Nel's New Day

May 24, 2012

Investors Upset about Facebook IPOs

Almost everyone I know seems to belong to Facebook; worldwide the number of members is up to 900 million. I belong only because I had to join in order for a conference get-together four years ago and I can’t get off after losing my password. Occasionally the desire from someone to “friend me” wanders into my email, and I just delete it with the resolution to get rid of my Facebook relationship.

There’s also been lots of discussion within the past year about whether teachers and students can be “friends” and whether employers can demand applicants and employees’ restricted Facebook passwords. Some schools are even asking students for their passwords. (They can look at my Facebook page if they’ll only take me off!)

Last week, however, media attention surrounding Facebook ratcheted up after the company decided to go public. As many people know, it began with the company belonging to the 28-year-old CEO Mark Zuckerberg providing something called “initial public offering” (IPO) and continued with the brouhaha surrounding the Brazilian co-founder Eduardo Saverin giving up his U.S. citizenship to take his $67 million—tax free—to Singapore where he maintains residency. Singapore doesn’t tax capital gains.

Initially Facebook stock soared from $38 per share to $45, before shooting down to $31, losing $2.9 billion for investors. Meanwhile, Zuckerberg walked off with over $1 billion dollars in his pocket before he got married last weekend.

The investment loss resulted in lots of finger-pointing. Facebook’s CFO David Ebersman decided to increase the number of shares offered to investors by 25 percent just days before the IPO. NASDAQ’s computer systems failed on the morning of the deal; investors couldn’t place orders or cancel orders or find out if their orders had been placed or canceled. A modest stock “pop” probably caused some institutional investors to immediately dump their shares, causing a greater price decline.

The biggest problem, however, may be that estimates developed by the underwriters to determine a fair price were cut partway through the debacle. Facebook told the underwriters, but not the investors, that its business outlook had deteriorated. Institutional investors were okay; individual investors weren’t.

Investors are not happy about the loss, but they’re really not happy about finding out that underwriter Morgan Stanley had cut revenue forecasts before the offering, an action that investors didn’t know until after the stock was listed. Underwriters JPMorgan Chase (of the famous multibillion-dollar losses this spring) and Gold Sachs also “selectively” changed their estimates early on, letting special clients know earlier than the others.

Yesterday, riled investors filed a proposed class-action suit in federal court against not only Zuckerberg but also Morgan Stanley, JPMorgan, Goldman Sachs, and other underwriters of the IPO, arguing that they were not informed of the trim in revenue expectations. The state of Massachusetts issued a subpoena to Morgan Stanley for documents related to the IPO. Investors also sued the Nasdaq OMX Group because the exchange struggled to process orders during the first half hour of trading.

SEC is trying to figure out what to do: Chairwoman Mary Schapiro said that regulators are “looking into” the “issues.” Congressional lawmakers have raised questions about the deal. Chairs of both the Senate Banking and the House Financial Services committees are getting information about what happened  to see if they should have hearings.

Morgan Stanley has a history and a culture of tricking their own clients into making lousy investments. CNBC reports, “Morgan Stanley may have spent billions of dollars to support the [Facebook] stock price by buying shares in the market.”

Before losing up to $4 billion—so far—in its botched derivatives scam, JPMorgan Chase gave up billions more to settle charges stemming from its rampant foreclosure fraud, which involves mass perjury and forgery, and its bribing of public officials.

Goldman Sachs lied to prospective investors about mortgage-backed securities and illegally shared confidential information with its preferred clients.

Conservatives like to talk about the virtues of a “free market,” but the lack of regulations gives the entire game to the financial corporations. Investors can’t know until it’s too late what the banks are doing to take all their money. In summary, the Facebook IPO demonstrates how shady traders make money by hyping stock while secretly betting against it.

These huge financial corporations can break any law that they want. When they get caught, they just pay a fine that they can afford because they have stolen so much money that it isn’t a problem for them. Maybe losing money will teach Republican investors that their party doesn’t benefit them as individuals.

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