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.

‚ÄúFacebook changed the numbers ‚Äď they didn‚Äôt forecast their business right and they changed their numbers and told analysts,‚ÄĚ a person at one of Facebook‚Äôs 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. 

‚ÄúThey are holding my money hostage,‚ÄĚ said¬†Sam Lesser,¬†who had put in a¬†$10,000 Facebook order from money he made in a small business he created. "It‚Äôs 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. S

    Gullible idiots shouldn't be rewarded for making bad choices. If you bought FB on the day it came out thats your fault regardless of insider knowledge. For a company with 100x valuation vs earnings, chances are you would've bought it anyway.

    May 23, 2012 at 12:38 pm | Report abuse |
  2. look around

    create some work for the unemployed sharks. good for bubble economy.

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

    Greed all around FB included.

    May 23, 2012 at 12:38 pm | Report abuse |
  4. I think you understand it.

    I think you understand it.

    May 23, 2012 at 12:39 pm | Report abuse |
    • Heime

      I think I understand it.

      May 23, 2012 at 2:34 pm | Report abuse |
  5. J G

    Anybody who didn't realize that Facebook was overvalued is quite simply not very intelligent. Now they're looking to blame somebody else for their poor choices. Typical of our new American way. No responsibility for our own actions anymore. Thanks judicial and legislative parentism.

    May 23, 2012 at 12:39 pm | Report abuse |
  6. David Kuklinski

    Wall Street responds to facebook helping #occupiers communicate. Case closed.

    May 23, 2012 at 12:39 pm | Report abuse |
  7. angelika

    If you all watched the Social Media movie last year, about how FB came to be. You would know he stole these ideas from student buddies that he was friends with > I don't wish him bad, but if you steal some once idea, and post it as your own, no fruit can come of it! There is too much hype about FB . And who cares any way?

    May 23, 2012 at 12:39 pm | Report abuse |
  8. jeff

    the problem is that normal people can buy stocks like all the advisers that have the 1% as their clients. so with all the hype passed around by the media that FB is worth X (by the way probably the only advice the 99% gets), it is not hard to understand what or why this happened. people believe what they read on the internet because of the patina of truth surrounding technology and the media. obviously the media would not herd us in the wrong direction.

    May 23, 2012 at 12:40 pm | Report abuse |
  9. look around

    i'm gonna work on my vegi garden, now that i have no portfolio of bubbles.

    May 23, 2012 at 12:40 pm | Report abuse |
  10. sripton

    Facebook? Isn't that the site I avoid because posting pics there will cost you your job and privacy?

    What can Facebook do for me that my iphone can't?

    Overvalued? YA THINK!

    FORE

    May 23, 2012 at 12:40 pm | Report abuse |
  11. Buddha2112

    Let's all delete our FB accounts now and watch it tank. A young fool and his money hungry problem. Sold to the US gov before Steve Jobs died. Remember that dinner?

    May 23, 2012 at 12:40 pm | Report abuse |
  12. Jeff

    "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.

    ‚ÄúThey are holding my money hostage,‚ÄĚ said Sam Lesser, who had put in a $10,000 Facebook order from money he made in a small business he created. "It‚Äôs really disappointing, because we could have made money on this.""

    Lesson #1: Life's not fair and s#!tt happens daily, Sammy boy.

    May 23, 2012 at 12:40 pm | Report abuse |
    • AM

      How does an 11 yr old boy have 10,000 to invest with . . . ?

      May 23, 2012 at 12:47 pm | Report abuse |
  13. pet peeve

    ironically, these are the same people who want less regulation and government intrusion...obviously, the government needs to step in when they lose money...but don't tax or regulate when they make money since that would stifle capitalism.

    May 23, 2012 at 12:40 pm | Report abuse |
    • bigb19

      Exactly, Pet Peeve.

      May 23, 2012 at 12:45 pm | Report abuse |
    • DAC

      ... my sentiments exactly. bascially, LEAVE ME ALONE UNTIL I NEED YOU!

      May 23, 2012 at 12:51 pm | Report abuse |
  14. David Kuklinski

    FB under $10 by 4th of July.

    May 23, 2012 at 12:40 pm | Report abuse |
  15. Chuck Jasper, Ga.

    Given this revelation (which is not really a revelation) people should at least give thanks for regulations that attempt to keep things like this from happening. Of course that leaves out the Republicans and conservatives. They oppose regulation and government interference in "business".

    May 23, 2012 at 12:40 pm | Report abuse |
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