May 23, 2012

"Investors File Suit Against Facebook, Underwriters."

"The suit follows reports Tuesday that analysts at Morgan Stanley and Goldman Sachs Group Inc. cut their revenue forecasts on Facebook amid the investor roadshow, a change that wasn't widely disseminated."

26 comments:

Michael said...

Underwriters are obliged to disclose any new information prior to the issuance of stock. Bad for MS if they were selective in who got the revised numbers.

FB appears to have been too greedy in their insistence on getting the IPO price they got. In many senses, from the client perspective, MS got a perfect execution (assuming full disclosure of the new numbers). The co-underwriters, the institutional desks and the retail arms as well should have all given indications of the orders they would/could execute at the price. Appears they were wrong.

Probably nothing illegal (assuming full disclosure by MS) but plenty of disappointment.

ndspinelli said...

Just when did Wall Street become a game of 3 Card Monty?

Scott M said...

I'm still trying to wrap my head around exactly what happened here. Most of the articles covering the story are too full of inside baseball.

MadisonMan said...

They told me it would be a sure thing!!! Waaaaaaaahhhh

Some investments don't work. You can't have all the information out there. Sometimes you don't have the right information. It's only criminal, IMO, if the person advising you to buy isn't telling you the whole story. But information release can't be instantaneous.

KenK said...

Bulls can make money and bears can make money, but (greedy) pigs usually get slaughtered.

SteveR said...

My 15 year old would have told you not to buy it.

Scott M said...

but (greedy) pigs usually get slaughtered.

I did see a mention of that twerp that renounced his citizenship and left the country may now end up in the red over this whole thing.

Mick said...

Scott M said...

"I'm still trying to wrap my head around exactly what happened here. Most of the articles covering the story are too full of inside baseball."


Simple. Criminal bankers, Hedge Funds, Facebook founders, private equity and venture capitalists cashed out, and M. Stanley offered way too much supply. When there is way too much of something, what happens to price?

Lem said...

Apparently someone discovered internal data that said there were more facebook-over-the-phone-platform users than what was disclosed... translating into less chances of commercial transactions.. ie revenue.

Now, it appears this information was shared with some people prior to the IPO and of course word got out.

traditionalguy said...

That is a type of insider trading. The insiders get to skin the public as they usually do in hard times.

We only respect Wall Street because when times are good the skinned public keeps some upside profits too. It is all about timing the fall.

But this gave timed information to a few favorites that the fall already started. That deserves to be exposed.

gadfly said...

From farm and energy subsidies straight into investment subsidies. All risk has to be thwarted in order to make life fair. Risk, what is risk?

From what I heard, the investment houses took it on the chin for Zuckerberg who wanted the IPO to have more shares offered at a much higher price than current market. The little guy is now buying now Facebook at 25% under the offering price. I wonder if the courts might penalize these folks for not paying their fair share?

MadisonMan said...

My 15 year old would have told you not to buy it.

This.

My kids aren't on facebook anymore. On to the next thing.

Don't invest in a mature product hoping to make it big.

Tank said...

Some people thought they were going to make a bundle for doing nothing.

They were disappointed.

Next.

roesch/voltaire said...

Generally IP0s are set up for the favorite clients of the bank who get the early shares or in this case the D sales before hand so that they can sell when the public pops up the price. Long ago, I learned as an ordinary investor to stay away from IPOs. Further in the case of Facebook, not to believe the numbers-- the smarter, older students have already shifted to Linkedin, leaving only the teens without jobs to post.

Dust Bunny Queen said...

@ Scott
I'm not in the business anymore, retired since Dec 2010 thank God!, but here is my take on it. Really simplified and from memory.

"Morgan Stanley, Facebook's IPO sherpa, was encouraging its client to up its initial price while at the same time cutting its estimates for Facebook's future financial success. What's worse, they managed to whisper that last bit into the ears of their giant institutional clients while managing to keep it obscured from Joe Investor."

The IPO is presented with a Red Herring Prospectus/Preliminary Prospectus. The brokers, grunts on the ground, take "indications of interest" and present the IPO based on the information in that document. This is to indicate to the underwriters (Morgan Stanley) how much of the aloted stock might be sold in the IPO. Sometimes if there is not enough interest or not enough at the potential IPO price, the underwriter will redo the prospectus and either lower the price or the number of shares or just cancel the whole thing.

The underwriter is to set the initial IPO price of the stock based on the information in the Preliminary Prospectus. The broker and investors rely on that information.

