Facebook investors seek revenge in court

At least 2 lawsuits have been filed claiming that Wall Street's favored clients got privileged access to information that individual investors missed out on.

By Kim Peterson May 25, 2012 11:55AM
Some investors bought Facebook (FB) shares with dreams of instant riches, hoping the stock would fund their retirement or pay for their children's college. Those dreams were dashed immediately when the stock opened for trading, and it's been mostly a downhill ride ever since.

What can those burned investors do? Some are just going to suck it up, saying that when you play the stock market, you take a gamble. But others are taking their grievances to court.

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At least two claims in New York and California could become class-action lawsuits against the company, its executives and its underwriters. The lawsuits don't focus on the stock tumble -- although you can be sure they wouldn't exist if the stock had gone the other way.

Instead, the suits claim individual investors missed out on important information about Facebook's finances -- information that privileged Wall Street clients knew about before the IPO began. The investors say the information might have made them think twice about buying the stock. Or maybe they would have done what other in-the-know Facebook buyers did: flipped the shares for a quick profit on the first day.

At the center of the issue is this: Facebook made a change to its regulatory filings about a week before its IPO and warned about the financial challenges in its mobile business (Facebook doesn't show ads to mobile users and therefore makes no money on them). Analysts responded by cutting their revenue forecasts for the company and calling major clients to let them know.

Even worse, some underwriters were helping their clients short the stock, according to The Wall Street Journal. Short sellers bet against a stock by borrowing shares to sell at a high price and then buying them back later at a low price.

So analysts were throwing out these red flags for favorite clients, leading some to back out or change their strategy to flip the shares. But Joe Investor still thought Facebook was a rocket to the moon.

It's unfair. But is it grounds for a lawsuit? The Journal's David Weidner says there were so many early warnings about Facebook's potential that investors should have gotten a clue. There's a sucker born every minute, he says in his column. "Are you really so helpless that you're depending on Morgan Stanley and Goldman to connect that last dot of Facebook's financial picture when 95% of the drawing is visible?"

He's missing the point. Wall Street's favored clients do need Morgan Stanley and Goldman to connect that dot, and they basically got a direct line to Facebook's executives before the IPO. Individual investors don't even get the opportunity. Instead, they're told by people like Weidner to accept what they have and move on.

The biggest impact of the Facebook fiasco may be the potential to change this long-standing practice on Wall Street of analysts secretly giving top investors the heads up before the IPO. Laws do exist to limit this behavior, but the big banks always find a way around them. If regulators are serious about investigating what happened -- and the class-action lawsuits may force that, to some extent -- we may see real change.

But for now, the Muppets have lost another match to Wall Street.


May 25, 2012 3:16PM

The SEC destroyed ALL of the records pertaining to the largest investigation into insider trading in history(the unusually high volume of short selling of airline stock prior to 9/11).


Do you honestly think the SEC cares about YOU or what happened to your money regarding a nothing stock such as FB?


If you didn't see this coming, you didn't have your eyes open at all!

May 25, 2012 2:45PM
      You can't sue because your stock went bad, if you could they'd shut down the stock market, stock is gambling, when you gamble you usually lose
May 25, 2012 2:14PM

What's "wrong" with Facebook?  Nothing.


Some folks lost money on a get rich scheme.  Other folks made money.  Facebook was never worth 100 times it's earnings.  Only an idiot would have believed that.  But the billions didn't just evaporate.  It only changed hands.  And some people did make money.  Sucks to be on the wrong side of the market, but it was a bonehead move.

May 26, 2012 9:26AM
"Facebook investors seek revenge in court"

Too funny!!!!!!!!!

Your honor, I invested in a company with ZERO hard assets. Most of the world saw the writing on the wall, but not me. I want my money back!

If it went through the roof, how much of it would you give away?? That's what I thought.

May 25, 2012 2:14PM
I did not buy facebook but show tat I have good money in the market and now i wil only invest in land and other hard assets. lehman was a bunch of crooks and madoff  in China these guys would be shot
May 25, 2012 2:34PM
Come on people, really?  You're suing because you didn't read the information right, or you didn't do your homework in the first place?  Anyone who knows how to use google could've told you that Facebook is one of the top 50 publicly traded companies in size.  With increased size comes increased difficulty in growth.  You don't make a fortune investing in Coca-Cola anymore, you would've had to get on that train long ago, and the same holds true with Facebook.  There isn't much room for Facebook to expand into, they are already a huge company with massive face-value.... no room to expand means no large increases in value unless you're going for inflation matching.....
May 25, 2012 9:53PM

You lost 30 million to bad  you made a bad move gambled and you lost. That's the way the old bounces. You thought you were going  to cut a fat hog and you only got pork bellies.



May 25, 2012 7:31PM

It's called insider information. Ask Martha Stewart about it. Those on the outside did not have the information that everyone else had. If there is a class action suit and I hope that in these times of "Occupy Wall Street" that there will be one, I will jump right in for the losses that I incurred. It's a matter principle. If they ever want the government to allow people to be able to invest their FICA in the stock market rather than have the big government control it then Wall Street should demonstrate that they will be responsible and fair to all.  Wall Street can take the high road or the low road but they would be hurting themselves if they take the low road if they want to change the governmental social security system.

May 29, 2012 6:56AM

Tis a pity. Crying over spilt milk. Well now the talking heads can go on about FaceBook for a few more months, when they are not on PIIGS. Somebody in the Fourth Estate ought to be looking at the criminals running the Governemnt in the USA.


More bad news. I've never felt safer buying more Gold.

May 27, 2012 7:01PM

The issue doesn't seem to be that FB was a dog that only a fool would touch at the asking price. The issue is, was the insider information given to the institutional and favored investors before the opening bell on Friday's IPO day made available to you and me?




Is it actionable that it was not?


That is what is to be be determined. Essentially, just how "caveat emptor" is our financial system to be - how far can sharp practices be taken - and may one employ 'emptor' discrimination?

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