Regulators call for Facebook IPO probe

Did institutional investors get warned about the company's prospects in the days leading up to the IPO?

By Kim Peterson May 22, 2012 5:41PM
The controversies around Facebook's (FB) botched IPO just keep coming.

Now, word is emerging that Wall Street was getting warnings about Facebook's prospects in the lead-up to the IPO -- warnings that retail investors were clueless about. If regular mom-and-pop investors had heard about those warnings, maybe they wouldn't have jumped into the shares.

It's an extraordinary story, if true, and could heap further damage on an already disastrous IPO.

Post continues below.
Two financial regulators may soon begin investigating the circumstances around the offering, Reuters reports. The heads of the Financial Industry Regulatory Authority and the Securities and Exchange Commission have separately called for a review.

Facebook shares were priced at $38 each in Thursday's IPO, but have tumbled in the market and closed Tuesday at $31.

Reuters reported Tuesday that Morgan Stanley's (MS) Internet analyst cut his revenue forecasts for Facebook in the days before the IPO. That alone is shocking. Any time a major analyst cuts estimates, it's a big deal. But even before the IPO?

To top it all off, Morgan Stanley was the lead underwriter in the IPO and stood to make a huge amount of money.

"Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors," wrote Reuters' Alistair Barr. Investing analysts operate with some degree of independence, and Morgan's guy was allowed to cut revenue forecasts, even though it might make the rest of the company cringe.

At around the same time, analysts revised estimates at JPMorgan Chase (JPM) and Goldman Sachs (GS), which also made a lot of money underwriting the IPO.

The revisions came during Facebook's pre-IPO roadshow -- a prolonged series of meetings between the company and potential investors.

"I cannot recall that ever occurring during an IPO roadshow," wrote Barry Ritholtz at The Big Picture.

Hedge funds seemed to be aware of the event. "They definitely lowered their numbers and there was some concern about that," a senior partner at research firm IPO Boutique told Reuters. "My biggest hedge fund client told me they lowered their numbers right around mid-roadshow."

So what did that client do? Flipped the IPO shares and shorted the stock.

Which leads to the main problem here. Institutional investors and other wealthy clients knew Facebook was a dud at $38 a share. But retail investors who used Facebook and were excited about the stock had no idea that Wall Street sentiment had turned against it.

Business Insider is reporting that bigtime institutional investors verbally heard about the estimate cuts. Smaller investors were left out of the loop.

"At best, this 'selective disclosure' is grossly unfair to individual investors who bought Facebook stock on the IPO (or at any time since)," writes former analyst Henry Blodget. "At worst, it's a violation of securities laws."

Is it odd that analysts at all three underwriters cut their estimates in unison? Blodget says that one of the analysts was told to cut his estimates by a Facebook financial executive. If true, that's another grenade just waiting to explode into something big.

Normally, we aren't supposed to hear from analysts at the underwriting firms until 40 days after an IPO. The underwriters aren't allowed to give out material information that isn't available to all investors, Reuters reports.

So who knew that the forecasts were cut at Morgan Stanley and other places? Obviously, people were talking -- and some hedge funds got word.

"Night and day the institutional clients get things that we don't get. It's a big issue," one Morgan Stanley Smith Barney adviser told Reuters.

So Wall Street gets advantages that regular investors don't get. Huge surprise, right? Will federal regulators ever get to the bottom of these crooked dealings?

"The allegations, if true, are a matter of regulatory concern," said the chairman of the Financial Industry Regulatory Authority.

But if you think anything will happen out of this supposed concern, hey, I have a great social-networking stock to sell you at only $38 a share. What a deal.
Tags: FBGSJPMMS
15Comments
May 22, 2012 7:38PM
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Facebook stock is only worth around $10 tops .What sucker payed $38 for a company with a CEO in a hoodie and sales on the decline. Congrat to all those who stayed on the sidelines. Very smart move. If you were sucked in to this IPO get out and fast!
May 22, 2012 5:57PM
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Sounds like insider trading to me… Trades placed with privileged information. Facebook is a scam and a lot of people have been fleeced. As they say “nothing is free.” It looks like the public is “paying” for using Facebook, so I guess ‘S’uckerberg conned the public, monetized his company and got rich. Brilliant!   