The Red Herring can be updated and altered to reflect new information and since the indications of interest are not binding the client can change their mind based on that new information. Since MS changed its recommendation in the preliminary stages and at the same time was downgrading the outlook AND apparently not letting everyone know this the ordinary investor is suspicious that they have been defrauded. The brokers who also relied on the info from MS should be pissed as well.

The money for the IPO shares goes directly to the company and into their capital. Unlike shares that are traded later on the exchange. The underwriter also takes a cut of the IPO and the higher the shares and the larger the issue, the more they will make.

So...it "appears" that MS and Facebook purposely inflated or left the inflated price of the IPO out there to make more money and defraud the ordinary investor. This may be hard to prove since the whole IPO pricing is hypothetical. BUT. If they can prove that the new information was not given out to everyone there is probably a case.

30yearProf said...

SEC Rule 10b-5 applies to EVERY sale of a security (FB stock).

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
* * *
b.To make any untrue statement of a material fact or TO OMIT TO STATE a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,
* * *
in connection with the purchase or sale of any security.

GOTCHA !!!

Michael said...

DBQ: I think that the shift in the analysts' view was occurring at the very moment the road show was underway: highly inconvenient to the investment bankers and FB but a positive sign that there is indeed a wall between analysts and bankers that did not exist in the past when the bankers would have told the analysts to keep their new numbers to themselves. I think most, if not all, investors got the new numbers but if they did not then MS and FB are both in trouble. They should have called a halt to the road show, done a repricing and reprinting of the S-1. None of this is to say that investors wouldn't have bitten at the same price with reduced numbers: there was a certain hysteria around this issue that can't be discounted. I wouldn't have touched this deal with a ten foot pole. I don't think the governance issues could be priced properly into something with such emotional appeal.

Dust Bunny Queen said...

@ 30 yr,

Right. There is a difference between being wrong in your estimates and purposely misleading or omitting information that investors and brokers need to be able to make informed decisions.

It seems that that is what MS and maybe Facebook did. Worse, they only misled some and not all. So they were selective in who they gave the real information to.

I did see a mention of that twerp that renounced his citizenship and left the country may now end up in the red over this whole thing.

You only make money on your stock if you sell it. Since his shares, as I understand it, were dispersed to him as a part of being an owner of the company, the tax situation is very complicated depending on how the issuance was structured.

Dust Bunny Queen said...

I wouldn't have touched this deal with a ten foot pole. I don't think the governance issues could be priced properly into something with such emotional appeal.

Ditto. I would have advised my clients to stay away from this IPO for those very reasons. Over hyped. Feeding frenzy atmosphere. Priced exorbitantly compared to current income or even future income.

But.....sometimes you just can't stop stupid.

Dust Bunny Queen said...

I think most, if not all, investors got the new numbers but if they did not then MS and FB are both in trouble.

That is what we hope would happen. I have had to call back all of my 'indications of interest' and give them new information or inform them that the offering had been withdrawn.

That is not unusual in the least. The problem is when you don't get the new information in time, if your broker drops the ball and doesn't get back to the client or in this case it appears, not all people were equally informed.

As a broker, you really had to scramble, drop everything else you were doing, and work on contacting every single person. AND document document! that you tried to reach them.

X said...

I'm amazed by how often Zuckerberg gets sued and has to pay up or settle. He seems like a sneaky little shit.

FreddyB said...

This is BS. Anyone watching CNBC (or just generally paying attention) knew about it. People need to put on their big girl panties...

FreddyB said...

Quick followup: You can see the filings and amendments (S-1 and S-1/A's) on the SEC website: www.sec.gov -> filings -> search for company filings.

Michael said...

FreddyB: Understand that the filings on SEC.gov are not instantaneous and the issue at hand is whether the information that was available in the S-1 as posted was the same NEW information available to to the underwriters and FB at the time of the IPO.

No one watching MSNBC or prowling the S-1 would have had a clue that the analysts had lowered their estimates or to what number or level they had been lowered.

I am as opposed to investment pussies as the next person but if you are relying on SEC filings you are, to put it mildly, looking at old news.

Penny said...

So I guess this means we aren't likely to see anymore articles on how to buy one share of Facebook?

PatCA said...

Anyone familiar with the internet realizes FB is just a free blogger platform, with really rudimentary, clunky software.

Someone might make more money if they started a FB with more capabilities and charged two bucks a month. And promise not to share their info with the gubmint or Netflix, etc.