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. Lila

    When the CEO cashes in immediately at $37 so he can get his billion, that should have been a big red flag. The stock is junk, the company isn't worth much.

    May 23, 2012 at 12:46 pm | Report abuse |
  2. Aunt B

    I am waiting for the day this Steve Jobs wannabe starts wishing he would have finished college........ heh!

    May 23, 2012 at 12:46 pm | Report abuse |
    • Valerie

      Doubtful, but keep hoping.

      By the way, college means nothing in the grand scheme of things.........plenty of idiots went to college and most millionaires didn't. : )

      May 23, 2012 at 12:50 pm | Report abuse |
    • Valerie

      I meant this in reply to you, for some reason it didn't thread to you properly:

      Doubtful, but keep hoping.

      By the way, college means nothing in the grand scheme of things.........plenty of idiots went to college and most millionaires didn't. : )

      May 23, 2012 at 12:51 pm | Report abuse |
  3. lager1000

    ruh roh. bag holders now suing.

    May 23, 2012 at 12:47 pm | Report abuse |
  4. max3333444555

    you let racism guide your investing decisions? good luck with that

    May 23, 2012 at 12:47 pm | Report abuse |
    • capnmike

      It's a better guide than kneejerk liberalism

      May 23, 2012 at 2:48 pm | Report abuse |
  5. Regulatory Capture

    At least people are starting to get it. Watch The Ascent of Money if you still don't get it.

    May 23, 2012 at 12:48 pm | Report abuse |
  6. jon

    Does he remember anything about programming any more? He is all about money now.

    May 23, 2012 at 12:48 pm | Report abuse |
  7. wise investor

    C'mon now! don't tell me you couldn't see this coming? Their sole product is our personal data so we can have our spam tailor made. No guarantee that will generate a sale down the road. (personally i'm sick of ads and would rather pay to have a site spam and data mine free) To all you poor saps that drank the kool-ade, all i can do is quote you last night's fortune cookie: "a fool and his money are soon parted"

    May 23, 2012 at 12:49 pm | Report abuse |
  8. Tim

    What goes around, comes around, as they say. Zuckerberg earned all the troubles he's swimming in right now.

    May 23, 2012 at 12:49 pm | Report abuse |
    • muhron

      What troubles? He's cashed in his stocks already and is a billionaire!

      May 23, 2012 at 1:02 pm | Report abuse |
  9. John

    Why in the world would anyone invest in something that is useless?????? LOL
    Never such a thing as an easy buck. Sell Sell Sell! ! ! ! !

    May 23, 2012 at 12:49 pm | Report abuse |
    • muhron

      Haven't you learned to sell high? hahaha Now all the FB investors are stuck with their junk stock in the hopes that it will go above the original price some day...

      May 23, 2012 at 1:03 pm | Report abuse |
  10. Grateful Dom

    Awww, it sounds as if those poor greedy investors didn't become millionaires overnight after buying the stock so know they're gonna sue. Cry me a river. Anyone who bought Facebook stock thinking it would ever make them money obviously isn't very smart. I hope it goes down to $10/share.

    May 23, 2012 at 12:50 pm | Report abuse |
    • Grateful Dom

      "now" they're gonna sue, i meant now.

      May 23, 2012 at 12:51 pm | Report abuse |
    • mickey1313

      Agreed, no sympathy for these fools. It's social media it is worth squat.

      May 23, 2012 at 12:54 pm | Report abuse |
  11. Obamanation1

    sounds just like the store of Odumbos popularity, out of the gates it was up and a steady decline since

    May 23, 2012 at 12:50 pm | Report abuse |
  12. kit8

    Morgan Stanley sharing negative news about a stock with key clients while at the same time pumping the stock as underwriters to fleece unsupecting investors in not news. Morgan Stanley telling it like it is and walking way from a crappy stock to protect investors now that is news.

    May 23, 2012 at 12:50 pm | Report abuse |
  13. Tattrixnamine

    Rome was once an empire and it fell. Hard. Stop being a Product, Stop consuming and start creating!

    May 23, 2012 at 12:50 pm | Report abuse |
  14. Marci

    I hope you are wrong about the stock. Facebook is not going anywhere anytime soon. Everyone knows the market fluctuates so I don't know how someone can suggetst Facebook will go belly up?

    May 23, 2012 at 12:50 pm | Report abuse |
    • Marcello

      Its because FB now has massive pressure to make a LOT more money, at least 10 times as much, to justify their stock price. That means FB will have to somehow earn money off its users, most likely be cramming adds down their faces. Given that other social networks like G+ run add free, it could (not saying it will) be the beginning of the end as users go elsewhere. Time will tell, but don't think for a second this isn't problematic for FB.

      May 23, 2012 at 12:58 pm | Report abuse |
  15. coolbreeze

    You see this face? Now you don't...Poof, gone

    May 23, 2012 at 12:50 pm | Report abuse |
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