Little guy gets short end of stick in Facebook IPO

Here's why retail investors are filing class action suits en masse.

By Wall St. Cheat Sheet May 24, 2012 2:04PM

Does the average, mom-and-pop investor really get a fair deal in our financial markets?


It's a question that is again in focus after favored customers at the major banks and underwriters got an earlier peek into Facebook's (FB) expectations of lower revenues during its second quarter and for the full year.


The small investor, saddled with Facebook shares at $38 each that currently quote $32, can't be blamed for feeling that he may have been done in. Could these lucky, high-net-worth individuals have sold into strength based on their privileged information?


The issue is fraught with complications, but at the outset, it should be clarified that Morgan Stanley (MS), Goldman Sachs (GS), Facebook and other names figuring in the controversy are not yet accused of any wrong-doing as per the laws.


True, there is an impending inquiry by the Securities and Exchange Commission into the initial public offering, and informal reviews of the IPO process are being conducted by the Senate Banking Committee and the House Financial Services Committee -- yet the exact scope of these inquiries is not yet clear.


It is far more likely that no specific transgressions can be pinned on any of the actors in the drama, and the real culprits may be antiquated or inadequate IPO regulations that are taken advantage of by the bigger players.


"While the SEC investigates some of the problems surrounding the Facebook IPO, I think it is important to broadly and publicly examine the procedures for taking a company public," said Senator Jack Reed, Democrat of Rhode Island and chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment. "We need to ensure the system is fair, balanced, and works for everyone."


Specifically, however, investigators may look at the fact that the lowered guidance by Facebook, the subject of two conference calls with analysts, did find its way into the hands of "more-equal" customers at Goldman Sachs, while it did not fall foul of prospectus disclosure laws simply because the problem was disclosed in the filing, albeit in a veiled and unspecific manner.


It also may be noted that IPO laws do not allow analysts at underwriters of the issue to publish or disseminate research about the company but interestingly, they may communicate that information "orally" to chosen clients, and are not obligated to share the same with the general public.


So, no question about it -- the bigger guys get the choice pickings and the process starts as early as the road shows, a series of meetings where the likes of hedge funds and bulge bracket investors get advance guard.


Saul Griffith is a staff writer at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.


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Tags: FBGSMS
13Comments
May 24, 2012 7:25PM
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Assume The Postion ...

 

No matter how, where or when you cut the cake, the 'little guy' always, but always gets bent over by a poke in the posterior with a pointy projectile. The Wall Street 'casino boys', the big banks and financial houses, the Fortune 500 corporations and their uber-rich CEOs have all of the bases covered, in spades. Because they basically own Congress, if somehow they get caught short with their hand in the cookie jar, they have Uncle Sam to bail them out and go their merry way. I must say, it's a nice deal if you can get it!

 

Peace to all

May 24, 2012 10:06PM
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The FB IPO was the most blatant pump & dump scheme I've ever witnessed. Some poor teenager robs a liquor store of a few hundred bucks and gets 10 years in the slammer.  Morgan Stanley steals billions from unsophisticated investors and gets what?
May 24, 2012 6:30PM
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The government needs to step in on this and null and void the IPO and all funds be returned. The release was so botched how could you call any of what happened fair and equal playing field. There was so much inside trading with that information that the only people who could save themselves was the brokers and underwriters.

Facebook should have never been able to set the price where they did. I feel the price was seriously over bloated and the true value should have been around $18-$25 a share. When the issues started to plague the system the regulators on the markets should have stopped the release of the IPO instantly to avoid the series of events that unfolded.

These types of flagrant miss steps are exactly why we need serious regulations in the markets. We just went through one of the worst market crashes and failures since the great depression and just this one IPO could have really ramped up the downfall of the system that we are working to rebuild..

May 24, 2012 10:20PM
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I understand 14 Morgan Stanley upper level executives are arriving in Las Vegas tomorrow and checking into Encore courtesy of Facebook.  The $500.00 greens fees at Wynn are paid and the nubile teenage girls in purple tank tops will be waiting in their rooms.

 

Seven come eleven!

 

 

May 24, 2012 4:42PM
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How hard is it to just buy some more Exxon and Tekay Tankers?  Sheeesh.

 

 

May 24, 2012 6:54PM
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..And with the "usual suspects" eh?
May 25, 2012 2:44AM
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Would any of the small investors have paid any attention to this ?  GM cancelled it's ads. nobody cared. Zuckerberg the entire time said that profits were not a priority but a better user experience was.  He only sold non voting shares.  Many analists work for fees that the small investor doesn't pay so of course this information was not "freely" given to them.  Most small investors were interested in flipping this for a profit.  If they were long term investors it's either going to be very profitable with 900 million users and growing so this might be a low price 5 years from now.  or it's a fad and be worth nothing 5 years from now.  Demand was so great they probably could have gotten $45 a share and still sold out.
May 25, 2012 5:47AM
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I don't see how the little guy got the short end of the stick. My impression is that those who participated in the IPO by getting special allocations from their brokers paid the IPO price. They knew the risks involved and so they should not be complaining. Any "little guys" who bought the hype and paid full price once the stock started trading where conned, not by Facebook but by the media.

 

Please stop making out that the little guy lost out. The IPO deck is stacked fully in favour of the bankers and their special clients and hedge funds. No sympathy here.

May 25, 2012 5:47AM
avatar

I don't see how the little guy got the short end of the stick. My impression is that those who participated in the IPO by getting special allocations from their brokers paid the IPO price. They knew the risks involved and so they should not be complaining. Any "little guys" who bought the hype and paid full price once the stock started trading where conned, not by Facebook but by the media.

 

Please stop making out that the little guy lost out. The IPO deck is stacked fully in favour of the bankers and their special clients and hedge funds. No sympathy here.

May 25, 2012 5:48AM
avatar

I don't see how the little guy got the short end of the stick. My impression is that those who participated in the IPO by getting special allocations from their brokers paid the IPO price. They knew the risks involved and so they should not be complaining. Any "little guys" who bought the hype and paid full price once the stock started trading where conned, not by Facebook but by the media.

 

Please stop making out that the little guy lost out. The IPO deck is stacked fully in favour of the bankers and their special clients and hedge funds. No sympathy here.

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