 4:26 pm | Report abuse |
  11. BOBBY

    Here we go agian....what a joke...Investing in air...thin f n air, think of all those billions going to a company that acdtually makes something.

    May 23, 2012 at 4:27 pm | Report abuse |
  12. meaz23

    Why does Mitt Romney have his staff bring young pre-teen boys to his hotel room late at night?

    May 23, 2012 at 4:28 pm | Report abuse |
  13. driranek

    O ye of little faith – there's still money to be made off this. I've got my order in to buy 10,000 shares at $8.

    May 23, 2012 at 4:28 pm | Report abuse |
  14. meaz23

    Ann Romney has AIDS, not MS like tge campaign claims.

    May 23, 2012 at 4:29 pm | Report abuse |
  15. Harvard

    This guy stole the idea, screwed his business partners and now the shareholders. If you were blind enough not to see it coming and invested in the company, you deserve it !

    May 23, 2012 at 4:29 pm | Report abuse |
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