May 22, 2012 5:57PM
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They priced a Chevy like a Ferrari. Apple is 10 times eanings. FB was priced at 100 times. What a joke. No wonder the polecats are all out suing them...
May 22, 2012 8:56PM
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As soon as I heard FB was going public, I had a hunch the little prick in a hoodie was up to no good.  Why go public when you're raking in that kind of money?  Smart kid like that knew it was time to cash out.  Was not surprised at all of the news the IPO was a bust and the transfer of wealth monumental.  Of course there will be investigations but nothing will really come of it.  The Nightmare on Wall Street continues......... 
May 23, 2012 6:39AM
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don't you love it WALL STREET WINS AGAIN and little retail investor gets hosed again. and they wonder why so much money is on the sidelines????????
May 22, 2012 6:40PM
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"If regular mom-and-pop investors had heard about those warnings, maybe they wouldn't have jumped into the shares."

 

On the other hand, for weeks preceding this IPO, the warnings on FB were so strident, so detailed, so reasoned, and - yes - ubiquitous that a certain obtuseness was required to be even marginally interested in this issue.

 

Throw in a recollection of the dot-com debacle at the turn of the millennium and it was clear FB was dangerously close to sharing with so many of those dogs nothing to sell.

 

In this case, the institutional information should have been available to mom and pop (of course!). But given the detailed, reasoned, and widespread press on Facebook, that information wasn't in fact needed to make the informed decision to avoid drinking Mark's Zucker-Aid. 

May 22, 2012 10:51PM
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anyone that was scammed by the facebook IPO may be able to join a class action law suit against the company and morgan stanley .check out glancylaw.com for more info
May 23, 2012 7:15AM
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If you touch anything with "Morgan Stanley" in it's name, you'd better wash your hands as soon as possible.
May 23, 2012 3:15AM
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You can believe they'll find someone on the sidelines that had nothing to do with it to be the fall guy like they did to Martha when Enron and the market makers decided to rip off the hard working people that had money invested through their 401 K's with companies like Fidelity Investments that stole more than 100 grand from mine and many other people I worked with at the time.

I learned my lesson and began studying the markets and since have done all my own investing and I knew enough to stay clear of this fiasco. All the indicators were saying no way!

May 22, 2012 11:38PM
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Another great example of how the entire process is manipulated from the getgo and people are still dumb enough to invest in the stockmarket.   I will be offering shares in this bridge at only $100 a pop with a limit of 10,000 shares.
May 23, 2012 3:19AM
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As if we really believe federal regulations would change a damn thing. Yea the answer seems to always be for most people, "we need more government reguations"  well if you fell for that hype then you got what you deserved. Wise up it's always a risk so if you can't afford to lose it then don't buy it. I think a good buy right now is FMCC but then again I have faith in the American way of life.
May 23, 2012 3:31AM
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Is the economy really recovering? What effect will the European economy collaspe have on the USA?

Maybe it was because the political climate in America but since graduating from the University I've never had a struggling economy and even when I've lost tens of thousands of dollars have I suffered financially and never will. The America Economy is at an all time high and if you want a job in America you can find one and only those with some sort of political agenda will use the economy as some sort of issue. If goernment stays away from the economy and would keep the Federal Reserve out of it as well then business will prosper and America can grow this economy with or without war or Europe.

Their is no time over the past 100 or more years when Europe's economy was as strong as the USA and it never will. The "Euro" is artificially higher because America has allowed it. I am happy that this is happening and I see it as only serving to give a true representation of the European Economy VS The American Economy.

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